South Atlanta Househounds

It use to be where a hand shake and a person’s word was how a deal got done… especially when you were talking about a rental property in South Atlanta.  There was no paper trail or deposit money needed in order to rent a property.  Ahh… the good ole’ days.  These days we need to submit an application fee, deposit, credit check, reference check, previous landlord reference check and list just seems to go on and on. 

But what about when you don’t have to jump through those hoops?  What if there is no checks and balances?  Well… your Spidey senses should be tingling! 

We know a very nice lady at church that just told me her story.  After looking through 50 plus rental units they finally found not just a house, but a house that was more then she could have imagined.  The rent was way less than any of the other rentals in the area, the square footage was nearly twice what she was looking at in her price range and it was in a private, gated community in McDonough.  She and her husband signed a year lease agreement, paid 2 months of deposits and also put down 3 months worth of rent in advance.  Within 45 days she had an agent knocking on her door and she was told that the house had been foreclosed on and she needed to make arrangements to move within next 10 days.  Needless to say, she was distressed. 

Unfortunately with today’s market, some homeowners are not able to maintain their home and as a last resort, they try renting the home out.  Because it took so long to obtain renters and in the meanwhile they have moved out of the house in preparation for foreclosure, they have depleted their checking account.  It wasn’t their intention to take someone else’s money, but they needed it more than the bank.  So here you have a renter who is out of the deposit money as well as any advance rental money that was given. 

So what can you do to avoid this situation? 

Use a reputable Real Estate Company when looking for a rental property.  At least make sure the landlord is asking for all the proper information such as place of employment, length of employment, reference check, previous landlord references, permission for credit check and appropriate amount for deposit.   A true professional landlord will place all your deposits into an escrow account.  If the property is being managed by an agent, ask to have the deposits placed in their brokers escrow account.  Ask questions.  Ask the landlord about their rental experience to see if this is their first go around or if they are in a desperate situation.  It’s amazing how much you can learn just through normal conversation.  If your instinct says “it’s too good to be true”, then it probably is.

Unfortunately for this nice family, they were forced to move out.  The bank was good enough to offer them cash for keys and it helped them to recover some of the moving expenses.  Looking back, she said that she should have known better because the landlord did not ask for previous landlord referrals, references, employment verification or credit checks.  The landlord did talk them into putting 3 months of rental fees, so that was rather slimy of them. 

Just a quick note, this situation also applies to Lease Purchases.  Make sure your agent has inquired with the listing agent of the seller’s situation and have all deposits held in either your agent’s or the listing agent’s brokers escrow accounts.  This is to protect you so you can get your deposit back. 

Note: Our goal is to become the best real estate resource for all of
South Atlanta – Henry, Clayton, Spalding, Butts, Rockdale, Fayette and surrounding counties. The ideas in this blog are our personal opinions and subject to market uncertainties. Should we ever be able to assist you with any of your real estate needs, please give us a call at any of the numbers to the right or call our main line at (770) 769-8000.

Every cloud has a silver lining, and the rise in South Atlanta home foreclosures is no exception. That’s if you’re an investor hunting for good deals.

Investing in foreclosures is not a low-risk venture. You often need to act quickly, have ready cash and may need to earmark money for repairs to make properties sellable. Here are some basics on buying distressed homes.

Where The Deals Are

Short sales: When borrowers can’t keep current with mortgage payments, some lenders agree to allow the sale of the property for less than the loan balance. These can be found by reading the comments section of the MLS listings.  Beware of the difference between an approved short sale and an unapproved short sale.  In an approved short sale the current owner has already gone through the short sale approval process, which can take up to 3-4 months.  If  your dealing with an unapproved short sale be prepared to wait.   

Auctions: Auctions typically offer good buys, but the risk to you is greater. You must research liens against the property and decide on your maximum bid price. You’re also required to have proof of funds or be pre-approved and in most cases a large down payment is required just to bid.  Typically the auction companies do not offer any financing or inspection contingencies.  You can use an agent to assist you or deal directly with the auction company. 

REO’s, Foreclosures: (Real Estate Owned)  These are properties that have been taken back by the bank. These homes are frequently listed in the multiple listing services and can be found on the internet through a multitude of websites.  I suggest you use an agent that is comfortable with buying REO properties as the process is different than buying an owner occupied home. 

HUD Homes:  These are properties taken back by the FHA.  While primarily targeting the owner occupied, there are often deals for investors who don’t mind making improvements.  While the owner occupants get first crack at these properties, they tend to stay clear of most properties that need improvements, thus making great deals for investors.  Traditionally HUD has taken a 8% to 12% discount off their list price, but they now are taking deeper discounts on properties that have been on the market for longer than 120 days.  For a listing of the best 4 HUD deals in South Atlanta you can visit www.southatlantahudhomes.com. 

To Repair or Not Repair… That Is The Question!

Deciding to repair or not should be dependent on what your goal for this property is.  If you want to flip it for a profit then you will most likely need to make some repairs.  If you’re wanting to keep it for a rental, maybe repairs could be less.  In all likelihood you will need to make some repairs, but the trick is to set a budget and keep to it.  Your repairs or updates need to match the value, neighborhood and price point of the house.  If you have a property your planning on selling for $70k, then putting granite counter tops may not be cost effective.  If however you have a house for $300k, it may be expected.  Doing the repairs yourself or working with an agent like me, who has a complete list of reliable subcontractors will save you money.  If you need some help with reliable subcontractors, just drop me a line at alrichard@charter.net and I’ll send you a list of who we use.  We list and sell bank owned properties and we constantly have to use subcontractors for all sorts of repairs.  Make sure you include not only your repair costs into your final selling price but also a realistic estimate of your holding costs.  If it will take months for you to repair it before you even start marketing the property, make sure you account for that cost.  For Henry County, Clayton County, Spalding County and Rockdale County 157 is the average days on market. 

Now What Do You Do With It

A couple of years ago the flippers were everywhere.  Even today you can’t turn on HGTV without finding a flip this house type of show.  We work with many investors and while there are abundant deals to be had, most of our investors are not flipping properties outright.  There are still a few areas where flipping is still happening but it’s in small pockets throughout the city.  This is not a great market for first time flippers to be cutting their teeth that have never done this before.  With the downturn in the market, most of our investors are now picking up these properties and sitting on them until the market turns.  By and large, most are only making minor repairs and renting the properties.  For most, the plan is to rent the properties for the next year or so until the market turns, then make the major repairs and sell it for a bigger profit. 

Should you need any help finding investment properties please give us a call.  We list bank owned properties, we run South Atlanta HUD homes and we are very knowledgeable and comfortable with these properties.  We know how to find the deals so please give us a call at (770) 769-8000 or drop me a line at alrichard@charter.net. 

To fully understand the entire REO process lets start at the beginning  
It all begins with Foreclosure.  In the initial stages it’s called pre-foreclosure and there are still several options open to the homeowners at this point.  Shortsales, short refinancing and deed in lieu of foreclosure are all options on the table during this time.  It’s unfortunate but over 60% of the homeowners who were foreclosed on felt they had it under control so they waited until it was too late to explore these options.  If you are having a hard time paying your house note, please don’t wait any longer to contact your mortgage company and try to work it out.  Here in Georgia we have the shortest foreclosure process in America.  It only takes 42 days to foreclose on a property.  Additionally the homeowner has no recourse once foreclosure has taken place.

Heading to the Courthouse Steps 
The next stage on our way to REO is the courthouse steps.  Here in South Atlanta we do property auctions on the first Tuesday of each month on the courthouse steps of the county where the property is located.  Are there deals to be had there?  Sure… but only for the seasoned veteran.  You must be prepared to pay cash and you’ll receive the property as is.  Sometimes that means you also inherit current occupants that need to be evicted and any liens on the property.  The banks and mortgage companies are also going to be there and they will always bid the amount of the loan balance plus any interest and other fees associated with the foreclosure.  The bad news is that many of the houses up for auction were purchased with zero down, interest only or negative amortization loans and have no equity to take advantage of.   

Now it’s a REO 
REO is an acronym for ”Real Estate Owned”.  As stated above these are properties that have been foreclosed on, went to the courthouse steps but didn’t get a high enough bid and then ended up being owned by a bank or mortgage company.   The advantage of REO properties is they are much more attractive to purchase.  Since the bank or mortgage companies now own it they will see to the removal of tax liens, evict occupants and prepare for the issuance of a title insurance policy. There are some items you need to be prepared for when dealing with an REO.  First there will not be a disclosure statement from the seller so buyer beware.  Always, always, always get a professional home inspection when dealing with REO homes.  There is also a wide range of special stipulations that vary from one mortgage company to another.  You should always (yes I know I’m using that word a lot lately) read and fully understand any special stipulations before you place an offer on a REO property.  Make sure you deal with an agent who is comfortable dealing with REO’s or the special stipulations can truly catch you off guard.  Lastly, since many of the REO properties are owned by companies outside Georgia, be prepared not to use our standard Georgia Association of Realtor (GAR) Forms. 

Are All REO’s a Good Deal?
Typically it’s assumed that all REO’s are a real steal.  This is not always the case.  Yes it is true that the bank does not want to own homes and they are rather anxious to sell it quickly.  They are also strongly motivated to recoup as much loss as they have already taken on this property.  The average REO in Georgia costs the mortgage company between $30,000 and $40,000.  Before they even put a property on the market each one has had two BPO’s (Brokers Price Opinion – similar to a CMA) and in most cases a professional appraisal. 

There are bargains to be had and many people do very well with foreclosures and REO’s.  There are also many so-so deals that are unlikely to turn a significant profit.  Be sure you look closely at the area comparable sales and don’t forget to add in the cost to repair/remodel and any holding costs.

Ready to make an offer?
Most of the time the REO property is listed with a local agent who will market the property somewhat and list it on the local MLS.  It is good to try and contact the listing agent but many are very busy and can be hard to reach.  As I said before REO’s are AS IS so be sure to include an inspection contingency in your offer.  All REO’s will require a pre-approval letter, not a pre-qualification.  Also, many will expect a final approval letter within 5 days of notice of acceptance so be sure to have your financing well in order before you place your offer.  Many REO properties will not allow financing contingencies and on some if you try to scratch through anything on their forms the entire offer becomes void. 

Make Your Offer and Let The Games Begin
Once you make your offer expect the bank to make a counteroffer.  Then it will be up to you to decide if you will accept it or make your own counteroffer.  Instead of dealing with a local homeowner you will be presenting offers to multiple levels of management at the bank, all filtered through the listing agent.  Expect the offer, counteroffer and notice of acceptance to take longer than you expect.  They work bankers hours remember so don’t look for any news at night or on weekends. 

In an REO negotiation the buyer is in the stronger position but don’t expect the banks to act that way or to give the property away.  REO managers expect you to try and lowball them but some of the offers are laughable and won’t even be considered.  Some REO managers take it very personally when you place a ridiculously low offer.  From that point on they don’t think your serious and won’t truly consider any further offers from you, even reasonable ones.  I’m not saying it’s right, I’m just saying it happens.  I believe it’s best to set your price range, make your offer, counteroffer and if you get a no just walk away.  More times than not I get a call to see if my buyer is still interested. 

But What’s The Secret Formula? 
Well therein lies the problem.  There isn’t a secret formula, golden ratio or magical percentage.  There is a lot of “information” out there that promises you can shake the money tree with no effort, but that’s just plain false.  As with most things, good deals on REO’s are there for those who have a good guide and do their homework.  

Halloween conjures up images of the boogeyman and these days the big scary snarling beast is foreclosure.  According to the AJC the value of property entering foreclosure in the Atlanta Metro area in November is $1,076,975,783.  That represents 6,809 properties in 13 counties around Atlanta, many here in South Atlanta.  In October in Henry County we had over 400 foreclosures.  With the increase in foreclosures we also have to increase our foreclosure vocabulary.  Have a seat class, here are some of the new terms you may see and what they mean.

• Short Sale -  A sale of a house where the proceeds fall short of what the owner still owes on the mortgage.  Some lenders will accept the shortsale and forgive the rest of what is owed on the mortgage. 
• Deed in Lieu of Foreclosure – A potential option taken by a homeowner to avoid foreclosure under which the mortgagor deeds the home back to the mortgage company in exchange for the release of all obligations under the mortgage. 
• Short Refinancing – The refinancing of a mortgage by a lender for a homeowner currently in default on their payments.  This is done to avoid foreclosure and the new loan amount is less than the outstanding loan and the difference is typically forgiven by the mortgage company. 
• REO (Real Estate Owned) – Property owned by a mortgage company or bank that was foreclosed on and taken back after an unsuccessful sale at the courthouse steps.   The minimum bid taken at the courthouse steps is equal to the outstanding loan amount, the accrued interest and any fees associated with the foreclosure. 
• Predatory Lending – Actions of a dishonest nature carried out by a mortgage company to entice, induce, and/or assist a borrower in taking a mortgage that carries high fees, a high interest rate, removes the borrower of equity, or places the borrower in a lower credit rated loan to benefit the lending institution.  Georgia as in most states has anti predatory laws, but an informed consumer who is more financially literate and shops around for a mortgage is unlikely to be taken advantage of. 
• Resetting Mortgage – If you have an ARM (Adjustable Rate Mortgage) the mortgage rate will be reset.  Some are based upon an index and will reset annually.  Some mortgages carry “Negative Amortization” and are written to give the homeowner the ability to make minimal payments for the first several years but once the initial period is over payments could double.  Other interest only mortgages were interest only for the first few years, with no reduction in the original loan balance and now payments can jump by 50%.

 All news is not bad news however.  Currently many mortgage companies are using “Loss Mitigation” to keep homeowners in their homes instead of foreclosure.  More and more we’re seeing a shortsale or deed in lieu of foreclosure which is much easier on the homeowners credit than a foreclosure.  The mortgage industry is working hard to eliminate loan fraud and predatory lending.  On the other side of the coin there are plenty of opportunities for buyers seeking either investment properties or homes for themselves. 

What is a short sale?

A short sale is when a mortgage company accepts a discount on the note to avoid a possible foreclosure action.  Instead of buying from a seller, the property is purchased directly from the lender for a discount.  When a homeowner can’t meet their financial obligations on the property lenders are sometimes willing to accept less than the full amount due, commonly referred to as a “Short Pay” or “Short Sale”. 

Do all lenders approve all short sales?

No.  A homeowner needs to prove they deserve a short sale and that it is in the mortgage company’s best interest to do so.  First the homeowner must prove that they can not meet their obligation and it is “incurable”.  If you have any assets such as vacation property, boats, extra cars or retirement funds expect that the banks will not approve a short sale.  Also a short sale is not always a quick sale so waiting too long before exploring this option would result in the bank declining your request.  Some lenders will only consider a short sale if it is presented with an offer, which in many cases is simply putting the cart before the horse. 

What are the negatives?

To begin with they are complicated and time consuming.  For the homeowner an extensive package must be prepared to prove that you are worthy to do a short sale.  After all that work, you are relieved of the financial burden but you walk away with nothing.  The payout to the homeowner in a short sale is zero.  For the buyer it is a tedious process of make an offer, wait, wait, wait and see.  The really bad news is that the success rate of short sales is under 50%, even when the offers are fair. 

So what are the benefits?

The homeowner avoids foreclosure and the massive credit damage that goes with it.  Also they often can control the timing of when to move and there are no costs to the homeowner.  The sales costs, commissions, title and escrow fees are all paid by the lender.  So long as the short sale is negotiated correctly, the homeowner gets a full release from the lender and is not financially responsible to repay any loss to the mortgage company.  As for the buyer, they traditionally get the property at a discount.  FHA and VA have a limit of 82% of the fair market value of the property.  Lastly, the mortgage company gets a new loan. 

Is there credit after a short sale?

Homeowners who complete a short sale with the lender do far less damage to their credit rating than those who go through foreclosure.  No doubt that short sales, deed in lieu of foreclosure and foreclosure all affect your credit score, but short sale and deed in lieu let  you avoid “debt discharged due to foreclosure” on your credit reports.  Having a foreclosure on your credit report reduces your FICO score by an average of 250 points and takes three to five years before you can get a mortgage at a reasonable rate.  The effect of a short sale on your credit score is 80-100 points and is recorded as “pre-foreclosure in redemption”.  After the sale, the mortgage may show up as “discharged” on your credit report.  People who complete a short sale may qualify for a mortgage at a reasonable rate in as little as 18 months. 

How debt forgiveness works and your tax consequences

In a short sale the mortgage company has three ways to handle the negative balance. 

1. They can attempt to collect the deficiency balance from the seller after the property has closed.
2. They can require the seller to sign an unsecured promissory note for the deficiency balance.
3. The can agree to cancel the entire deficiency balance.

While option 3 seems the clear choice, the IRS considers any canceled mortgage debt ordinary income.  That means that the deficiency balance is taxed at the same rate as your salaries and income.  Additionally the IRS requires lenders to file a 1099-C form stating the amount of canceled debt to the IRS and to the seller.  The state of Georgia also considers cancelled debt as ordinary income.  I’m in the real estate business, not taxes and as such I suggest you get professional tax advice on this issue.  They can help you to convince the IRS that the amount of the 1099-C should not be considered ordinary income.  More information can be found here.

Let’s wrap this up

In the end you loose your house but not your credit.  Be prepared to do a lot of work.  Some of the items you’ll need to present or prepare are:  a budget, pay stubs, banking statements, hardship letter with supporting documents, mortgage payoffs, two years of tax returns, W-2’s and a cover letter to wrap up all the information.  Some of the items your agent will need to prepare are:  marketing plan, CMA or BPO, copy of listing agreement, sales contract, addendums, disclosures, title report, MLS sheet and the HUD-1 net sheet.  Undertaking a short sale is an extensive process and should not be attempted without guidance from an agent experienced in the short sale process.