Today’s jam-packed post is a follow-up to last week’s about short sales in which I covered a lot of solid information about the basics of short sales.
I started by explaining the difference between short sales and foreclosures, and I talked about the key players who are involved in both types of strategies: the homeowner, the lender and you – the investor. I also covered why short sales are usually the better option over foreclosure and how they benefit everyone involved.
You should definitely give Part 1 a read as it has a bunch of valuable info.
For today, let’s move from the basics of short sales into all the details…
You may be wondering how I do short sale deals in my own business, or why a Broker’s Price Opinion (BPO) is such a critical factor in short sales, and how an external BPO differs from an internal BPO, and more importantly, which type of BPO you want as the investor. Maybe you’re thinking about how you actually close a short sale deal…
Well, I’ve got you covered with all that and more. Read on.
How My Business Does Short Sales
Let me first say that I really like short sales as an investing strategy. And in my business, we are the buyer of the short sale property.
The homeowner would have found my business from our marketing and gotten in touch with us about selling their short sale home. Usually, the homeowner wants information about how our program works and simply asks for our help to get them out of their troubling situation.
Using a script, we explain how our process works and answer any questions they have. Sidebar – there is a right way and a wrong way to speak with sellers (that’s a whole post unto itself), but just know that using a script is super helpful and necessary.
Let me put your fear to rest here… speaking with short sale sellers is easier than you think. Remember from Part 1 – the homeowner greatly benefits from a short sale because they avoid foreclosure. So they really are more willing to speak with and work with you.
So, if the seller agrees to do business with us and we all agree on a sales price, I put together a Purchase Agreement and any other disclosure documents that are needed to buy their property.
Important Reminder #1: You must have an experienced attorney review all of your legal documents, agreements and contracts to ensure you are protected. Don’t have an attorney on your team? Ask for referrals from other investors at your local REIA meeting.
Our next step in the process is to create a professional-looking short sale package. This will contain all of the documents, agreements, disclosures, property stats, etc. and will be sent to the lender. Once the lender has reviewed the short sale package, you’ll be in contact with them and start to negotiate.
I’m sure you’ve heard the saying: Patience is a virtue. Well, your patience will be tested here.
The short sale negotiating process with lenders can be tedious and lengthy. We actually have a team in my business whose sole job is to negotiate and handle this part of the deal.
You (the buyer) and the lender might agree on the terms of the sale in just 7 days (albeit unlikely, it could happen) or it may take up to 4 long months. Be prepared to dig in and wait.
Important Reminder #2: This is a perfect example of why you should never stop marketing for new deals. Because short sale negotiations with lenders tend to be a long process – you need to keep your marketing going so you continuously have leads coming in that you can be working on and moving forward while you wait out the negotiations. If you stopped marketing and had no deals in the pipeline, how would you bring in any profits while you did nothing but wait 4 months for something to happen with your current short sale deal? My point exactly. As your business grows, build a team so you can handle working on several deals simultaneously – and never stop marketing.
So, at some point during the negotiation process, the lender will come back to you and say the price that you and the seller agreed to is either (i) something they want to entertain or (ii) is ridiculous.
If the latter happens, you need to be prepared to substantiate why it does makes sense – which leads me to the most important part in the short sale process…
BPO – Broker’s Price Opinion
I believe that the BPO – Broker’s Price Opinion – is what the entire short sale transaction hinges on.
See, the bottom line is that as the real estate investor, you need to get a significant enough discount from the lender so that this deal makes sense for you – and that is based on the BPO.
The BPO will come from an internal source or an external source.
Internal BPO: The lender will contact a local real estate firm to hire an agent to put together a BPO report on the property. The agent heads to the property, does a walk-through taking notes and pictures along the way, and then creates the report from the information they’ve gathered.
That BPO report will provide a value for the house based on certain things – condition of the house, any needed repairs, comps, etc.
Let me be very clear here: We want the internal BPO. We do not want an external BPO and here’s why…
External BPO: This is also called a Drive-By BPO, for obvious reasons… the agent literally drives up to the property and simply confirms the house is still standing. The agent will also note what houses are selling for in the neighborhood and provide a price for your property based on that – and that’s it. Really, that’s the extent of the external BPO. That is all they’re opinion comes from, which just simply isn’t based on enough information. And because of that, you’ll lose the deal.
Now do you see why you always want an internal BPO? You have to request that the lender orders an internal BPO.
I’d encourage you to take this part of the process a step further…
I (or one of my team members) will meet the agent at the property and walk through the house with them. It’s the ideal time to look around and work on repair estimates. It also provides you an opportunity to ethically influence the agent’s price.
It should go without saying that you’re NOT going to hand the Realtor a $20 bill or a gift card and say, ‘Hey, let’s bring your price down to $XXXk.’ Besides the fact that doing that is unethical – you can get in a whole heap of trouble.
So, here’s what I mean by ethically influencing…
You can say,
‘Well, these are the comps I’m seeing, and based on these comps the price should fall near $XXXk.’
‘Based on the repair estimates we’ve received, this house is worth $XXXk.’
This works because during the walk-through, the agent will see what bad shape the bathroom is in or that the floors need replacing, etc. So by bringing those things to the agent’s attention, they now have more solid evidence to base their decision on (unlike in the external/Drive-By scenario).
I’ve had good outcomes with the internal BPO of an agent.
But, I do have a word of caution about a potential conflict of interest. Now, I first have to say that I do not think agents are bad, and I’ve worked with many who are great and honest. But, I need to share this with you, so you are prepared for all scenarios.
Beware: Sometimes, the agent is an REO Realtor. They might be thinking, ‘Hmm, if this house doesn’t sell because the BPO is too high and this deal doesn’t work, then I might be able to contact the lender and get this listing myself.’ So they might try to sabotage the deal by providing an inaccurately high value for the home.
And, there’s actually one more type of BPO, which is a full-blown appraisal. You’ll see these from time to time in the short sale process. This is when the lender hires an appraiser to do a complete appraisal of the property.
And you know what?
This kind of BPO is really good. I’ve had great outcomes with appraisers.
Hopefully now you can see why I think that the BPO is the #1 biggest piece to the short sale puzzle.
Show Me the Numbers
Let’s put some numbers into this short sale process now…
If your deal involves a property that could sell for $250k on the market, and your offer is $200k, but the BPO values the house at $250k – you have a problem.
The lender is going to see that the BPO is $250k and not only is your offer too low, but the lender will likely decide they can sell the property on the market for around $220k. So, they might come back to you and ask you to increase your price to $230k.
At that price, it probably won’t make sense to you as an investor and your deal is pretty much dead.
Here’s when it would make sense – if the BPO agent finds comps to be around $220k plus there are repair costs – their BPO price might be around $210k – then, your $200k offer price is good.
Typically, lenders will take a percentage of the BPO – maybe 82% or 90% (each deal and property is different). So if they want 90% of the $210k – now you have a winner and everyone involved is happy.
You then buy the property at the discounted price of $200k and quickly wholesale it to an investor for $239k – and well, I don’t have to tell you that that’s a good payday.
Buying the Property and Closing
Now – at the same time the negotiating is happening and the BPO report is being created – you’re busy looking for a buyer.
Keep in mind that you do not have to finance the deal to buy this property… you don’t need to use any of your own money or credit.
The way this works is with a simultaneous or double close – which is you buying and selling the property at almost the exact same time (probably back to back) and definitely on the same day.
Some states also require transactional funding to close deals.
Both of these closing methods vary depending on your state. So here’s another important time when you need to consult your attorney.
Wrap it Up
And there you have it. The short sale process really isn’t that complicated once you understand who’s involved in it and the steps that take place.
Best of all, short sales benefit all parties – the homeowner avoids foreclosure, the lender is done with the property and you make a nice chunk of change in the middle.
Maybe now you’ll consider a short sale as your next deal.
Do you have something to add about short sales? Speak up in the comments section below.