Today’s REI Classroom Lesson

Brian Meara teaches us today how to determine the best course of action for short sales.

REI Classroom Summary

Analyze what is profitable for you by calculating the cost of money. Closing costs and repairs need to be factored in when looking at profit.

Listen to this REI Classroom Lesson

Real Estate Investing Classroom Show Transcripts:

Announcer: 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 everybody, this is Brian Meara, Founder of The Investor Entourage, and today’s topic in the REI Classroom is going to be to flip or not to flip. That is the question.

Announcer: This REI classroom real estate lesson is sponsored by AceBusinessFunding.com.

Brian: All right, guys. A lot of times in the world of short sales, people always want to know, specifically, about flipping short-sales with all the new laws and regulations that are always coming about and changing, I guess you could say. “Hey, Brian, how do I know whether or not to flip the property, how do I know whether to do an assignment,” which you can do, we’ll get into that in a second, “or how do I know whether to walk away?”

Well, guys, first of all, let me just clear the air right here. You can wholesale short sales. If you determine that it’s not a good opportunity to flip it, you can and should actually wholesale that property. There’s no reason for you to walk away and not get paid for you and your team, absolutely none, especially with the amount of work you have to do, and there’s a legal way to do it.

Now, here’s the thing that most people don’t understand and I want to talk about briefly here today. Every short sale approval letter . . . because, remember . . . let me set the foundation. When you go to a bank and say, for example, someone owes $250,000 on their mortgage, but now the value has gone down and it’s only worth $200, 000. And you’re going to them and saying, “Okay. I want to buy this house and I have a buyer. It’s going to be $200, 000. It’s the sale price.” Well, they’ve got to give you permission to basically “eat” that $50, 000. They have to give you that 3rd party approval to sell short, hence the name “short sale,” okay?

For those of you that are brand new, I just want to make that very clear to you. The bank is the one that has to decide if it’s going to go through or not and allow you to sell short. I should say to allow the seller to sell short and allow you to buy short.

Now, that being said, when everything is all approved, you are going to get what’s called a short sale approval letter and it’s going to list all the terms of the sale. It’s going to say here’s the seller, here’s the buyer, here’s the price, here’s how many days you have to get it done in. Normally, it’s 30 days. So from the date they issued the approval, you generally have about 30 days to get it closed.

And, speaking of that, you can get an extension if you need one. A lot of times because someone’s getting a mortgage or maybe just some title issues, etc., you are generally able to get at least one extension. So if you had to get another month, that’s generally not a problem. It’s not guaranteed, but in our experience, about 95% of the time you will get an extension if you do need one. Here’s the thing, it comes down to analyzing what’s going to be more profitable for you and what’s going to better for all parties involved.

So with the short sale approval letter is going to come what’s called a short sale affidavit. The short sale affidavit is going to list the specific terms in bullet points on the terms on the sale in addition to what was shown to you on the short sale approval letter. For example, most people don’t know that when you buy a short sale, a very big majority of the time, guys, you’re going to have what they call resale restrictions. Meaning, if you’re an investor, and you’re going to flip the house, they’re going to say, “Okay, John, you can buy the house, this is a short sale. We’re giving you a good deal here, but you can’t resell for x amount of days.”

Now, back in the day, when they first started placing these restrictions, it actually started in 2010. It started with a bank called Country Wide, which is now known as Bank of America, and they came out with what they called their famous/infamous Bullet Point Number 10. It was a 30-sday restriction saying, “Okay. You can buy for this price, but you can’t resell it, no matter what, for 30 days.”

Okay. Well, then other banks and services started getting on board and then we started seeing 60 days and 15 days, and I’ve seen 180 days, 120 days, 90. What the GSEs did, basically, the government, the FHFA, which stands for the Federal Housing Finance Agency, who is overseeing Fannie Mae and Freddy Mac, the GSEs, the Government Sponsored Enterprises, what they basically did is standardize everything a few years back.

And they said, “All right. Look, there’s too much confusion. There are too many rules floating around. We’re going to standardize this.” And basically, what they came out and said is this, “You can buy a short sale at a discounted price, wonderful. But, you cannot resell it for 30 days.” And they standardized that. They basically said 30 days or nothing. “We don’t care what you do. There’s no transfer of the deed to another person after you buy it for 30 days. Now, from day 31 to day 90, so basically, for months 2 and 3, you can resell that house, but we’re going to cap your profit.”

I know that doesn’t sound American and I don’t agree with that, but these are the rules. They say, “We’re going to limit your profit to 20%. So you cannot resell that house for more than 20% of what you bought it for.” So if you paid $200,000 for it, guys, you can resell it for $240,000 and not a penny more.

You can say, “Well, I put work into it. Well, you know, I got my contractors in there!” It doesn’t matter. Unfortunately, it doesn’t matter. These are the rules. Now, after day 90, day 91 and forward, you can sell for whatever you want. You can take that $200,000 house and sell it for $2 million. But, along the way, you have to follow these rules.

Why am I telling you all of this? Because, based upon how you’re going to buy the house, based upon how and what type of funds you’re using, there’s a cost to money. Well, you can say, “Well, I’m using my own money, taken out of my 401K.” Wonderful, well, then maybe if you earn 3 or 4% in that account, it’s really not going to matter too much to you.

If you’re using your own cash, then I guess that’s not going to matter too much either. But if you’re going to get a private loan, if you’re going to borrow some hard money, or even if you’re going to a bank, and that’s not really too popular or even possible, today, but say you’re getting some kind of financing, let’s just say that. You need to calculate the cost of the money.

Number one, how much is this money going to cost me? So, the first thing you need to do is decide, well, knowing I have to hold this for 30 days. I’m automatically counting that I need this money for, let’s say, 31 days at minimum. And then you run through and you do your math. You say, “Here’s the cost of the money.”

And the second thing you need to keep in mind is closing costs. Because when you buy a house, there’s a closing cost. And when you sell a house, there’s a closing cost. You have the first end and you have the buyer-side closing costs, what you as a buyer have to pay. And then you have to sell it and you have your seller-side closing costs.

So what we say is when you flip a house, guys, number one, count the cost of your money. Number two, count the cost of both ends of your closing costs, first as the buyer, then as the seller, and then you do your math and say here’s how much I’m going to make.

What’s interesting is this: a lot of the times, you’re going to find that it would be easier just to remove yourself from the situation, step aside and get paid what we call a wholesale fee. And, again, there’s a very specific way to do this, but we’re just touching the surface today. You’re going to find that 95% of the time, you’re going to make more money stepping aside. You make more money and you get paid quicker. Last I checked, everybody loves that.

Now, here’s the final point on this training here today. How do you know if the short sale that you’re about to start with, you’re going to get a short sale going, you say, “Brian, how do I know that this is going to have one of these rules attached or this set of rules that you talked about? These hold periods?”

Well, you know if it’s a Fannie Mae or Freddie Mac deal, it will. It’s 100% guaranteed. If it’s not a Fannie or Freddie loan, chances are we don’t know and that’s where there’s a little bit of risk involved. You have to, I would say, assume that it’s going to have it if you don’t know for sure. But, if it’s not a Fannie or Freddie loan or GSE and you get lucky, well then great, you don’t have any restrictions. You can flip it the same day for $1 million.

Here’s how you know if it’s a Fannie or Freddie loan, and this is what we’re going to close with, guys. I’m going to give you two websites that are called look-up sites to find out if it’s Fannie or Freddie Loans so you’ll know for sure. The very first one, for Fannie Mae, is KnowYourOptions.com. So that’s “know,” K-N-O-W YourOptions.com/LoanLookup. Just like it sounds. L-O-A-N-L-O-O-K-U-P. KnowYourOptions.com/LoanLookup. That’s how you will know for sure if Fannie Mae owns that loan.

For Freddie Mac, you want to go to ww3, not www, it’s ww3.freddiemac.com/corporate. C-O-R-P-O-R-A-T-E. You go to these two sites when you’re analyzing a deal. You know up front whether it’s a Fannie or a Freddie. You know, therefore, whether it’s going to have these restrictions and you can work your deal accordingly. So, until next time, we hope that helps.

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Brian Meara
Brian Meara, CEO and Founder of The Investor Entourage, has closed and worked with thousands of deals that span the entire nation. He is one of the nation’s top real estate investors and educators, specializing in distressed debt (short sales).To learn more, visit http://www.investorentourage.com.
Brian Meara

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