Short Sales and Foreclosures

While some sit around and complain that the real estate industry is suffering from a down market, others seek out an entirely new way to prosper by focusing on segments of the industry that are experiencing growth: short sales and foreclosures. It might take extra education and enterprise, but with the knowledge we garnered from area experts, this could be a profitable direction to consider taking your business. By Dave Gottesman
The number of properties in pre-foreclosure – properties where the owner has missed enough payments to warrant foreclosure consideration, but have not yet been auctioned off and are therefore ripe for short sales – continues to rise and contribute to a larger percentage of the overall market than in recent memory. As lien holders increasingly face decisions regarding the handling of property owners who are late or unable to meet payment obligations, the process of initiating foreclosure proceedings or negotiating a short sale has become much more common.

A short sale is an agreement between the lender and borrower where the borrower has a contract offer by a third party to purchase the property for less money than is owed on the mortgage. In the short sale negotiation, the lender agrees to the discounted price, and absorbs the loss in order to avoid costly foreclosure proceedings.

Despite the popularity of these two methods, the number of experienced Realtors able to manage these transactions is more limited than those primarily using their talents to sell homes on the open market.

Turning Foreclosures Around
According to RealtyTrac Inc., foreclosure filings in the U.S. rose 94 percent in October 2007 compared to October 2006, and November saw a 68 percent increase over the same time period the previous year. Developing expertise in this growing niche has often led to success for those in the industry poised to take advantage of the changing marketplace.

Providing Realtor services in the skyrocketing foreclosure market is similar to selling homes on the open market. Additionally, there are many Web sites and seminars specifically designed to assist Realtors with the unique details of the negotiations.

Glen Daniels, director of real estate owned (REO) for the Web site Foreclosure.com, suggests that finding success working with foreclosed properties relies on understanding that the seller is not a homeowner with an attachment to the property, but rather an objective lender.

“Lenders are sophisticated in evaluating properties and current market conditions,” says Daniels, who stresses that the lien holders are motivated to sell and merely seek current value for their properties for quicker sales. An offer on a foreclosed home that is fair and impartial has a greater chance of being quickly accepted, as prices are based strictly on data and not on any emotional attachment. In some ways, the lack of personal attachment to the home makes this type of negotiation even easier, as putting a price tag on property is much simpler than putting a price on a family’s memories.

Many Realtors recommend formal training as a way to get a foothold in these niche markets, and encourage learning the subtle differences between dealing with foreclosed properties and standard purchases. Nancy Freeman, broker/owner of RE/MAX Realty of Joliet, offers a training class to agents entitled “Foreclosures, REOs and Short Sales” in order to provide important background information for Realtors that are newer to the industry.

The Realtors Real Estate School, a collection of courses offered by the Chicago Association of Realtors, offers an 8-hour foreclosure class, which also counts as three hours of continuing education credit toward Accredited Buyer Representative Manager (ABRM) requirements.

States vary on foreclosure statues, making it critical to pursue courses that focus on laws pertinent to Illinois, or the individual state in which a Realtor wishes to work in the market.

Entry into the foreclosure segment of the market has very few barriers and no formal license is required; however, industry veterans are in agreement that additional education is beneficial. Reviewing the statues themselves in order to develop an expertise in the timeline and undertaking of a foreclosure or short sale transaction is also a constructive way to penetrate the market.

When dealing with REO properties, unlike traditional home sales, the Realtors’ involvement in a foreclosure transaction typically commences once the lender has formally foreclosed on a property. At this point, the lender will put the property up for auction, often at a lower price than the expected sales price, in order to encourage a prompt sale. The property is also usually vacant, which speeds up the process. When a foreclosed property is sold, the buyer will likely need to secure financing via traditional routes, as the property is viewed as if the mortgage has been removed, and the lender now wishes to sell the property outright instead of restarting a payment process.

Web sites such as public-record.com and Daniels’ Foreclosure.com provide comprehensive and regularly updated listings for Realtors to locate these properties. Daniels speculates that this readily-available information will alter the role of the Realtor in the near future, creating an industry where the Realtor provides more sophisticated guidance instead of simply supplying data. This, however, will require Realtors interested in this niche to become experts.

Marketing Foreclosed Properties
One option for Realtors to market foreclosed homes to clients is to look at it as an investment strategy, as lower prices may provide a more profitable opportunity for a client to own property for rental purposes. Daniels, who does not expect the recent interest rate freeze to have much effect on the foreclosure market, says that current “investment opportunities are lucrative for buying and renting.” He predicts that the foreclosure market is “a niche that is viable in the foreseeable future.”

While the median price of homes that are foreclosed is lower than the average overall price of homes, expensive properties are not immune from the proceedings. Foreclosure risk for homes on the higher end of the market is mitigated by their greater equity, while homes on the lower end are affected more by the changing interest rates. However, the increase in foreclosures has been spread relatively evenly among all homes, according to Daniels.

Making Short Sales Work
Short sale transactions are also growing at a rapid pace as a potentially quicker, and more affordable, alternative to the lengthier foreclosure process. However, the short sale process is by no means easy. “Make no mistake, it’s very hard work,” says Dale Shea, a broker associate with Koenig & Strey in Lake County.

To qualify for a short sale, the borrower must first demonstrate that they have endured a hardship, such as sickness, victim of fraud, loss of job or other extenuating circumstance. The Realtor, often collaborating with a lawyer, contacts the lender’s loss mitigation department to express the client’s desire to initiate a short sale and negotiate the terms. To present a short sale to a lender, the Realtor must have a contract to purchase the property by an unrelated third party and the original property owner is not permitted to remain an occupant in the home following the short sale.

A short sale is almost always a preferred solution to both a borrower unable to make payments and a lender seeking to recoup as much of their loan as possible. With this process, a homeowner’s credit score can be spared a hit of up to 200 points, and a short sale often yields a better price for the lender than costly foreclosure proceedings. With the recent surge of properties eligible for short sales and threatening to be foreclosed, “the rules have gone out the window,” according to Marki Lemons, an experienced foreclosure and short sales Realtor with Keller Williams Realty. She contends that the average discount hovers around 80 cents on the dollar. However, once short sale negotiations have been entered, other factors influence the discounted price, such as the condition of the property, or if the property has a subprime loan.

Shea, a 25-year veteran with short sales and real estate experience, has seen discounts as large as 30 to 40 percent, and others as small as 5 to 10 percent. He also notes that negotiating a short sale requires more work than most transactions, and despite a short sale being in the best interests of all parties involved, “it is very hard work, a lot of communication.” However, ultimately, “most people are very grateful.”

In rare cases, a lender will not agree to a short sale. Such as when a Veterans Affairs Loan is involved, since that loan is guaranteed by the government. In some cases, if there are multiple liens on a property, the holder of the first mortgage of an 80/20 loan may leverage their position, since the second loan absorbs most of the loss. However, the vast majority of the time, a lender will opt for a short sale before foreclosing once it has been determined that the homeowner or borrower is unable to make payments. According to Shea, it is important to “prepare buyers for the extra work of a short sale or your deal is likely to fall through.” Short sale offers tend to be initiated by the Realtor, though a lender may also solicit a short sale proposition.

Offering Additional Assistance
A Realtor familiar with short sales may be able to offer additional services to a homeowner besides finding buyers and providing assistance with the transaction. Lemons points out that negotiating a short sale may require significant patience, both in terms of being able to reach the proper loss mitigation specialist on the lender side, and also providing empathy to a client.

Many homeowners are unfamiliar and overwhelmed with the process of losing a home, and “most clients believe that someone is going to come and put them out in the middle of the night,” says Lemons. However, Illinois laws governing foreclosure include one of the longest timeframes in the nation between the first missed payment and eviction; 10 months at the minimum and possibly much longer. Even clarifying the timeline to a client and explaining the options provides an invaluable service to a concerned homeowner.

“First and foremost use empathy and not judgment,” suggests Lemons. “Explain everything in its simplest form.” Shea agrees and uses a similar approach, easing the fear of the unknown by assuring the client that the foreclosure process is a long one, where the lender can not simply sell an owner’s property after one or two missed payments. Shea alleviates his clients’ distress by guaranteeing the minimum number of months that the client will still have in their current home.

A critical responsibility is “dealing with feelings and attachments,” says Shea. He also feels it is important to openly tell short sale clients, “You have taken proactive steps to move your property and minimize a lender’s loss, you are selling your home and everyone is hereby in cooperation.” A Realtor can assist a client by easing their anguish and uncertainty, which may be of greater importance than the transaction itself.

Getting Started in Foreclosure
Locating properties that have recently been foreclosed or are in pre-foreclosure can be difficult and time consuming. Therefore, some organizations compile lists of these properties available via membership. Lemons recommends subscribing to a local foreclosure report, such as the one available at midwestforeclosures.com, to keep informed of current foreclosure activity and listings.

Due to the lack of understanding most people have in terms of the short sale process, finding clients can often take a long time. Shea recommends reviewing public records, for example the legal classifieds of local newspapers. Freeman adds that developing relationships with industry attorneys to get referrals is a good way to find potential clients. Pursuing an aggressive local mailing campaign to properties in the pre-foreclosure stage helps get your name in the forefront of a community, and serves as a good introduction for those who may utilize the assistance of a Realtor.

One of the more difficult aspects of the foreclosure market is acquiring the correct contact information of the lender or owner, as the task can often be tedious. Realtors first learning the proper research methods may spend hours on the phone, the Internet or at the Daley Center. The Multiple Listing Service of Northern Illinois is an excellent resource for locating foreclosed homes to show to clients, according to Lemons. When searching for properties, use search criteria such as “Bank Owned,” “REO” or “No Survey” in the Remarks field.

To profit in this developing market, Lemons advocates taking advantage of current low interest rates and falling prices, and consider marketing properties as investments. Taking the initiative to negotiate a short sale helps both the client and lender, and highlighting the potential for significant discounts can help build a track record of success. It is also advisable to align with an attorney proficient in handling foreclosure issues, as loss mitigation specialists and lenders commonly look favorably toward legal experts ahead of Realtors.

The foreclosures and short sales market has seen tremendous growth recently, with industry forecasts indicating the market will remain profitable for those in position to benefit from the growing need for experts in this segment of the industry. With lenders interested in moving properties quickly, Realtors who know where to look can often show clients a rising number of affordable properties. Identifying and educating property owners and homebuyers about the benefits of the preferred short sale transaction provides an additional opportunity for profit. Maintaining sharp knowledge of both the changing market conditions and rules of the road may prove rewarding for the savvy Realtor. C.A.

Resources:
Glen Daniels
Foreclosure.com
561.981.5337
gdaniels@foreclosure.com

Nancy Freeman
RE/MAX of Joliet
815.741.3100
Nfreeman221@comcast.net

Marki Lemons
Keller Williams Realty
773.536.8515
markilemons@kw.com

Dale Shea
Koenig & Strey Lake Forest West
847.295.8400
dshea@ksgmac.com