4 Investment Lessons Learned The Hard Way

Just got off the phone with clients - a term I am using very loosely for these folks.

They bought an investment property about 30 months ago, with someone else, because their friend-of-a-friend salesperson told them it would break even. They apologetically called me a few months later. They were sorry they hadn't used me, they were trying to help this new salesperson and now they were having trouble with tenants and their new agent wasn't any help. [I looked up the salesperson on the DRE website and saw that he had been in the business 11 months.] These clients knew I did property management so they pumped me for information and help for about 40 minutes before begging off on paying for my services because they wouldn't break even on their investment.

A few months later they called again. They had received the supplemental tax bill and wanted to know why it wasn't paid at the closing. I explained how it worked and when I got off the phone I realized that their break even property was now a couple hundred dollars a month negative.

Tonight they called because they are out of money. They have tapped all their credit cards, one of the current tenants has lost his job and they haven't paid for August. Plus the property is worth about $85,000 less than what they owe on it before title, escrow and sales fees. Now they are shopping around for the cheapest agent to sell it.

Of course, I mentioned that most agents have no experience with short sales, that's why only about 32% of them close before the trustee sale. I reminded them that ALL of my short sales had closed and that their loan is a purchase money loan so the bank won't come after them for a deficiency judgment.

"In essence, you're not paying the fees anyway - why not hire the best?!!"

There was a long pause and they told me they'd call me back. I am not holding my breath.

So, did you catch the four lessons?

1) Taking someone's word on the numbers is like handing your money over to your crazy uncle Charlie. You have to learn to check the numbers yourself.
2) Hire a professional property manager. One months worth of vacancy will pay for 10-12 months of property management.
3) Know what the expenses are up front. Include maintenance, vacancy, insurance, the new tax base, etc
4) Hire the Best! You don't have to do it alone. You don't get an extra gold star. Instead you stand to lose a bunch of money and get a foreclosure on your record.

I feel bad for these people. I am a lot like them. I know just enough about something to get me into a lot of trouble! I have to constantly remember my own advice about using my team if you don't have your own. You need a CPA and an Attorney and a great Realtor - at a minimum.

My gut tells me that these folks aren't quite done learning the hard way. Perhaps this example will help you from learning the hard way, too!

Mortgage Workout Relief

Here's the info from the IRS website regarding Short Sale Workouts and the tax consequences:

Mortgage Workouts, Now Tax-Free for Many Homeowners;
Claim Relief on Newly-Revised IRS Form

WASHINGTON — Homeowners whose mortgage debt was partly or entirely forgiven during 2007 may be able to claim special tax relief by filling out newly-revised Form 982 and attaching it to their 2007 federal income tax return, according to the Internal Revenue Service.

Normally, debt forgiveness results in taxable income. But under the Mortgage Forgiveness Debt Relief Act of 2007, enacted Dec. 20, taxpayers may exclude debt forgiven on their principal residence if the balance of their loan was less than $2 million. The limit is $1 million for a married person filing a separate return. Details are on Form 982 and its instructions, available now on IRS.gov.

More About Short Sales

I have a friend, in the middle of a divorce, that's liquidating everything. Unfortunately, his investment property, that he bought for appreciation, was underwater and he asked me to help him sell it.

It started off like any listing; here's where we should price it, I'll put a sign out front, is there a tenant there now? This is where it starts to get interesting. His soon-to-be-ex has been living in the property with her new boyfriend and oh-by-the-way she hasn't paid the mortgage for six months! Crap!

I took the information and started getting in touch with everyone; the almost-ex, the lenders, the Home Owner's Association. The ex was civil to me. The lenders passed me back and forth and the HOA never called back.

This went on for a few months before the mortgage meltdown hit. The few buyers that were in the market couldn't get financing now and the number of sales dropped 75%. The Seller and I sat down to have a heart to heart. The only people buying right now are sharks looking for blood in the water, you aren't getting any money out of this property anyway, let's get this thing sold before it's a REO. He agreed to a DRASTIC price reduction and we got an offer within two weeks.

This is where the real work begins. We had submitted short sale packages to the lenders showing the Sellers insolvency and the market conditions for the subject property. The lenders had done their own valuations and their appraisal came in 10% higher than our sales price. I worked and negotiated and reasoned with both lenders for a month before lender #1 refused to take a short payoff.

Then the Notice of Sale was posted. Now I had great ammunition for lender #2; if you work with me you'll get some money back, if you don't you'll lose it all.

They finally saw my point and agreed to the shortsale - after reducing my commission and if you can get it done in 10 days - including the holiday.

I was pissed about the commission. I feel like I have been working twice as hard on this as any other listing and now my paycheck is a revenue source! When I calmed down I realized the truth is I have been blessed with lots of great clients that have gone overboard to get me a commission. Now, here is a buddy that needs my help, so I conceeded.

We got the Seller signed off, loan docs in title and then the payoff came in. We were $1500 short to close - and we were 4 days from sale.

I went back to the second lender, begged for their help, and got them to take care of the shortage. The new lien recorded, the payoffs were sent and my client won't have a foreclosure showing up on his credit report for the next 15 years.

It's a lot of work, you never know if it's going to fall into place or not and you don't get paid well. Welcome to real estate.

How to Buy a Short Sale

Being in California, I have had very little exposure to foreclosures - until the last few months. Now it seems like everyone I run into needs help selling the home that they owe too much on.

I remember the pyramid schemes of the 70s, if you were in first you got your money back. If you were a late adopter, you got the privelege of paying the early adopters. This translates over to real estate of these last few years as the stragglers finally jumped on the bandwagon just as it was going off the cliff.

So, in a short sale, the owner owes more than s/he can sell it for.

As the Realtor®, I get to market and sell the property as usual, then I get to negotiate with the overwhelmed bank for 2-4 weeks only to get a proposal back from the bank either accepting or rejecting the offer. And, oh by the way, the bank often thinks the realtor commissions are a profit center for them so, I get paid poorly or not at all.

Why would any business person deal with this kind of sale? Simple, I do it for my clients. As the buyer agent, we can negotiate some rockin deals. As the Selling agent, I have a client that is in trouble and I am much more skilled at negotiating a decent resolution that the client/owner.