Friday, August 1, 2008

And The Winners Are...

Short Sale Prospect!


MY thanks goes to those 12 virgin "profitable investment strategies" survey responders!

According to our survey, the top two most important issues we face are, 1) "Finding Deals, and 2) "Finding the strategies that work today".

Well, thankfully that is the purpose of this blog; to offer, discuss and brainstorm the best ways to find "deals", and what is working "best" today.

Of course, the "best" strategies for finding deals differ for each particular niche we mine. For now, we'll talk about short sales. For instance, driving neighborhoods, and looking for "short sale" candidates would be really inefficient, and the long route to success.

On the other hand, a more efficient strategy would include focusing on those prospects who've been sent a Notice of Default. That's obvious, except some prospects want to try a short sale, when they can't sell, but their house payments are current.

Meanwhile, even more efficient...is focusing on those in default, who also have more than two mortgages.

Uh, yes! To continue, the even more efficient strategy is to focus on those who have mortgages with two or more lenders --- and those with mortgages older than 18 months old.

Still further...those with mortgages that have been sold more than once. Wow! There's more. The owner is also bankrupt, cannot recover, has a story to tell, has a house that's in terrible shape, and requires more than 10% of the value in repairs.

Do these houses exist? Of course they do. However, the amateurs don't know that they need these criteria to line up before "messing" with them. Short sales are already "hard sells" with lenders, so it's important to focus on the most likely candidates. The fact is finding these gems takes patience and work.

This is a "wholesaling" approach to short sales, not to be confused with the approach a typical real estate agent would use to help a residential buyer negotiate a "mild" discount.

Here's a more comprehensive list of things we look for in a true wholesale transaction:


  • all loans in default

  • more than 2 loans in default

  • each loan with a different lender

  • loans are older than 18 months

  • loans sold more than once

  • 2nd loan exceeds 30% of current LTV

  • 3rd exceeds 10% of current LTV

  • Combined junior liens exceed 35% of current LTV

  • borrower cannot recover financially

  • borrower is insolvent

  • borrower has a "sad story" (less useful when negotiating with with larger lenders)

  • house has more than 10% worth of repairs needed (the worse the "better")

  • lender has local loss mitigation dept.
Focusing on homes with these qualifications will put the investor way ahead of the pack, if not massively increase the likelihood of a successful negotiation.

Of course I'll just add here that we're building a case in our short sale package submission for the senior lien holders. In a gross nutshell, the junior lien holders typically discount their face values roughly 90%. That is a $70k 2nd might be sold to us for $7k without much hassle, and sometimes with just a couple phone calls to the lender and very little paperwork. So we'll focus less on these, and more on the mechanics of discounting senior liens.

Meanwhile, we want to make sure we've built a convincing case that can be easily understood by the lender...and make it as easy as possible for the lender to accept our proposal. That doesn't mean they'll just roll over. However this does mean we include pictures, and supporting information that sells our proposal...including making sure the bank receives our photos of the dump which requires both faxed and FED-EX'd, copies of the short sale package.

When/if the bank counters us, we would then supply negative demographic information. On the second counter we would include as much negative market data as available. In the third and final counter, we include criminal data, and anything else that offers a negative picture of the situation.

Why do I say "final". Our experience has been we've got three chances at bat. After this, there is a diminishing return on our investment of time. This doesn't mean we have "no" chance, but at this point, we've pitched the price a half dozen times in conversations with the lender.

With experience, one can read the writing on the wall, and know when to fold.

Care to respond, or add two cents?

6 comments:

Anonymous said...

Great post; I really like how you break down the criteria to focus on in order to zero in on deals before even talking to any sellers. Huge time/frustration saver.

One question: I'm assuming you're looking for these deals exclusively in your farm area so you know a good deal when you see it; how large of a farm area would you suggest starting out with?

Obviously having a large farm will bring in more opportunities, while a farm that is too small won't bring in a consistent stream of deals.

How much territory can a one-man operation effectively cover, while maintaining the required level of familiarity with it all?

Thanks!

Jay said...

Anonymous,

Thank you for asking several sophisticated questions!!!

Yes, we are looking in a specific farm area so that we CAN "know" what a good/excellent deal looks like.

As far as the size of the farm to start with...

We'll assume the mail piece has been tested, and the response rate is dependable for a certain control group.

If not, we would need to test our DM pieces by starting with a small geographical area and mailing maybe 1 or 2 hundred records/prospects once a month for 3 months:

Profile Example:
3/2/2's
1,500 sqft. (plus or minus 200 sqft)
6,500 sqft. lot size (plus or minus 100 sqft)
60% LTV(+-) First (Short Sale Prospects)
35% LTV(+-) Second ("")
10% LTV(+-) Third ("")
and whatever else you sort for.

After 3 months, we can know precisely what to expect, and from this data determine how much to expand/contract our mailing list/farm area.

Meantime our response rates, coupled with the time and money we have available for everything, will dictate the size of our mail list and/or geographical farm area,

My mentor closes on two properties a month, and sends out only 50 postcards a week to a highly sifted and tailored mailing list. He says this keeps him busy enough. At roughly $50k gross profit spread per transaction (sub2'ing), he says that’s plenty for him. However, he's retired! So this may not fit your needs/abilities/desires/goals.

Otherwise, the size of the farm is finally dictated by how much time and money we have available, not the geographical boundaries.

It's just more efficient time and money-wise to keep the farm manageable to what we can drive to within 20 minutes, or less, and not so much failing to be an expert in the farm area. It doesn’t take a lot of time to become familiar with the market values and trends if we’re using the correct tools, such as FARES provides us [First American Real Estate Solutions].

It’s just that many people try to shoot from the hip, are too impatient, and are finally “gamblers” who won’t spend the time and money studying the local comps and market data before making offers, or negotiating in good faith with prospects.

These are same “investors” that fail to buy, or do their due diligence until after they’ve negotiated an “unprofitable” price, and pull out of a deal --- all because they didn’t do their homework --- in the right order.

Jay said...

Anonymous,

We needed to add that with short sale candidates, the gestation period is critical to our success. The gestation means the time left before a trustee sale occurs.

So our DM pieces have to be "seen", opened, read, and compelling to get a response --- because these folks are getting a lot of mail that they DO NOT want to open, including offers to buy their houses, loan them money, negotiate a short sale and whatever.

So, we MUST stick out in a positive, attractive fashion.

The best way we know is to send a handwritten letter to the prospect that establishes credibility and rapport with the prospects. This is done by reinforcing the feelings they are experiencing, and suggesting we know something about their plight --- whatever that experience has been.

We've received responses literally within 24 hours of mailing a test piece using a personal letter. They work. They're time consuming to write, but worth it.

We highly recommend Daniel Bruckner's Short Sale course ($3,500 workshop/seminar). It's worth every last dime, and he only does a couple a year in So. CAL, as far as we know.

Meanwhile, Daniel hires a "staff" of elderly ladies living in a mobile home park that write, stuff, and hand address all his mail pieces at $1.50 a piece, or so.

In our first and successful test run, we formatted a Word doc with a "handwriting" font, and "tinted" the writing to resemble the purpelish ink color of a BIC pen.

We used the same font/color on the envelopes, too. Then we "merged" the first names of the prospects into our letter into a couple of different strategic paragraphs.

It was absolutely awesome/realistic looking --- without resorting to the expensive, retired mobile home resident "ghost writer" situations.

Someday, we're going to sell the complete process we used! LOL!

MattJohnson said...

Great point about testing the mailers and the response rate. Thanks Jay!

Jay Palmquist said...

FYI:

First American Real Estate Solutions, the property data provider I recommend, changed it's name to "FACORLOGIC".

Jay Palmquist said...

Now it's called CoreLogic