This document discusses opportunities for buying distressed real estate properties due to the current foreclosure trends. It outlines the benefits of buying now including increased affordability and potential for appreciation. It provides tips for successful buying such as getting pre-approved, building a strong team with an expert agent, understanding the differences between traditional and distressed property rules regarding price, speed, decision-making and negotiation. Key points emphasized are that foreclosure inventory remains high, all parties are motivated to sell, and mortgage rates are low, though not for long. Myths about distressed properties are debunked.
Instructor Notes: The objectives of this workshop are to do the following: Show your expertise in distressed properties Inform potential buyers in a way that gets them in the game with you—so you get appointments! Recommended Resources: Have these with you to refer to and show when you present: Your First Home (the book) KW First-Time Home Buyer Survey KW Distressed Property Buying Survey TIP: Depending on the percentage of distressed properties in your local market, buyers may or may not decide to buy a short sale or REO. You should always position yourself as interested and able to help them with either distressed or traditional purchases, or both. Winning with Foreclosures
Get attendees involved right away by asking these questions. Learn what they’ve been hearing in the news, and from friends, about foreclosures nationally and locally. How many are there? What kind of deals—how “great” are they (people’s value expectations)? Are deals easy or hard to do? Other impressions, rumors, etc.? Be prepared to start citing some local distressed property market data right away, to show your expertise. LATER IN THE PRESENTATION THERE ARE TWO CHARTS SET UP FOR YOU TO POPULATE WITH LOCAL DATA. Always be sure to cite data sources (your MLS, local Board of Realtors, or State Commission, for example). The graphs and charts in the presentation have credits marked on the slide. Mention the source’s website if it’s been provided in the notes. Winning with Foreclosures
Make the local opportunity real for attendees with examples. At this point, you should show, as illustrations of the opportunity, photos and just a few facts about 2 or 3 recent great local distressed property buys—either listed or closed recently. Touch on the following: How great the value is—compared with nondistressed comps Extent of repairs involved, if any Closing time Return potential: flip sold price or cash flow Tell a personal story about at least one of these properties; it’s all about showing your expertise right away. Winning with Foreclosures
There are three main buyer groups that benefit, confirmed by November 2009 KW Distressed Property Buying Survey. This is the order of buyer types with number one being the largest group. First time buyers using the recently extended tax incentive—they get value in the home and cash in their pocket. Investors, whether beginning or more experienced, who can generate stronger cash flow and better long term return prospects at these prices. Move-up buyers who find they can get more for their money in a move-up than they thought—and do it sooner than they thought possible. Move ups also can worry less about the price they sold at when they’re capturing great value in their move up buy. OPTION TO READ THE PERCENTAGES: The percentages of each buyer type—and what they bought—are available from the KW Distressed Property Buying Survey. These are numbers reported by our agents, based on the percentage of total buys they closed January-September 2009. 50% of REOs are being bought by first time buyers, and 45% of short sales 27% of REOs are being bought by investors, and 15% of short sales 13% of REOs are being bought by move-up buyers, and 15% of short sales Winning with Foreclosures
These are the five main steps in the process of winning with foreclosures. We’ll cover them all during the presentation. Winning with Foreclosures
Foreclosures, or distressed properties, have their own special language. Understanding the basics makes things clearer. Important to recognize the playing field—who controls what property, and where they’re coming from. There are some special rules in buying—different from traditional sales—that need to be followed. Winning with Foreclosures
Distressed Property: This term refers to all pre-foreclosure and foreclosed property. Notice of Default: The homeowner has missed one or more payments and gets this letter saying lender will foreclose. Short Sale: The lender agrees to settle for less than the full amount due on the homeowners mortgage. Foreclosure: The process by which the lender takes property from the owner for failure to pay; also the term to describe the foreclosed property itself. Auction: Foreclosed property is normally offered at auction first—auctions are run either by local government or a private auction vendor. Bank Owned or REO (real estate owned—a banking term): Foreclosed property that is not sold at auction returns to the lender (bank). The lender usually hires asset manager who lists property with an agent. HUD properties are FHA foreclosures. FDIC properties are properties that were owned by a bank that went out of business. NOTE: The “groups of people” symbols appear at points where buyers and their agents can learn of buying opportunities. Winning with Foreclosures
Start by asking how many have bought property before that was distressed, not distressed, or traditional. People who’ve bought and sold before in traditional markets will find some important new twists and requirements in REO or short sale deals. Review the categories in which traditional real estate deals and distressed property deals are significantly different. The next seven slides break down the five differences listed on the left of slide of this slide. NOTE: The term “traditional” is used to mean nondistressed transactions—normally sales of property whose owners have at least some equity in the home. Winning with Foreclosures
Winning with Foreclosures
Winning with Foreclosures
In short sales, technically, the seller has input on price since they must sign the offering purchase contract. In reality, the price the seller agrees to does not matter unless the bank or lender also approves it. Winning with Foreclosures
TIP: Be sure to position yourself on communication: what kind of communication you believe is essential. Give examples of the kind of communication your provide to your buyers. Winning with Foreclosures
Fannie Mae-backed loans underlie a substantial percentage of properties. When these properties become REOs, Fannie Mae has been known to be open to some limited negotiation on property condition to help save a deal with a buyer. (This kind of action in Fannie Mae deals has been reported by agents. There are no statistics to back this up in our KW Distressed Property Buying Survey.) Winning with Foreclosures
Short sales and REOs are running around 40 percent of all residential real estate sales nationally. There’s a 10-40 percent price (or value) opportunity over traditional sales in all but the most distressed markets. In the most distressed markets distressed property sales can sometimes be as much as 90 percent of the market. Data source: 2009 NAR 2009 Profile of Home Buyers and Sellers. Winning with Foreclosures
Buyer and seller markets are cyclical—they come and go over time. Here’s a look at 1989 to 2009. When inventory drops and sales rise far enough, you’re back in a seller’s market—that trend starting to happen in late 2009. Seller’s markets provide appreciation of your investment as inventory shrinks and sales increase. NOTE: The horizontal line at six months of inventory represents the balanced market inventory level (favoring neither buyer nor seller). For example, the period from 1992 to 1997 was a balanced market time nationally. Winning with Foreclosures
The interest cost of a mortgage has been falling steadily in recent years. Rates are now at or near historic lows. Motivation claim is per November 2009 KW Distressed Property Buying Survey. There’s a risk of waiting right now—there’s a real chance that, despite U.S. government efforts to keep them down, rates will begin to turn up sometime in 2010. TIP: Fill in the current best rate at the time you give the presentation. Winning with Foreclosures
NAR’s Affordability Index, which measures ability of a median priced buyer to purchase a median price home, has risen to record levels Index assumes buyer with good credit puts 20 percent down on a 30-year fixed mortgage at current rate. Another way to look at affordability is the percent of income required (on a monthly basis) to own a home, which has dropped from 23 percent in 2006 to 15 percent currently. TIP: The KWConnect video report “This Month in Real Estate” provides the latest affordability data. Plug it into this slide or into your notes for the slide. How long will these levels of affordability last? It’s all about supply and demand—which the next few slides address, moving from national to state to local data. Winning with Foreclosures
The foreclosure rate (notices of default to homeowners or “foreclosure filings”) remains high almost everywhere, but foreclosure sales have slowed some. Most REO agents believe that’s due to bank and government policy shifts (government’s mortgage modification program, for example). This data reports the percentage of transactions from January through September 2009 that were distressed sales. It comes from the KW Distressed Property Buying Survey. UPDATE: Foreclosures in December 2009 topped 300,000 for the tenth month in a row—according to RealtyTrac. NOTE: You can update this number monthly. The data is reported at www.realtytrac.com A record 2.8 million U.S. properties received foreclosure notices in 2009, up 21 percent from 2008 and up 120 percent from 2007 according to RealtyTrac. Winning with Foreclosures
NOTE: Substitute a map like this of your own state. The counties are shaded to show relative degree of foreclosure activity by county. Here’s how to get the map: Go to RealtyTrac’s website at www.realtytrac.com Click on your state on the RealtyTrac U.S. map on their home page. Use an image-capture program to capture your state’s map as a file and paste it onto this page, as was done in this example for Texas. Winning with Foreclosures
NOTE: You can create your own version of this chart easily. The point is to show you’re on top of local market facts and trends. When you double click on this graph, a table appears Fill in your own numbers for your local market. This bar chart is set to show traditional versus distressed listing volume. You might use an alternate approach, depending on local data available. Winning with Foreclosures
NOTE: You can create your own version of this chart easily. The point is to show you’re on top of local market facts and trends. When you double click on this graph, a table appears. Fill in your own numbers for your local market. This bar chart is set to show traditional versus distressed sales volume. You might use an alternate approach, depending on local data available. TIP: If your market is dominated by distressed properties, you may find it helpful to insert the Total Market Overview Report for your market. Go to TMOReport.com to learn how to access these reports. TIP: You may also want to insert an additional graph like this one—following this slide—that shows nondistressed vs. distressed sold prices. Just copy this slide, insert as a new slide following it and enter your local sold price data. Winning with Foreclosures
This chart shows dollar volume of mortgages resetting to much higher interest rates. Homeowners who chose these resetting mortgages signed an agreement to begin their mortgage at a rate that would be guaranteed (usually for 3 to 5 years) and would then “reset” to another higher rate. These resets can dramatically increase people’s mortgage payments, resulting in defaults and foreclosures. The year 2010 is highlighted to help reinforce your message. The high point of mortgage reset volume (number of mortgages resetting) will come in 2010. Then it will drop dramatically during 2011. NOTE: Other economic realities, mainly unemployment, could extend the foreclosure phenomenon, but government programs like mortgage modification and a possible streamlining of short sales could be positives offsetting the negative effect of unemployment. Winning with Foreclosures
Distressed homeowners are seeking relief now. Banks are foreclosing property, but they don’t want to keep it on their books. TIP: You may choose to explain that specialist listing agents (in the case of REOs) are investing their own dollars to secure and manage foreclosed inventory—they want to sell it! In the case of listing short sales, there’s a different cost: agents are investing far more than the usual amount of time to get listings sold. Combine these three factors with your motivation to get a great deal and everyone’s motivated; there’s a win-win for everyone involved. Winning with Foreclosures
Probe more and involve attendees further. What have they heard in more detail, especially about the process of buying (time and hassle involved, condition of property, multiple offers, etc.)? This sets up the following slides where you debunk key myths. Winning with Foreclosures
Truth 1: Many foreclosures are in good or excellent condition in very desirable locations. Homeowners in every price bracket are impacted by foreclosure. Values reflect condition, as always Average foreclosure fix-up cost is under $5,000 (per November 2009 KW Distressed Property Buying Survey) TIP: You can emphasize this point by naming some local neighborhoods where buyers might be surprised to learn there are foreclosures. Truth 2: True with some short sales, but banks will clear title on REO property; short sale lenders also starting to routinely clear title. Winning with Foreclosures
Truth 3: Bidding wars happen in some markets, mostly in the lowest price ranges. This happens primarily in the most distressed markets. Also, remember that the best properties always get the most attention in any market. In distressed properties, like any other, if you think it’s a great property, make a competitive offer—not a lowball offer. Truth 4: There are no special limitations on lending for foreclosures. Lenders’ willingness depends on factors including property condition, as always. Your best path is to work with a lender who regularly finances distressed property buyers. There are special opportunities: 203(k) “rehab” loans backed by FHA are a special product that bundles financing the sales price along with financing the agreed cost of rehabilitation repairs. Winning with Foreclosures
Truth 5: Short sale and REO closing timelines are shrinking; lender/agent cooperation and lender processes are improving. Here’s some data from November 2009 KW Distressed Property Buying Survey: 60 percent of REO buyers and 50 percent of short sale buyers looked for less than a month before writing their first offer. 70 percent write 3 offers or less before getting an acceptance on either a short sale or an REO. Short sale transaction times are still double the length of REO transaction times—and can sometimes be much longer than that. Offer response time on REOs averaged less than two weeks in the survey, compared to about two months for short sales. Contract-to-close time on REOs average about a month, compared to about two months for short sales. Overall transaction time on average: about a month and a half for REOs, about four months for short sales. Value you can get is worth the wait—10 to 40 percent price premium, depending on the market where you are. Truth 6: Foreclosures are still happening in record numbers, and they are expected to continue at that rate through most of 2010. Sellers are still very motivated, but data projections show it clearly won’t last forever (as you have seen in the preceding data slides). Winning with Foreclosures
A final involvement step: come with one or two great stories about buyers who won with a foreclosure buy. Focus on the following: What they wanted What they got What they went through to get it What they say they learned TIP: Include points about the buyer’s Motivation Preapproval Search Use of expert agent advice TIP: Be sure NOT to use buyers’ names unless you have their permission! Winning with Foreclosures
The three key ingredients that make for a great start in buying distressed property. They’re broken down on the next three slides. Winning with Foreclosures
Know your “Big Why”—your most powerful motivator. Is it family, financial, personal, or another reason? Have a real sense of urgency—you’ll need to make good decisions, with advice, and sometimes make them quickly. This involves more than motivation. You need to have set very specific criteria for the property you want: price, size, location, features and amenities, cash flow potential, etc. Communicate clearly and avoid misunderstandings about the process and terms—help your agent and yourself move through the transaction as efficiently as possible. Winning with Foreclosures
Have cash (proof of funds). Have financing (proof of loan approval, preferably from a distressed property-experienced lender). Winning with Foreclosures
Strong agents add value anytime. There’s no time when you need an expert agent more than in buying distressed property. Market, language, playing field, and transaction differences all demand it! Sample tips about benefit of your expertise: Save to invest; create equity We won’t buy junk We’ll go reasonably low, but not lowball We’ll inspect, but not to negotiate Investing—we’ll be on top of the cash flow picture, property management options, and any other issues with the property Winning with Foreclosures
Run down the value you bring as an expert coach and teammate for them. Process: Help you sort through mountain of information and misinformation about properties. Everything is not what it appears to be. Ensure your purchase follows the rules to succeed. Market: Study market continuously, in depth. Keep you on top of current facts and trends; Guide you to your best opportunity Game Plan: Understand your goals; Plan with you how to meet or exceed them Financing: Refer you to distressed property expert lenders; Help you get best possible terms; Be sure your qualifications are impeccable for sellers Price Location Condition Highest and best use for you—residence, investment property, second home Find Right Property: Combine your wants and needs with their local knowledge and experience; Find property that fits your criteria; Your agent should prescreen for property with experienced listing agents Smart Offer: Avoid low ball; accept as is and other conditions; understand reply time; know multiple offer strategy (multiple offers are common in REO; not good idea in short sales because they can confuse the lender’s pricing process) Win Acceptance: Fight frustration with communication; stay in touch with process; Monitor and Close; Watch for clear title, favorable terms, accurate close date. Winning with Foreclosures
It’s time to answer questions and get appointments! TIP: Depending on the percentage of distressed properties in your local market, buyers may or may not decide to buy a short sale or REO. You should always position yourself as interested and able to help them with either distressed or traditional purchases, or both. Winning with Foreclosures