Shoestring to Millions

His First Deal- Part VII

Posted on: July 28, 2009

Mark made his offer to Sam and is nervous and excited. Mark sits in his office chair, on Thursday morning, running the events of the previous night through his mind as he stares at his computer screen.  He thinks back to the conversation he had with Sam about the fishing trip, and was concerned for being “too corny” while trying to connect with him.

It is lunch time and he constantly stares at his cell phone waiting for the call from Sam… but alas still no call.  Thursday turns into Friday, which blends into Monday with no phone call from Sam. Mark starts to fell discouraged, is concerned that Sam will walk away from the deal. So, Mark decides to bury the file and move onto the next deal cultivation by sending out more mailers.

TIP: It is balancing act when it comes to deciding when to let a deal go and when to keep working on it. If you work on it too much, then you will spin your wheels and not accomplish much and forgo the needed attention to grow and develop your business

One afternoon, a couple weeks later, while reading a real estate article on the art of following-up, Mark decides to give Sam a call just to check in and see if he had reached a decision.  Sam reveals that, “ahh, ya know what Mark? I have honestly avoiding thinking about my problem. I’m just not sure what to do”

Mark then goes reiterates the benefits of his offer:

  1. no upfront fees
  2. Mark will work the short sale and make sure that homeowner is not responsible for any deficiency judgment
  3. no moving costs to Sam
  4. Mark will find him an acceptable rental apartment

Definition: a judgment for an amount not covered by the value of security, is delegated as a loan or installment payments.  In most states, the borrower will only get a deficiency judgment if he/she chooses to file a suit for judicial foreclosure instead of just foreclosing on real property.

TIP: Offers are strengthened based on the benefits you as an investor can offer the homeowners.  Please remember that deals are made during the follow up and not the initial meeting.

Sam voices his concern about the issue of being responsible for any difference between the negotiated amount and the principal amount he owed on his mortgage. Mark advises him that as long as the property is Sam’s primary principal residence, the deficiency judgment is not applicable for the first mortgage (if the bank accepts the Short Sale payoff). In addition, Mark assured Sam that the short payoff letter will state that the lender will not go after Sam for deficiency judgment amount.  (CONCERNS THAT TYPICALLY ARISES WITH SHORT SALE SELLERS)

Sam, based on Mark’s confidence, decides to go forward with Mark and allow him to work the short sale and sell the property. Mark is super excited and he schedules a follow up date to meet up with Sam and finish locking up the paperwork for the short sale. Mark also called his realtor to get the requisite listing documents.

TIP: To process a short sale, most lenders want to see the property listed and marketed before they start accepting lower payoffs for the property.

Mark works on his MaxOffer (MO) to see what he should try to negotiate the bank down to in order to allow him to sell the property for a profit. This is the formula utilized by Mark is as follows:

MO

Numerical Numbers

Max Equity Exposure (70% of ARV)

$381,500

Less: Rehabilitation Costs

$10,000

Less: Closing Costs

$7,000

Less: Hardmoney Points and Fees (5 points which is 5 points of the loan amount of $364,500)

$18,225

Less: Negotiation Buffer

$5,000

Offer Range

$348,275-$381,500

Based on the above-indicated formulation, Mark decided to start his offer price to the lender at $348,275 for principal loan amounts totaling $800,000 (in first and second mortgages). Is Mark crazy? Will he get the bank to accept the short at the price he is offering? Tune in week and find out!!

MARKS NET WORTH as of July 27th, 2009:  $72,500

Equity in home: $57,000

Savings: $3,500

401K: $12,000

Written by Ankit Duggal

Investment Director: www.rernj.com

RER is a boutique real estate investment company based in Clifton, NJ

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  • krishna: Hey thanks a lot for posing this topic. I was preparing a paper presentation about this topic and i got many points about a real estate investor.

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