In my previous blog post, “What is a Pre-foreclosure Investor Buyout,” I gave you an overview of the process from the perspectives of all of the players’ party to such transactions: investors, real estate agents, property owners facing foreclosure, and end-buyers. In this article I’ll explore Pre-foreclosure Investor Buyouts (PFIB’s) more specifically from the property owner’s perspective.
As a quick recap, remember that a PFIB occurs when a real estate investor (and his/her team of negotiators and BPO agents) in conjunction with his real estate agent, places an offer on a property while simultaneously placing the property on the market for resale. The investor’s intention is to make a fair profit on the spread between what he purchases the property for in a short sale and what he resells it for to an end-buyer.
Why is this a Good Thing for a Property Owner Facing Foreclosure?
As far as the property owner is concerned, there are two principal issues:
· Avoiding foreclosure if possible.
· Minimizing the negative impact that such unfortunate circumstances can wreak on both current and future finances.
A successful PFIB directly addresses these concerns by stopping a foreclosure from happening and thus avoiding the financial repercussions that such inevitably brings. And, because a short sale transaction accomplished using a pre-foreclosure investor buyout is more likely to close (and to close more quickly as compared to a conventional short sale listing — often by months) accruing costs and fees are minimized.
If you have any sort of experience working short sale listings, then you are likely well aware of the many challenges involved in getting them negotiated and closed — the primary stumbling blocks to success being:
· The ridiculously long timelines involved.
· The “fragility” of offers and the ease with which a buyer can “walk away.”
Properly executed PFIB’s serve to hasten the negotiation and sales processes to as short a timeline as possible while also building in protections to help ensure that end-buyers are serious and well qualified before accepting their offer. So, how is this done?
When entering into a PFIB the property owner gives the investor permission to immediately submit and negotiate his offer to the lender and to simultaneously market the property for resale. Unlike a conventional short sale listing, where the actual negotiations with the lender(s) don’t begin until an ultimate end-buyer submits an offer (often weeks, or months after the listing is taken) the negotiations start immediately with a PFIB, and at the same time that the property is being marketed for resale.
This “simultaneous negotiating and marketing” can mean a significant decrease in the total time required to get final lender approval of the short sale and to get the transaction closed. Since time literally translates into additional missed payments, compounding and accruing interest, late fees, attorney’s fees, and penalties, decreasing the timeline unquestionably means decreasing the negative financial impact to the property owner.
Furthermore, and for reasons that I’ve never quite understood, the purchase offers typically forwarded on to lenders by real estate agents engaged in conventional short sale transactions are most often written and accepted with so many “holes” in them that the odds of a buyer backing-out without consequence are high.
A typical, conventional short sale purchase offer might allow for:
· “Earnest money to be submitted x-days from written lender short sale approval.”
· “Inspection to be completed within x-days of written lender short sale approval.”
Given the fact that “written lender short sale approval” may realistically not occur for as long as three to six months from the time an offer is submitted (all while costs and fees continue to accrue to the property owner) such language is clearly detrimental to a property owner counting on a buyer to stay in the deal and close.
Think About It
After months of waiting and thinking the property is sold (and as the pending foreclosure sale date looms closer and closer) the so called buyer can, without consequence, decide to reject the property, or ask to renegotiate the offer, knowing that the property owner is becoming desperate and has little in the way of leverage to hold the buyer to the transaction. Furthermore, it is not unknown for short-sale buyers to simultaneously make many such offers on multiple properties, knowing full well that they are only going to move forward with the property that is approved first, and “letting the other’s go,” to the detriment of the underlying property owners.
At least in the early weeks of the process, what the investor and property owner most want from a buyer is a “firm commitment,” which in the short-sale world means an “up-front” earnest money deposit and inspection/review period. A buyer who is unwilling to “put their money where their mouth is,” up-front, is one who is looking for the flexibility to walk away without consequence. I can tell you from personal experience that buyers who really want a property will make the commitment – I routinely get buyers to put up earnest money and complete inspections with the full knowledge that if they withdraw from the transaction for any reason within 120-days they will lose their deposit.
Does this keep many from submitting offers in the early weeks of the process? Of course it does, but who cares? Our goal is not to get “offers.” Our goal is to actually close transactions, save people from foreclosure, and make a fair and ethical profit in the process.
Of course, as the negotiations with the lender(s) progress, your requirements for an acceptable offer can be loosened accordingly. Ultimately, and only because the property is being simultaneously negotiated and marketed using a PFIB, the property can be marketed as, “Approved short sale – 30 day closing,” and the price dropped to virtually guarantee a quick sale to a ready, willing, and able end-buyer.
Finally, as we all know (or should) a short-sale has MUCH less of a negative impact on the credit-score/financial history of an individual than does a foreclosure. A foreclosure judgment is permanently recorded in the county records and will negatively impact an individual’s credit-score for upwards of an entire decade. On the other hand, a short-sale shows the mortgage as “paid/satisfied” in the county records and doesn’t have near the negative impact of a foreclosure – in conjunction with a good credit repair/counseling program, good credit can be restored after a short-sale in as little as 2-3 years.
The benefits to property owners of working with investors to effectuate ethical PFIB transactions are clear. By choosing to work with an ethical investor who’s well versed in Pre-foreclosure Investor Buyouts, a property owner can do much to avoid both the pitfalls of conventional short sales, and the dangers of foreclosure itself.
Clearly, in a perfect world, needing to short sell one’s property is not an ideal state of affairs, but we are not dealing in “perfect worlds,” nor “ideal states of affairs.” We are talking about dire circumstances in which a foreclosure is inevitable. While having to do a PFIB is not an ideal situation to find oneself in, it is far and away the BEST alternative (in my opinion) amongst some not so very good alternatives for the property owner.
PFIB’s don’t make the world “perfect” for the property owner, they just make it as good as it can possibly be given the circumstances, and as such, they should be a readily accessible and familiar tool as you move forward in your real estate career.
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IF you are a Realtor or Listing Agents reading this, all you need to do is contact me for any of the following reasons:
***You have a current short sale listing yet no buyer
***You are about to go on a listing appointment that will be a short sale (or about to list a short sale)
***You would like to learn how to market effectively and truly capitalize on this once-in-a-lifetime opportunity
Because remember agents, “You’ll never talk to the bank, and I’ll never touch your commission!”