The 2 Most Important Parameters

Mike: Welcome back to the flipnerd.com REI Classroom, where experts from across the real estate investment industry teach you quick lessons to take your business to the next level. And now, let’s meet today’s expert host.

Brian: Hey, guys. Brian Meara here with the Investor Entourage and I’m today’s host of the REI Classroom, here to talk you about the two most important parameters to talk about when dealing with a short sale.

Mike: This show was sponsored by passiverental.com.

Brian: Okay, guys. I get asked all the time, “Brian, how do you analyze a deal?” And many of you have seen my trainings on how to properly analyze a deal or going through a 14-step questionnaire, analyzing the camps and really getting into the detail. But a lot of people want to know right off the bat, “Well, that’s fine and all, but what are the base parameters?” And I tell people all the time and the whole purpose of this short training today, guys, is you only need two things and two things alone to have a successful short sale. Let me rephrase that. To have a successful candidate for a short sale. Okay. What are they and why are they important?

Number one, you need to be behind on payments. If somebody is current on their mortgage, they are not going to qualify for a short sale. But some of you may say, “Hey, Brian, wait a minute.” Part of that national standard short sale policy, if it’s an FHA, FHFA, Fannie Mae & Freddie Mac loan, didn’t they say that you can actually be current and still qualify for a short sale? Well, sure, they’ve said that, but I’ve just never seen that happen.

We’ve done enough sales guys around the entire country to tell you with a 100% certainty I have never seen a short sale go through where the people were current on their mortgage. Now, there may be some strange circumstance where it actually took place. I’ve just never heard of it. And if you have, let me know because I don’t think it exists. So you have to be behind on payments.

Now, another question to follow up to that is, “How far behind do they have to be?” Do they have to be in extreme default? Is it 90 days? Is it when they file the lis pendens? Guys, one month. One full month. So if the mortgage is due on the 1st of the month, when it rolls around the first of the next month if they didn’t pay, they’re now legally in default. They broke their contract and now we can do the short sale. So yes, you’re going to come across deals where they haven’t paid in six months or maybe two years, and that’s obviously fine, but as long as they’re at least one full payment behind, they qualify for the very first parameter that they have to be behind on payments.

The second parameter, getting right into it, is you have to have negative equity. For those of you who don’t know what I’m talking about, that means you need to owe more on the home than what it’s presently worth. So generally, most people, you’ll find, have two mortgages. They’ll have their first mortgage and will have the second or they’ll have their first and a line of credit or a HELOC, home equity line of credit, whatever. Whether they have two, three, any combination, when you take their combination of the liens, whatever they are.

So let me give you a good example. If they have a first mortgage with Wells Fargo and it’s for $150,000, they have a second mortgage or a second HELOC if you will for $50,000 with Bank of America, the total that they owe is $200,000. If the current market value is less than $200,000 of their home, you have a short sale. You have what’s called negative equity. And people say, “Well, what if you’re right on the brink?” What if they actually owe $200,000 total and the house is worth around $200,000? Well, then you still have a negative equity situation.

“Well, how is that?” Because, guys, there’s a little something called closing costs when you sell a house. And generally, it’s right around 8% to 10%. Closer to 10% in most areas because 6% right off the bat goes to a realtor. Then you add in your transfer tax, your this, your that, your other, so you’re at about 8% or 10%. So 10% on a $200,000 house is another $20,000 the seller would have to bring to the table.

Well, let me tell you something. People who are unable to pay their mortgage don’t have $20,000 lying around in check book. So you have the perfect storm where you’re behind on payments, you have negative equity, and now we can begin. Now we can actually do a proper analysis and get into those 14 questions to see if we have a deal that meets our parameters as investors.

So, guys, until the next time, I hope that helps. When you’re going out there, you’re doing your lead generation, your marketing, keep those two things in mind because that’s all it takes to get the ball rolling. Talk to you soon.

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