Understanding how money work is the first step to building wealth.
Remember, money is a tool. When used properly, money can build you great wealth. But, when used in the wrong way, you can be digging your own grave.
Consider this your user guide to money.
The Power of Time
Time can be your worst enemy or your greatest ally. No matter where you are in life or in building a financial strategy, the key is to begin saving now. The sooner you begin, the less money you need to set aside to create a solid financial future.
Mr. Save Early saves $3,600 per year for 7 years in an 8% tax deferred account.
Mr. Wait Longer starts saving the same $3,600 per year for 17 years in an 8% tax deferred account, 7 years later than Mr. Start Early.
Procrastination is one of the main causes of failure.
Pay yourself first each month, so you have money to invest and take advantage of the time and compound interest.
Don’t wait until you pay off all your debts to invest. That’ll be too late.
The Wealth Formula only works with early investing, high rate of return, and minimizing tax.
Make small changes in your lifestyle and spending habits to save at least $10 a day.
Related article: Turn Your Cash Flow from Negative to Positive
The Rule of 72 is an estimation of how long it would take for any amount of money to double.
You simply divide the number 72 by the rate of return, and the result is the approximate number of year for your money to double.
Take a look at the following hypothetical example that shows how an initial $10,000 investment grows over time.
Notice how a $10,000 investment at age 29 doubles faster as the rate of return increases. Your $10,000 compounded to a grand $640,000 at age 65 with a 12% return versus a merger $40,000 at 4% return.
That’s the magic of compound interest - money keeps making money, which continues to make more money, and saving early.
That’s exciting…but consider the interest rate on your credit card.
Is it 18%? Or higher?
The Rule of 72 can work against you just as powerfully as it can work for you.
The Rule of 72 does not consider impact of taxes. Taxes can increase the amount of time it takes for money to double.
Money or wealth needs time and compound interest to grow.
KNOW YOUR INVESTMENT RISK
Stock market fluctuation can greatly influence how fast and how much your money can grow. Any loss will take an even great rate of return to recover. Therefore, you want o avoid risk of loss as much as possible.
Don’t underestimate even a small loss of 5%. It’ll take 10% to recover back to your previous position. A 20% loss will take a hefty 40% return to recover.
So proceed with caution when investing in stock market, if that’s your choice of investment.
Related article: Invest in Real Estate
In addition to procrastination, tax and inflation are also enemies when trying to build and maintain savings.
Tax and inflation is like the infection that eats at your money tree. However, you cannot avoid tax and inflation completely.
But you can increase your odds to minimize their damage.
Related article: How to Become Rich and Build Wealth
Exploiting the living benefits of a cash value life insurance
The cash value life insurance is a little known secret for real estate investment or anyone planning their retirement.
The indexed universal life is the best investment vehicle. Why?
Cash value life insurance, as in it's name, is life insurance with cash value. Similar to a savings account associated with your life insurance. The difference is this "savings account" grows tax-free as part of the life insurance.
This is the bonus for real estate investors. Short on cash. Borrow from your cash value account interest free. How does that sound?
Let me clarify this a little. Every cash value life insurance policy is different. Most charge interest rate for borrowing. But some charge more and some charges less. The one that I have, charges 0.75% for first 1-9 years, then 0% after 10 years. Contact me to find out more.
The other thing is when you borrow money from your cash value, you'll not taking money out from your account, you're borrowing against your cash value, which is being used as a collateral for your loan. This is an added bonus, because your cash continues to grow tax-free while you're enjoying your extra cash interest-free.
Another bonus with borrowing from a cash value life insurance is that you don't have to repay your loan it you don't want to. How? Good questions!
Remember it is a life insurance policy. So it also has a face value. When you die, the insurance will pay off your loan with your policy's face value.
Isn't this a great idea? People always think that life insurance only benefit the family after you diet, but with a cash value life insurance, you got to benefit from it too before you die.
Need help with retirement planning?
Many wealthy people use a cash value life insurance for their retirement planning. Say you pay your insurance premium every year and contribute to the cash value at maximum level every year for thirty years, and never taken any loans out. Now you're 65 years old, and ready to retire. By now your cash value should have grown significantly over the years TAX-FREE.
Now you can stop paying premium, because your cash value is be used to pay your premium, and at the same time pay you money for the living expenses. Again, this pay-out is given in the form of a loan, so the cash value continues to grow while you enjoy your retirement, and you do not pay tax. Remember, Uncle Sam taxes earnings only when you withdraw it, but not loan interest.
With that all said, you might be wondering what's the best cash value life insurance?
I would have to say hands down the indexed universal life. This is like the Rolls Royce of life insurance. What make this particular policy so special is that your cash value never loses money. The one that I have tracks the indexes of Europe, Hong Kong and US - Euro Stoxx 50, Hang Seng and S&P 500.
As investor, you probably knows the risk of investing in stock markets - the ups and the downs. In this product, there is a floor of 1%, which means, even if the stock market tanks, I still get 1% return on my cash, and the ceiling is 13.75%, the maximum return I can get. I think this is pretty good deal because when you lost 5% in the stock market, you need a 10% return to regain what you lost. With this policy I have no loss, only gains.
These are tried-and-true strategies that will sell your home fast.
1. The most important strategy is list your property on the Multiple Listing Service (MLS). If you want to list your property on the MLS, you’ll have to use an agent. However, I recently discover a new service for home sellers who want to do for-sale-by-owner. Check out owners.com. You can list your property on your local MLS for a reasonable fee through owners.com who has a license to list your property on the MLS for you.
Why do you want to list on the MLS? Because when a property is listed on MLS. It is automatically listed in other real estate websites as well, such as, Trulia, Zillow, Redfin, Google, etc.
Why is that important? Today, more than 95% of homes buyers find their homes online. Therefore, it is important to have an internet presents to be in front of as many potential buyers as possible. Furthermore, MLS are geared more toward retail home buyers, who are looking for their own homes, and are willing to pay more for properties.
2. Write an appealing listing description. In a MLS listing, there is a small space for agent to write a brief description of the property. You, as a home seller, assume your real estate agent is competent is writing an award-winning and catchy description that will get your property multiple offers in no time, right?
You are so wrong…You’ll be lucky if your real estate agent writes anything at all, let alone writing something appealing.
Whatever your agent is writing make sure they don’t use the following words or phrases in the listing. This list of words and phrases came a 3-year study in Dallas’ market and are found to be associated with lower sales price and longer days of markets.
Avoid these words or phrases:
“motivated sellers” - lower sale price and longer listing period.
“good buy” - lower sale price
“vacant” - lower sale price, assume can offer less. Not need to.
“repairs” - longer time on market and lower sale price. However, “updated” sold for higher price.
“good location” - lower sale price
Instead, focus on using the listing description to draw out emotion and help buyers to visualize living in the property. People buy for emotional reasons and justify with logic later.
3. Including a link to a video tour of your property is the simplest thing that anyone can easily do. Almost everyone has a camera with video recording capacity on their smart phone. So there is almost no reason to NOT to do one. A video tour is a great opportunity to showcase the best features of the property. Remember, your listing agent is not necessarily the one who shows your property. it’s usually the buyer’s agent who shows the property, and very likely he/she is showing the buyer another 3-4 properties too. So your potential home buyers will not know all the cool features of your property.
Remember, 95% of home buyers search for their homes on the internet, a video tour will give them a very good reason to call their agent to schedule a showing at your property.
4. Price it right at the start to avoid property sitting on market for too long. When you see a property with a days on market greater than a month, the number one reason is always price.
One of the thing I see frequently on the MLS is the astronomical asking price. This intimidates many potential buyers because real estate prices are already high. Most logic behind listing high is “I’ll start high and see if anyone would buy. If not, I’ll drop the price”. And real estate agent doesn’t mind that logic and, in fact, some promotes it telling seller it’s seller’s market. Really? Or it is because their commission is tied to the sales prices…
When I see sellers start reducing price, I know this is a motivated seller, and will put in a low-ball offer.
Sometimes, home sellers worry that they priced too low and is selling themselves short. No…sales price is determined by supply and demand. If you list at a reasonable price, compared to all those overpriced listing, home buyers feels they’re getting a deal, and you’ll end up with multiple offers, which creates competition. You know how competition makes people wants to win, and likely offer to buy at a price higher than your asking price.
When you list at too high of a sales price, you risk not getting any offer, then your property sits on the market. The longer it sits on the market, the less interest you’ll get from home buyers because they’re concern that something is wrong with the property that’s why it still not sold.
Another reason why listing high to start is a bad move is because when you first list your property on MLS, that listing is distributed to other sites. But when you reduce the price, MLS does not update other sites. And you end up missing many potential buyers because your property will be out of many buyers price range.
Pricing too high not only cause your property to sit on the market for too and ending selling for a lot cheaper, but it also end costing your more considering all the expenses you have to pay on an empty property.
5. Your first offeror (the person who put the offer) is always, always, always your best, assuming this person has the ability to purchase with cash or mortgage. This offer may not be the best offer. First offer is usually lower than what they are willing to pay, or the terms needs to be worked out. The reason why your first offeror is the best is likely because these individuals has been on the market looking for a specific property, and when yours show up on MLS, they spot it, they want it and put an offer right away.
Remember, no matter how good your real estate agent, or he/she is your cousin or neighbor, these people have different motivation than yours as a home seller.
What is a Foreclosure?
A foreclosure is a legal process by which a homeowner’s right to the property is terminated, usually due to default. It typically involves a forced sale of the property at public auction with the proceeds applied toward the mortgage debt.
In Hawaii, mortgage lenders may foreclose on deeds of trusts or mortgages in default using either a judicial or non-judicial foreclosure.
In judicial foreclosure or “foreclosure by action”, the mortgage lender files the appropriate documents with the court to rule that the homeowner is in default.
The mortgage lender then delivers the notice of default to the homeowner, or publishes the notice if they have trouble contacting the homeowner.
The homeowner has 20 days to respond. If the homeowner does not respond in 20 days, the court would find the homeowner in default and the mortgage lender can proceed with scheduling the foreclosure sale.
However, the homeowner has 30 days after the notice of default to file a notice of appeal.
A commissioner is usually appointed to sell the property at the public auction, which are usually held at the court house steps. The commissioner publishes the notice of foreclosure sale in the local paper showing the auction dates and open house dates, if any.
Any party may bid at the auction and the winning bidder is required to pay 10 percent of the bid cash or cashier’s check.
Unfortunately, the highest bidder does not automatically get the property. Additional bidding may continue at a confirmation hearing. If the court find the price fair at the confirmation hearing, then the sale is confirmed.
Non-judicial foreclosure or “foreclosure by sale”, does not involve any court action.
The mortgage promissory note usually contain a provision called a “power of sale” clause, which allows the mortgage lender to foreclose on the property upon default to satisfy the unpaid mortgage loan.
In a non-judicial foreclosure, the mortgage lender’s attorney would publish a notice of foreclosure sale once a week for three (3) consecutive weeks in a local newspaper in the county the property is located.
The last publication cannot be less than fourteen (14) days before the sale.
The copy of notice must be posted on the property and mailed or delivered to the homeowner no less than 21 days prior to the foreclosure sale.
The foreclosed property is auctioned off to the highest bidder. The auction maybe rescheduled, which happens frequently. And the notices of sale must be re-sent and re-published.
The homeowner has up to the three (3) days prior to the foreclosure sale to save the default by paying the defaulted debt along with any costs and reasonable attorney’s fee.
Hawaii offers no right of redemption for homeowners once the sale of the property is confirmed. However, homeowners in Hawaii do have up to one (1) year to redeem a tax lien foreclosure.
After the foreclosure sale, a homeowner may still face deficiency judgement if the proceeds from the foreclosure is not enough to pay off the mortgage promissory note IN FULL, meaning the property was sold SHORT.
A foreclosing mortgage lender who completed a non-judicial foreclosure of residential property is prohibited from pursuing a deficiency judgement against the homeowner unless the debt is secured by other collateral.
Did you know you do not need a real estate agent or broker in a real estate transaction?
If you think about it, buying and selling real estate property is like buying and selling a car, you can do it yourself.
Real estate agents and brokers are just car sales men in the real estate. They just want to make money from you.
For sale by owner makes sense and saves you lots of money.
And here’s how.
The median single family homes in Hawaii is $750,000. The average commission for a real estate transaction with a real estate agent or broker is 6%. You’re paying $45,000 for a random joe to sell your home. If your home is worth a million (which is majority of the homes in Honolulu), you’re paying this random joe $60,000 to push papers for you.
How about you save the $60,000 and hire an attorney, who can draft your purchase contract and give you legal advise about your estate planning and tax at the same time.
People are afraid of lawyers because they think they cost too much, which is true. They do charge a lot for good reasons, they have your ass cover when the time comes.
My attorney charges $400 an hour. The $60,000 commission you pay for your real estate agent, who does not provide any legal advice because they don’t know anything, will buy you 150 hours of attorney time.
My attorney went to 4-year undergrad, 2-year law school and passed his BAR exam, and is entitled to charge $400 an hour for legal fee, which is consider expensive.
A real estate agent (may or may not have a college degree) went to real estate agent prelicensing course for 60 hours and passed the real estate salesperson license test.
Say your real estate agent spends 50 hours for your listing…I don’t know, they may do 1 or 2 open house (4 hours each), writing listing description, etc, etc. Let’s say 50 hours, that’s $1,200 an hour.
Unless you make more than $1,200 an hour, I would do it myself.
Did you know how easy it is to sell your home on your own. The hardest part is marketing.
Read “How to Market Your Real Estate Property?”
Chances are if you’ll need your attorney to draft the purchase contract and go over your trust and estate planning stuff, you’ll probably needs a few hours of your attorney’s time, which probably would cost you a few thousand.
Even if you use a lot of your attorney’s time chit-chatting, say 50 hours, you’ll still come out only $20,000 on attorney fees.
Remember, the commission you pay your broker or real estate agent is just one of the closing cost. You still have more to worry about when you close.
If you used a real estate agent or broker, his/her only tasks are writing you listing description, list in MLS, find a new agent to do open house for them, answer calls from other agents about showing. Most of the time, it’s the buyer’s agent who show up to showing, so your agent just sits pretty in the office waiting for an offer to come through, and get you to say “yes” to the first offer that come through, so he/she can close and pocket the commission.
Once you have an agreement with the buyer, signed the contract and start escrow. There’s not much left to do - schedule home inspection, and just wait.
Real estate agent or brokers are not allow to give any legal advice. The standard Hawaii realtor’s Purchase Contract specifically provides that your real estate agent is not providing you with legal advice, and you should seek legal counsel. So, you are might as well hire an attorney from the beginning.
You know what’s worst?
Of course in Hawaii, everyone knows a friend or a relative who is a real estate agent. Hiring a Hawaii realtor is especially inefficient when the sale is between family members, and both sides are using a family friend to be the dual agency broker. That “family friend or relative” may receive a six percent (6%) commission for processing paperwork, even though as a dual agent they have probably utilized the standard “Dual Agency” disclosure which provides that he/she cannot really take sides. So who does he/she work for?
They can't give legal advise, and they can't take sides. So why are you pay this person?
Related article: Real Estate Agent…Absurd?
Anyway, if you decide to sell your real estate property on your own and put up a for sale by owner sign in your front yard, the process is really simple.
Advertise your real estate property like you would selling your car. Seriously, do you hire someone to sell your car?
Write a very descriptive ads from your property.
Show your property to potential buyers. You can do a open house event or private showing.
When you have a potential buyer, contact your real estate attorney to have him/her draft your real estate purchase contract.
Have both parties signed.
You’ll contact an escrow company to open escrow. Actually, the buyer opens escrow. When I purchase my last real estate property, I went to Downtown to the escrow company myself. My agent did nothing.
Your buyer should contact a home inspector for home inspection. This is a buyer’s expense. It’s up to the buyer to have an home inspection.
If you’re a condo owner, you’ll contact your property manager to have condo doc send over to your buyer.
The escrow and title company will make sure the transaction goes smoothly and both parties get what they agreed upon.
The other advantage of selling the real estate property on your own is that you know the property best. You get to meet the buyer directly, interact and negotiate with them directly without a third or fourth person involved.
According to the National Board of REaltors, 44% of buyers find their homes online (not from an agent).
Related article: Simple Home Selling Tips to Sell Your Home FAST.
There are many available sites to market your real estate property for sale. Here’s are a few that I use. If you type in “for sale by owner” in Google, more sites would show up.
Owners.com allows your listing to be posted in your local MLS.
Don’t forget social media. Share your postings on Facebook, Twitter, Instagram, wherever your people hang out.
Having hard time selling your real estate property? Let us help
Related article: Sell Your Home Fast
What is Owner Financing?
Owner financing or seller financing, is as the name implies, the owner finance the deal, meaning the own is now also the bank. Instead of the buyer getting a loan from the bank, and paying monthly payment to the bank, the buyer will pay the owner a monthly payment.
Owners usually offer owner-financing to make their properties easier to sell because the seller now has a larger pool of buyers, who are unable to obtain mortgage from banks. Sellers may finance part of the purchase price - 30% or 50%. Sometimes they may even finance up to 100%.
A typical owner-financing deal looks something like this. The owner or seller has a property that he/she wants to sell for $500,000. With more stringent bank requirement, mortgage loans are hard to come by. So the seller offers owner financing to less qualified buyers. The seller finance 50% of purchase with a small down payment, which means the buyer only has to come up with the other 50% from the bank. So instead of coming with $100,000 down payment (20% of the purchase price) and getting a $400,000 conventional loan, the owner may only require a $10,000 down payment, and owner-finance the $250,000. The buyer now would need only to borrow $240,000 from the bank for this purchase.
Seller financing are usually short-terms 3-5 years long, at which time the buyer, hopefully with better income and credit score, would be able to re-finance with the bank. Most seller financing charges higher interest rates, something around 5-6% now, for 3-5 years, then balloon payment at the end of term.
Why is Seller Financing a Win-Win Strategy for Both the Sellers and Buyers?
The benefit for the seller is that he/she would earn the interest that would normally goes to the mortgage bank. The seller is acting as the bank and the money he/she is lending is secured with the property, which means if the buyer default or is not able to refinance at the end of the financing term, the property goes back to the seller.
The benefit for the buyer is that he/she can buy the property now, instead of waiting to save up enough down payment or repair their credit score, or whatever their reasons for not getting a mortgage from the bank.
Hopefully at the end of the owner-financing term, the property would have increased in value or equity either through appreciation and/or consistent monthly payment. Now with more equity in the property, the buyer should be able to refinance to a conventional mortgage easily.
Isn't it brilliant?
Rent-to-own, also known as lease option, is an investing strategy that can be benefit both home buyers and home sellers.
For home sellers, rent-to-own may be the perfect solution to ensure you get top dollar for your home in a buyer’s market. It may even generates some extra income for the seller before the actual sale of the home. The rent-to-own strategy also increases the number of potential buyers for your home to include those who do not qualify for the conventional mortgage from banks.
In a rent-to-own or lease option, the homeowner rents his/her property to a potential buyer (lessee) with the exclusive right to purchase the home within a certain time period, usually 3 years or longer. The homeowner cannot legally sell the property to anyone else during the period defined by the lease option. The homeowner and lessee would negotiate in the beginning of the lease the term of the lease to include the purchase price, option or earnest money, monthly payment in addition to the rent.
Decide if a rent-to-own is for you. Rent-to-own isn't for everybody. If you need all the money from the sale of your home right away, you're better off with a straight sale. In addition, the majority of rent-to-own aren't exercised, so you may have to begin the process of selling your home all over again after the lease terminates.
You might also have to consider if you want to, or aren't able to, keep up with the responsibilities of continuing to own the home. In the a rent-to-own scenario, the homeowner must continue to pay property taxes and insurance and is generally still responsible for major repairs during the lease period.
Do a background and credit check on the applicants. At this point, you have to look at potential buyers as potential tenants, and you don't want to do a rent-to-own with somebody who you wouldn't rent to. Look for someone with good references, a steady source of income, and the ability to pay the rent plus, if applicable, the additional monthly option money.
As far as the applicant's credit history, you probably don't want someone with serious credit trouble, but at the same time you may want to be somewhat lenient. Many buyers who choose rent-to-own do so because they have some blemishes on their credit and want to improve their profile before applying for a loan.
Pre-qualify your lessee. It's a good idea to contact a loan officer or mortgage broker to at least discuss the potential buyer's prospects for obtaining a mortgage at the end of the lease term. There is more uncertainty (and, hopefully, more chance of improvement) the longer the lease term, but both you and the potential buyer can get a realistic idea of whether they'll be able to buy the house.
This step is essential if it's important to you to sell the house at the end of the lease. But ethically, and perhaps legally, it's important regardless of your preference because if you take option money and above-market rent from a tenant who can't possibly buy the house at the end of the lease, you're just ripping the tenant off.
Provide the potential buyer with a seller's disclosure form. The disclosure form lists any known problems with the house. You attest, to the best of your knowledge, to the condition of the house. This form is standard for other purchase transactions but is sometimes left out in a rent-to-own. Make sure you give the buyer this form to help him or her make an informed decision and to protect the integrity of the contract and sale. The buyer should also have an independent home inspection done.
Prepare a lease agreement with option to buy and collect option money. You can get fill-in-the-blank rent-to-own forms online, but you're better off getting them from a local real estate agent or attorney. The contract is sometimes added as an addendum to a standard sales contract. Unless you really know what you're doing, get help with the details of the contract from a real estate attorney, not a or broker.
The most important thing to remember is that you've got to cover not just the money issues but also who is responsible for what types of repairs and other complications that are bound to come up.
◦ Agree on the purchase price of the home, which should be fixed on the lease contract. You'll be obligated to sell at this price, so you want to make sure it's something you can live with. Ideally, the agreed-upon price should be at least at fair market value and maybe slightly more (especially for lease terms of 1 year or more) to compensate for the convenience to the buyer and for the likely appreciation of the property over the term. You and/or the buyer may want to pay for an appraisal to validate the price. Banks and other lenders will only loan against the appraised value, regardless of the price that you agreed on with the buyer.
◦ Determine how much option money to collect. Some states and municipalities have laws specifying a maximum amount of option money that can be taken, but in general the initial option money or option fee can be almost any amount. A typical figure is 2-4% of the purchase price. You will keep this money no matter what. If the lessee decides to buy, the money will be credited toward the down payment or the purchase price, and if the lessee doesn't buy, he or she forfeits the option money to you. Keep in mind that many buyers choose lease options because they can't come up with a big down payment, so don't expect to be able to get a huge amount of initial option money.
◦ Decide how much of the lessee's monthly payment will be credited toward the option. Anywhere from 0-100% of the monthly payments can be credited toward the purchase price, although the amount is sometimes subject to state or local laws. In general, the monthly payment will be calculated at fair rental value plus a set amount that will go toward the purchase price. This, like the initial option money, will either be credited toward the down payment or the purchase price or, if the tenant doesn't buy, will be forfeited to you.
◦ Decide on the term of the lease. Lease options typically run anywhere from 6-24 months. Less than six months usually doesn't make sense for the buyer, and more than 2 years (sometimes more than 1 year) may cause tax or legal complications. Shorter lease terms generally result in sales more than longer terms, simply because there are so many variables over the long term, but the length of the lease should be adequate to ensure that the lessee has time to get his or her financial ducks in a row. Keep in mind that if housing prices appreciate quickly, you may be getting a bad deal on a long lease, since you're obligated to sell at the agreed-upon price. If housing prices decline, however, you may be getting a good deal, but if they've declined significantly, the lessee is unlikely to buy the house. You still get to keep the option money, however.
Get the right home insurance coverage. Since you will no longer be the owner-occupant of the house, you may need to update your homeowners insurance policy to a dwelling policy. Check with your insurance agent to determine what policy is necessary and what coverage you need. Your tenant should also be insured to cover his or her liability and, depending on your state, any gaps in your coverage that may result from the lease option.
Collect monthly payments. Now, all you need to do is collect the payments each month. Keep track of the payments received so you'll have a record when the time comes for the lessee to exercise the option (or, in the the worst-case scenario, when you have to go to court to settle a dispute).
Sell the home. At the end of the lease term, the lessee can exercise the option to purchase your home for the price specified on or before the date specified. The total option money paid (including the initial option money plus any credit from the monthly payments) will go toward the down payment. Thus, the buyer already has equity in the home and should find it easier to qualify for a mortgage.
Short Sale vs Foreclosure
Homeowners facing economic hardships may have a foreclosure looming, but are often too proud or uninformed to do anything about it, until its too late. Before considering bankruptcy or allowing the bank to foreclose, consider a short sale.
Unlike a short sale, foreclosures are initiated by lenders only. The lender moves against delinquent borrowers to force the sale of a home, hoping to make good on its initial investment of the mortgage.
Also, unlike most short sales, many foreclosures take place when the homeowner has abandoned the home. If the occupants have not yet left the home, they are evicted by the lender in the foreclosure process.
Once the lender has access to the home, it orders its own appraisal and proceeds with trying to sell the home. Foreclosures do not normally take as long to complete as a short sale, because the lender is concerned with liquidating the asset quickly. Foreclosed homes may also be auctioned off at a "trustee sale," where buyers bid on homes in a public process.
In most circumstances, homeowners who experience foreclosure need to wait a minimum of five years to purchase another home. The foreclosure is kept on a person's credit report for up to seven years.
Although there is no guarantee your lender will agree to a short sale, here is a list of the benefits of participating in a short sale, versus being foreclosed upon.
Benefits Of A Short Sale Versus Foreclosure
• Homeowner can apply for a short sale even if they're not behind in payments.
• There in ZERO COST to the homeowner in short sale. The lender pays all the selling costs and real estate commission. Meaning the homeowner has nothing to lose!
• The homeowner receives professional guidance from real estate agent when doing a short sale.
• A short sale may postpone the foreclosure action to allow enough time for house to be sold.
• Homeowner may qualify for financial or relocation incentives from the lender, and receive up to $10,000 for relocation from a government program called HAFA which provides an option for homeowners transitioning out of their mortgage.
• A short sale only affects your credit score between 50-70 points vs 200-400 points with foreclosure.
• Homeowner may qualify for another mortgage loan as soon as 2 years, as compared to 7 years with a foreclosure.
• Doing a short sale avoids foreclosure and waives the full deficiency owed by the homeowner. They can now walk away from the property free and clear.
• Possible tax relief from cancellation of any debt income.
• Short sales are not likely to affect jobs that require a security clearance.
• It is easier to recover financially and emotionally from a short sale than a foreclosure.
If you plan to simply pack up, leave and “let the bank have the property”. This is the worst idea ever for the following reasons:
• If you leave the house, you will still owe the balance on the mortgage plus penalties and late fees (which in many cases is tens of thousands of dollars). This means that by law you are responsible for paying off this balance over the next 10 to 20 years for a property you no longer own!
• If you walk away from the house, the bank will still try to recover the money. They can legally do this by garnishing your future wages and investments!
• If you let the property go into foreclosure, your credit score can be affected up to 400 points. This means that it is going to be hard to find somewhere to rent (if they do credit checks). It is going to be hard to get another mortgage for a very long time with a foreclosure on your record. It is also going to be hard to get credit (in general) with a foreclosure on your record.
• Having a foreclosure on your record can also be a hindrance in getting a job, especially ones that require security clearance.
Read What is Short Sale?.
Read What is Short Sale?.
A short sale can be a good deal for a cash buyer or investor. And it can help the seller avoid having a full foreclosure on his or her credit record.
Because in a short sale, the proceeds from the home sale are less than the amount the seller needs to pay off the mortgage debt and the costs of selling, so for this deal to go through, everyone who is owed money must agree to take less -- or possibly no money at all. This is one reason why short sale can be a very complex transaction that move slowly and often falls through.It is a lengthy and paperwork-intensive transaction that may take up to a whole year to process.
If approved for short sale, the buyer or investor negotiates with the homeowner first, then seeks approval on the purchase from the bank. It is important to note that no short sale may occur without the lender’s approval.
Before you rush in, consider the following issues.
1. Know what you are getting into. Buying a short sale is not a do-it-yourself project. Find a real estate professional (even attorney), who understands the short sale process in your state. Having an experienced and knowledgeable real estate agent (or fellow investor) on your side who knows how short sales work will increase the chances of closing the deal without loosing your shirt. Even under the ideal circumstances, short sales can take a long time to close and may require extra effort on the part of the buyer.
2. Be wary of the condition of the property. If the seller is in financial distress, chances are the home may not be well-preserved. The seller also may be reluctant to reveal serious maintenance issues. Proceed carefully and get the property inspected by a knowledgeable person before you commit.
3. Make sure the deal can close. If you've decided to go for it, the first step is to determine the status of the short sale. Below are items that most lenders require from a short seller. If the seller is unable or unwilling to provide this information, the short sale won't close and any buyer is wasting his or her time.
• A hardship letter. The seller must explain why he/she cannot keep up with making payments. The sadder the story, the better. A seller who is simply tired of struggling probably won't be approved, but a seller with cancer, no job and an empty bank account may. The most common acceptable reasons are divorce, bankruptcy, loss of job or some kind of emergency.
• Proof of income and assets. It is in the best interest of the lender to recover funds from the home owner. If the lender discovers that the home owner has other assets, including retirement funds, they may prefer to liquidate these assets for payment on the mortgage, and denies the short sale. The proof of income and assets must include income tax and bank statements, going back at least two years. Sometimes sellers are unwilling to produce these documents because they conflict with information on the original loan application, which may have been fudged. If that's the case, this deal is unlikely to close.
• Comparative market analysis. This document shows that the value of the property has declined, which essentially means the home owner has no equity in the property, and it won't sell anytime soon for the amount owed. The comparative market analysis should include a list of comparable properties on the market and a list of properties that have sold in the past six months or have been on the market in that time frame and are about to close. This analysis is very similar to the Broker Price Opinion, which is less formal but often more informative than a property appraisal. The prices should support the seller's contention that the property is worth no more than the short-sale price.
• A list of liens. The home owner must be at least 3 months behind on the mortgage and has been served a lis pendens from the court indicating that the lender intends to foreclose on the property if they do not receive payment in the near future. There may be more than one lender or liens on the property, and all lien holders have to agree to take less -- or possibly no money at all..
If there are first and second mortgage liens, the question becomes: What's the plan to satisfy these lien holders? If there is a third mortgage lien, reaching any deal is very iffy.
Deal killers include child support liens, state tax liens and homeowners association liens. If they exist and there are no obvious solutions, walk away, Thompson says.
Because a short sale generally doesn't cover the whole amount owed or other liens, it can trigger mortgage insurance. If the property is covered by a mortgage insurance policy that doesn't have to pay off until the home has been in foreclosure for 150 days or some similar length of time, chances are the insurer will hold up the sale because it won't want to pay any earlier than necessary and hopes the foreclosure will just disappear. Often the mortgage insurer will simply go silent. Thompson says: No response, no approval.
4. Be realistic. Short sale is a waiting game. This is not your game, if you're in a hurry.
Part of the slow down in short sale is potential buyers’ lowball offers, which are ultimately rejected.
Another factor is the increasing number of government programs aimed at keeping people in their homes. According to the Mortgage Bankers Association, about 50 percent of defaults never go as far as foreclosure. So lenders see short sales as potentially the least attractive option and aren't willing to expedite them.
To avoid getting stuck in an extended process of negotiation, start by negotiating with the seller and the seller's agent that your offer will be the only one presented to the lender. If the lender isn't flooded with offers, it will be more motivated to move forward.
5. Have your cash ready. Once you have a deal, you should have your money ready, preferably cash. If you're getting a loan, you need bank approval in advance.
As with any deals like REOs, short sales, foreclosure, or auctions -- make sure you have money lined up ready to go. Cash is always the best financing option in all these deals.
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