Phil: 0:00

Welcome to the Loan Pros Podcast. We're here to help make you a more informed first time home buyer. I've got Raj Sharma here with me, and we're going to be talking about distressed homes, specifically, REO. Short sale and pre-foreclosure homes He's a veteran of the 2008 housing crisis, a current real estate agent with legacy homes Realty. His DRE license number is 01886334. And Raj welcome

Raj: 0:34

Thank you, Phil, for having me on your show.

Phil: 0:35

Yeah, I'm really excited because you and I have talked about this. It's like an alternate way of buying homes or different types of home sales, and sometimes you can get them at a lower price. Can you tell me a little bit about your time in 2008? What was it like?

Raj: 0:50

2008 was a different market., a lot of foreclosures were happening and a lot of short sales on the market. So overall the market was just on a decline part of it, a lot of deals were to be made back then.

Phil: 1:01

So a lot of deals. Now, I know from a lending standpoint, a lot of these, you can't have FHA loans. It's hard to do the three and a half percent down the banks. Were looking for a little bit more of a higher down payment, But I wanted to ask, what were you seeing? What kinds of offers were getting accepted.

Raj: 1:17

Back then, lot of cash buyers were in the market. lot of investors purchasing them for all cash, and then the conventional buyers who had money to put down, which was the case because of the property condition. So you really could only purchase it cash due to the condition or get a conventional loan where the lending rules are a little bit flexible versus the FHA or a VA loans.

Phil: 1:40

Okay, so if you've got 20% down and you're gonna go with a conventional loan, this could be a great way to get maybe a deal, I guess you could say, on a home that's going to need some work. work

Raj: 1:52

Absolutely. You're right.

Phil: 1:54

So, what we're really talking about here are distressed homes. These are REO homes, short sales and pre-foreclosure homes. I want to start out. Raj, can you just tell me. What is an REO home? Let's. Help our first time home buyers that are listening with what exactly these types of homes are

Raj: 2:14

REO basically stands for real estate owned. Those are the property that are foreclosed upon. And bank is the owner of the property. So bank is the owner now. So that's the REO.

Phil: 2:26

And what exactly is a foreclosure?? What does that actually entail?

Raj: 2:29

Foreclosure is a process where homeowner purchased the property and they default on the mortgage payments. And then once the default happens, the bank goes and records notice of default at the county, and then they start the trustee sale process. And once everything goes as planned, then the property gets foreclosed. And homeowners either gone by then or evicted by the bank. And now bank listed as a bank own home.

Phil: 2:55

And what's that timeline look like for that seller who's foreclosed on their home?

Raj: 2:59

So from start to finish, if everything is done legally, it could take anywhere from six to nine months for a homeowner to be evicted or foreclosed upon the property.

Phil: 3:11

And the foreclosure process starts after missing three payments. So really after that 90 days, what's that next step then?

Raj: 3:17

So 90 days is the notice of default, and in another 60 days is when bank files a notice of trustee sale with the county. And that's where the foreclosure is taken place at the county courthouse.

Phil: 3:28

and so basically what ends up happening is 90 days they get this notice, another 60 days to work with the bank to get back on track. And sometimes that's a loan modification, refinances, or just paying the back payments to get caught up. And if they don't, The bank's then gonna go ahead and try to foreclose on it. Now, what happens in between then? Are people putting their homes up for sale while the foreclosure process is going on?

Raj: 3:53

There is option for the homeowners to avoid a foreclosure and not get that hit on their credit and not be able to purchase a home for 10 years., best way to avoid a foreclosures in that meantime, they can start the short sale process, which is an alternate to foreclosure, and those are subject to short sale bank approval process.

Phil: 4:13

and short sales when the home isn't worth what you owe on it.

Raj: 4:16

Correct. So if the homeowner purchased the property , for example, 400,000 and now house is worth 350, now the homeowner's asking bank to let the homeowner sell the property for 350 and take a loss or short sell it for that difference.

Phil: 4:31

so if you're looking at buying a house that's in a pre foreclosure status, that means that someone's three months late on their payment, something's been filed, but they're not in foreclosure. There may be enough equity in the house. That's sometimes where you get a really motivated seller.

Raj: 4:47

That's true. pre foreclosure is basically a homeowner's knows that they're unable to afford the property and unable to make the payments. So instead of waiting for bank to start the foreclosure process, educated homeowners or, guided homeowner by their real estate professional will advise them to do a short sale if they're upside down on their home value and, those are the pre foreclosures out there.

Phil: 5:11

Now when someone's purchasing a short sale, they're dealing with the bank having to approve things. Can you just explain what needs to be approved and how that's different than just purchasing a home where the seller says, Yeah, I'll accept that price.

Raj: 5:24

Well, short sales are listed at a discount price. Uh, most of the uneducated. Not familiar with the short sale process. Agents will list a property, for a discounted lot discounted price, which attracts a lot of buyers to the property, and sometime happens to be a multiple offers, but it's all going to be subject to the short sale lender. Who's gonna approve that price. So if you see a house that's supposed to be at 400,000 and you see a list of a 200,000, that price is not what you're gonna purchase that house for is going to be an offer you submit for that price. And most likely, when bank gets the file from the short sale, agent, they're gonna review it and make sure they got what they need, meaning the net proceed. And if the net proceed doesn't meet their standard guidelines or the investor guide. They're most likely going to reject that offer or come back with a counter to the buyer, which could be a lot higher. And at that time, buyer can get discouraged and say, That's not what the price I was looking for, and walk away from that property. Now the property comes back on the market.

Phil: 6:27

Now you worked the 2008 crisis, like we talked about tons of short sales and foreclosures. You also did something called, is it a BPO?

Raj: 6:36

Yes, the BPO is a short form for broker price opinion. Those are basically alternate to an appraisal. Banks were doing those or hiring agents, uh, that are localized in the area where they had the foreclosure property to give them the value and condition of the property. So we were the eyes and the value determined for the banks.

Phil: 6:58

And the reason why I ask that is when you are a buyer and you're looking at some of these foreclosed or short sale homes, and the price is just too good to be true, you really wanna make sure you've got an agent who understands what the actual value is, not only just what it should normally be sold for, right? But what a bank, or someone who did a BPO would have said the value of the home, because that's gonna help influence what they'll accept.

Raj: 7:26

Absolutely. So banks there to sell the property fast as they can because it is a liability on their books. And, vacant properties are also a big stress for them to have. Best way to get those properties sold is take a discounted offer, but at the same time, banks are not there to sell the property for a deep discount because they lose a lot of money and they have investors who report to. So sometime properties could sell within the comps in the neighborhood, not necessarily a hundred or 200,000 deep discount. That's the mentality a lot of buyers have out there, that they can pick up a bank owned property for half the price. Bank has to also justify the neighborhood to not crash the homeowner's value.

Phil: 8:10

And what's the bank looking for? In an actual offer, what makes it enticing that's gonna have them go ahead and accept that offer.

Raj: 8:19

So banks basically are going to look at the credibility of the buyers. If the buyer's qualified, does the buyer have funds to put down? Did the lender do the cross qualification properly? And. Does that meet their investors? net proceeds that we won't know till the offer is made and bank has submitted to their asset manager to review the offer and then come back with a counter or acceptance, which can take about seven days.

Phil: 8:43

in that overall process of buying that kind of home, how long does that actually take?

Raj: 8:48

So the REO Bank one property, are not longest short sale process. They can take anywhere from 30 to 45 days, So four to six weeks, you could have that property as your own property from start to finish.

Phil: 9:00

And then from a short sale standpoint, how long do those normally take?

Raj: 9:03

So short sale is a lengthy process. The term short sale is not short process, meaning to purchase a property, it's the upside down on a home value term short sale. You're selling it under the market value to have bank approve it. So the process can take anywhere from 60 days for a bank to approve the offer all the way to 12 months. So I have closed short sales back in the days, anywhere from 60 days to 12 months, depending on the bank you're working with. How many leins does the property have and how many creditors you're working with to satisfy and have them also take the loss on the leins.

Phil: 9:37

Now one of the things that we are expecting to see, and we're in Q4 of 2022, so we're kind of in the late months of 2022. We are expecting that possibly some people who overpaid for homes over the last several months putting offers a hundred thousand dollars over appraised value, things like that when the market was just crazy. We are expecting to see some of those people do short sales or foreclosures. So do you estimate or predict that we're gonna see more of these on the market?

Raj: 10:10

That's true. So the people who are overbidding on a home just to get a home or the offer accepted, we are seeing market changing because of the high interest rate today, and they are pre foreclosure properties out there for sale. If you were to call me today and say, Hey, Raj, in Riverside County. Could you look up the pre foreclosure? I can very well jump on the MLS and tell you how many pre foreclosures are listed for sale. Just today. Before coming to this podcast, I looked online on the MLS in Riverside County alone. As of right now, today's date, there are eight short sales listed in the Riverside County. Seven homes are short sale listed in San Bernardino County. Six short sale homes are listed in San Diego County. Four homes are listed in Orange County. That's a total of 25 short sale homes for sale in four nearby counties. Phil and list is only gonna grow from now on.

Phil: 11:06

And I remember we looked at this almost exactly a year ago, and there were zero. Maybe there was one. And the reason for that is that the values of homes in the last 3, 4, 5 months have not gone up. And people who need to move or have changed jobs or lost their jobs and have to sell their homes, they're now finding that their home's not worth what they purchased it for, or they put such a small down payment down that the fees to sell off their house end up making it a break even or less.

Raj: 11:39

That's true, back when we looked at short sales in the area, like you said, zero to one were available. That was also due to the fact the pandemic, , lockdown and government having no evictions, no foreclosure moratorium. That froze foreclosure process for the banks for the last two years. And now that has been lifted. So banks are now getting aggressive again and now those homes are going to be foreclosed upon and you'll see more and more on the market.

Phil: 12:06

In your experience, when someone is looking at buying a short sale, an REO home, what kinds of issues are they coming across within the houses themselves?

Raj: 12:16

So, Those are distressed properties, so you're gonna see lack of maintenance and deferred maintenance on those properties. You could be walking into a home and see appliances missing because those homeowners are upset at the situation or upset at the bank not working with them. So you could see them trying to make some money somewhere. So I have seen properties where I walked in where the entire kitchen appliances, cabinets, counters, and everything is missing, even including the doors. So as of today, if you walk into a short sale or a bank own home, you will see some kind of maintenance or work needs to be done, which you gotta be ready as a homeowner, to know those are going to be your responsibility after closing. So be ready for those extra repair costs on top of your down payment, on top of your closing cost. So defer maintenance is a key. Also you need to check with your lender. Do they finance on those property? Because you thinking as FHA buyer or a VA buyer going into a property that needs a full rehab might not be the house for you. That's where the professional license experienced real estate agent come in handy. They know what the banks are looking for, what the appraisers gonna look for, so you don't waste your time writing an offer, working the process for two weeks and then later, finding out you can't buy this house because lender's guidelines are different on this type of homes, and now you lose that beautiful home that you wanted. So work with somebody you know and trust that done this in the past and gonna show you homes that are gonna be available for financing. If you're a cash buyer, those are perfect. You can buy those homes and basically renovate it and keep it or flip it in the future for quick profit.

Phil: 13:52

From a lending standpoint, every unit's different. Every property is different, and it's really a property by property basis. Remember that most FHA and government back loans are gonna require that the home is habitable. And so if it's missing major appliances that, won't allow you to cook. If electricity has issues, if there's incorrect plumbing, you need to have at least a full working bathroom. If things like that aren't in shape, you may not be able to get that loan approved, or that work's gonna have to be done through something like a rehab loan, like an FHA 203K., there are other options and routes to go, but it is a much more difficult process. So it's best if you do have that 20% down conventional loan or as Raj said, it's great. If you could buy it all cash, you're gonna get a heck of a deal.

Raj: 14:39

And also just to point out on that fill, um, when you're buying a distressed property, for example, mostly a short sale or an REO, utilities are not turned on on those property if they're vacant. So if you have a appraiser who needs to test the hot water to make sure property's livable condition, or check the appliance, If the utilities are not on, those inspections can't be done. So you as the home buyer, would need to turn those utilities on under your name so the inspection by the appraiser can be done and you can get the loan for that property.

Phil: 15:13

So there's definitely risks involved with purchasing these types of homes. What do you think the biggest risk is in buying a short sale or REO home?

Raj: 15:22

So the biggest risk is not getting the property that you spent money into it. So if you do a home inspection, that could cost you anywhere from 300 to $600, depending on the scope of the work. And also if you're in the process long enough and you had paid for the appraiser, which could be anywhere from 600 to $700, you're talking close to thousand dollars to$1,100 to later find out that your property that you're buying is not qualified for you to purchase and now you're out of pocket for those costs. And also, Those properties are sold as is. So the big risk is doing those renovations yourself or hiring a professional to do those work for you. And that comes with the price tag.

Phil: 16:00

Obviously there's risks and there's rewards. So what is the biggest advantage to buying a distressed property?

Raj: 16:10

The advantage will be finding the property at a discount price where you are. Paying less than the retail market value, and now you are happy to do those renovation yourself, so your sweat equity will come in place and reward you later.

Phil: 16:26

When you're looking with buyers and they're looking at distressed properties, what are the things that you are personally looking for and advising your clients on?

Raj: 16:34

So when I take my client to any property, I am actually their eyes. And looking at properties for the condition and, any deferred maintenance. So those things are important to find out during the first visit to the property. So, as a first time home buyer, you may not know what appraiser's looking for. You may not know what the home inspector's going to look for. You may not know what needs to be done to qualify for a loan. With my experience and knowledge that I've been doing this for many years, I am actually pointing out things positive or negative to my buyers walking through those property. That way they're familiar. Okay, well, Raj, you're right. If this property does not qualify for a loan, why would I wanna put an offer if the property sold as is, sellers strictly telling up front, I don't have the budget on short sale to fix any repairs, don't ask me for, uh, any type of repair or credit, then that's not the property for you. Especially on a REO property where banks are just there to sell the property at discount, they're not going to come in escrow to do those repairs, so you can qualify for a loan. So my main goal to do is, Do due diligence with my clients to make sure the property is in a good livable condition. Doesn't have to be perfect. Little TLC can be available, that homeowner can do later, but major ones I'm looking for. Make sure there's no dry rot. Make sure there's no, termite droppings or damages or, AC unit missing. That was the one main thing back in 2000 8, 9 10. Lot of acs, units were stolen from the backyard, and that could be a big no-no to the appraiser. Heaters were missing. So heating is one of those state laws that you must have to get a loan. So those are the things that I look for in the property to make sure those things are attached to the property and is still in a working condition.

Phil: 18:17

Most of our listeners are first time home buyers and so they don't have the experience of walking through homes and just knowing that these are the kinds of maintenance items and maybe what's most expensive. What kind of just common mistakes though have you seen with buyers when they're purchasing these distressed properties?

Raj: 18:35

So the major issues that I see with the first time home buyers are they're just too excited to get a deal on a property and overlook at things that are very important for a lender point of view. So, for example, on an fha, they are looking for a heating, working hot water. Working smoke alarms, carbon monoxide detector must be in a home and also a stove for a cooking. So if those things are missing and not there present, I want my buyer to be aware that if appraiser calls those things out called the lender conditions in middle of escrow, are you as a buyer ready to spend out of pocket to go ahead and buy those items and put it on the property that you don't own? And I have done that with my clients in the past. Make the deal happen.

Phil: 19:21

Yep. You and I have definitely installed a microwave and fixed some fences, FHA wants you to be able to move into a home that's habitable as is. And when you're looking at some of these homes, they could be missing some core things that make it livable. Raj. Thank you so much. That is some amazing information, and I think it's really important to consider all of your options. These distressed properties are your homes or short sales, or even pre foreclosures. They're all different ways that you might be able to purchase something at a little bit of a lower price, though there is that risk involved. What would be the first step someone should take when they are thinking about buying an REO short sale, pre foreclosure type, distressed home?

Raj: 20:03

The first step someone should do is reach out to a professional licensed real estate agent who's been around for a long time and who has done this. Many, many times it's not an easy process. It sounds easy. It sounds like a deal, but you wanna work with somebody who can guide you and coach you and work with the lender who knows what they're doing. Those are the key points that you want to have available to you and call an agent who is short sale specialist like myself, who has done REOs in the past, who has done bank broker price opinion. Call the BPO. So if your listener wants to reach out to me for any other questions or help them find the properties out there that are distressed or a deal out there, they can reach me on my cell phone direct. Happy to get their call. My number's (951) 314-4251, or they can email me anytime at Raj@LegacyHomesRealty.com.

Phil: 20:59

Well, thank you Raj. And guys definitely take advantage of that. If this is something you're thinking about or you just want to pick an expert's brain, he just gave you his direct number, and Raj, thank you so much for giving that information out and look forward to having you come back on to share more knowledge.

Raj: 21:15

Thank you, Phil, for having me. It was a pleasure.