Quickly Analyzing the Deal

Mike: Welcome back to the FlipNerd.com REI Classroom where experts from across the real estate investing 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, this is Brian Meara, Founder of the Investor Entourage here with another exciting lesson to teach you today about how to properly and quickly analyze a deal.

Mike: This REI Classroom real estate lesson is sponsored by VirtualStaffNow.com

Brian: All right, guys, when we talk about analyzing a deal, specifically a short sale, there are really only two things that we need. Now, if you are working closely with the listing agent on a short sale or if you are the real estate agent, there are two things that we need as a company, as the Investor Entourage, that we do together to quickly analyze a deal. We need answers to a set of questions. We actually have specifically 14 and we ask for two very specific sets of comps. And we’re going to review that here right now.

All right. Let’s get into the questions first. Number one, we want to know are the payments being made on the mortgage, of course, and if not when did they stop? Question number one.

Number two, has the bank filed a notice of default yet? Now, you would know because this would come via certified mail. They would tape something to the door so we would know if there is a notice of default.

Is there a share of sale or auction date yet and, if so, when is it? We want to know the mortgage company or the bank and servicer name and we want to know basically how many loans they have. Is there a first, is there a second? And in some follow-up information . . . it’s nice to collect that up front. You don’t need this right away, but we ask for the loan number. The reason for that is we want to look up sometimes immediately when we talk about another training to see if it’s a Fannie Mae or Freddie Mac loan.

We want to know, are the taxes being paid with the mortgage payment every month or are they being escrowed, or is the homeowner required to pay them on their own?

We also want to know if there is a homeowner or a condo association and if they are current.

Are there any other judgments or liens that the seller is aware of? For example, do they owe back child support payments? Do they have some alimony that’s due? Credit cards, judgments, back taxes etcetera. These are things that are going to need to be addressed when we’re working a short sale because, in order to get free and clear marketable title, all these things must be addressed. So we would like to know up front when we’re analyzing the deal exactly where we stand.

Moving right along, is the house currently listed on the market with a realtor? If so, what is the list price, when was it listed, and how has the showing activity been? Let me stop and talk about that for a minute because it’s very important. Number one, all short sales by law must be listed on the open market. So if you’re working a short sale and you’re thinking I’m just going to short sale this house and put together my offer and send it to the bank, they’re probably going to make you list it. You could pend it right away; most times you have to list it. You could mark it pending or under contract right away, but it still has to be listed. It’s just a law; it’s just a rule. Once in a while, you’ll find you don’t have to do that. But 99% of the time, plan on doing that.

So if it is listed, we want to know some of the background information. The next question is, following right along, have any offers or contracts been presented to the bank yet on this deal. If so, how much was the offer and what was the bank’s response? See, guys, we care, but we don’t care. Let me explain. Most realtors have no clue what they’re doing when it comes to short sales. I’m a realtor and I can tell you that. It’s not a mean statement. We as a collective are not trained to do short sales. When you go to real estate school, there’s no part on short sales. Maybe a little, tiny chapter, if that. Wasn’t even anything in my school. And you’re not trained to negotiate first lien, second lien position FHA versus VA.

You don’t know the rules. That’s not your job. Generally, attorneys are doing that stuff. What happened is with the downturn in the housing crash, all of a sudden realtors, listing agents specifically, had to learn how to become back negotiators and it didn’t work out real good. Now, I guess they got the job done and over the years, people have gotten better, but it’s still something that we find they make a lot of mistakes in. They list it too high or they list it too low. They send in the right offer, they send in more than one offer.

Many different problems that we’re not here to talk about today, but we want to know the history of what’s going on so we can see what the bank has already been looking at. Now, that is why we care. Why we don’t care is because we have a very set process in how we do things that we know works. So, again, we’re going to draw a line and start over regardless of what’s been done, but we want to know a little bit of history about that.

We want to know, does the house need work and, if so how, much and are there any major repairs needed, such as the roof, the foundation, electrical, etcetera. We want to know because this is going to determine value from the very beginning. How do you know how much to offer? Well, of course, you’re going to look at comps and you’re going to want to know what kind of work does the house need. The bank has to know this. Yes, they’re going to send and do a BPO, which is a broker price opinion, which is a mini appraisal, let’s say. Or they’re going to order a full-blown appraisal. But, with your offer, you’re going to want to send in some supporting documentation.

One of the things you want to send in is a repair estimate. And so, to analyze the deal at the very beginning, which is what we’re talking about, we want to know up front if the house needs work and if so how much.

We also want to know who’s on the title, the deed, who’s on the actual mortgage and who signed the promissory note. This is important because we need to know if all parties are around to be able to sign the paperwork. A lot of times, you’ll find that these short sales happen when there is a divorce. If someone cut and run and moved to the other side of the country and they’re not really on the best terms, let’s say, that could cause a problem for your deal. You want to know that up front.

We want to know, has the homeowner or the owner of record ever filed for bankruptcy? If so, when? Was it a chapter seven or 13 and where do we stand right now? Has it been dismissed?

We want to know was this a primary residence or an investment property. We want to know if it’s currently vacant or if they’re still living there.

There are the questions that we ask up front for every deal to completely understand and to get a very brief yet very accurate snapshot of what’s going on with the house.

When it comes to the comps, part two, we want two very specific set of comps. We want to know the three lowest comps of apples to apples. You want to compare the same number of bedrooms and the same style of house in the same area. We say to go back six months in time and don’t go out more than a mile. Those are general regulations. Six months in time, one mile, same number of bedrooms. We don’t really care about bathrooms.

We want to take a look at the three lowest comps and we basically average them out. We then want to look at the average comps. Not the highest, but what the houses are really selling for, we say, in today’s market, in its current condition without doing any work to it, just a 30-day quick sale value.

What we’re trying to do is we average that with the low comps and we try to find a range around $40,000. If we see an average spread on paper of $40,000 plus between the average of the three lowest comps and the average of the three average comps we’re going to know we have a thumbs up on the deal. If everything checks out on the questions, everything checks out on the comps, we can then proceed with the deal and that’s how we can quickly analyze any deal in five minutes. I hope that helps. Until the next one, we’ll see you soon.

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