Portland Short Sale -Case Study #6

Location: Investment Property in Portland Pearl District in downtown Oregon.

1st Original Balance Owed: $287,200  Ending payoff April  2009 $320,253 on EMC 1st Mortgage option ARM

2nd Original Balance Owned: $35,900 Ending payoff April 2009 $37,260   Countrywide 2nd lien.

Condo was listed in November 2008 at $309,000 and reduced to $269,000 to attract offers. This deal came to us from a Prudential agent who attended one of our advanced short sale seminars.

This case has the triple whammy of short sales:

1. Condo- New Buyer’s financing options are very limited and little deviation in Sales comparables. This limits the buyers feeling like a got a “Great deal” feeling.

2. Investment property and potential 1099 tax issues-Your Client may need to bring cash to the closing and face potential events. Please refer them to their CPA and mention the IRS form 982. I have a great e book I would be happy to email to any home owner seeking more information on it.

3. Two different lenders- We are always scrapping with the 2nd trying to get them on the same page as the first. They often want 10% of remaing balance. Bank of America has recently loosened up this guideline. Many deals get blown apart because the 2nd won’t release their lien.  They will generally settle for $3000 to $5,000.

We normally turn away Condo shorts. I only mention this so you can be real with the homeowners when starting the process.

During the 7 months it took to close this short sale, EMC would occasionally call client to offer loan modification. the sellers were waffling on what they should do so we kept going back to the basics of:

1. Does this Condo investment  net you postive cashflow?….NO

This was a nasty option ARM loan on Rental property. It barely was postive cashflow at the beginning but when it reset it was really negative cashflow.   If it takes money from your pocket, it’s a liability not an asset or investment.

2. Does this Condo investment take money away from other obligations like food, family, utility bills?…YES Both The homeowner’s employers cut their hours back.

The financial statement was negative $1500 a month. No modification in the world would be able to correct that fact. Until the loan servicers start to do massive principal reductions, many modifications trap distressed home owners into full time renters with little hope of being able to resell or refinance in the future.

3. Does this Condo investment  net you significant equity if you continue to pour monthly payments into it as a investment?…NO The negative amortization plus falling market crushed any hopes they had. It was very popular mortgage planning marketing idea to put negative amortization loans on rental properties. We have completed 4 of theses and they do not benefit the home owner in this falling market.

What we LEARNED from this experience and why shorting condos sucks?

We learned we couldn’t have one of our investors make an offer due to the Homeowners association. They had restrictions on owner occupied versus rental units. Unfortunately the HOA’’s was limiting the number of rentals and we not allowing any more. By doing this you restrict the buyer’s pool to draw from. It took us 5 months to find a buyer.

End buyers financing options are limited for condos. Every lender in the world are running away from Condos.  I would estimate that over 30% of the foreclosure out there are condo. Combined with being a non owner its the kiss of death. Lenders are making Condos extremely difficult to finance these days. This also restricts the buyer’s pool. I believe the only way we got this deal done is because we had a cash buyer!!

So here are the final numbers:

Client owed total $357,513 and lenders accepted $233,850 ( $123,663 LOSS) OUCH! 65% of indebtedness….

The 2nd Countrywide settled for $37,260 debt for $5000 and the sellers reluctantly brought $2,000 to the closing.

(Which I will bring this topic up in another BLOG post)

5% Commission Approved realtors were cool and split our 1% fee and paid us as “Serviced Rendered” on the HUD.

It took 7 months to close but only 60 days of negotiating. It takes a very special buyer to want to buy a condo. The re is no deviation in comps. When shorting we thrive on low comps and big gaps in value to help negotiate downward on the debts. It gives us room to come up to market value.

If you are a real estate agent try switching your condo listing to “Cash” only on RMLS and use a “Bottoms Up” approach when listing the price and drop aggressively…