What’s Better - Short Sales or Tax Certificates?

Late night guru’s and top selling books both proclaim tax certificates as a sure-fire way to build wealth. While tax certificates and liens can certainly become a profitable part of your investment portfolio, they are not without risk. When it comes time to investing your hard earned dollars into real estate, what is better - short sales or tax certificates? Keep reading to learn the facts behind the façade then decide for yourself which makes the most financial sense.

Fact- Tax Certificates can generate returns as high as 16 to 18 percent. While that certainly beats putting your money into a savings account or even the stock market, it’s still a far cry away from the returns realized by many short sale investors. Consider this, if you were to take $100,000 and invest it entirely into tax certificates each earning an incredible 18 percent, you would generate $18,000 profit (before taxes, transaction fees, losses etc…). On the other hand, that same $100,000 could be used to purchase up to 5 short sale properties at 20 percent down payment…each of which could easily earn $18,000 in much less than one year’s time!

Fact - Tax certificates and raw land rarely generates residual income. Your money is tied up until the redemption period or the property is sold. Short sales can be rented, leased or otherwise used to generate income prior to the actual sale.

Fact - Tax certificates are not always redeemed! Especially during tough economic times, the back taxes plus interest and other fees may cost more than the property is worth leaving tax certificate investors holding the bag. You can petition to have the property sold but back taxes, liens and other expenses often make it a losing proposition. Worse, if you don’t continue to pay the taxes on the property, additional liens could drive up the total cost even more.

Fact - Liens, environmental restrictions and major clean-ups can further reduce the profit potential of a property even should you become the “high bidder” for a non-performing concern. People promoting the benefits of buying tax certificates for investments rarely talk about the cost of taking acquisition should a property fail to be redeemed. The underlying assumption is the value of the underlying land would compensate for the risk - but what happens if the land itself is the risk? Remember, there is a reason certain properties are forfeited…typically because the value of the property has dropped below the back taxes and other liens or because there is a very high assessment, clean-up fee or restriction associated with the parcel.

Fact - Minimum bids on auctioned properties may not ever reach the minimum you have invested into the property. Further compounding the problem, if more than one tax certificate investor has an interest, proceeds are further divided.

Fact - Clouded title is common. Another relatively expensive problem rarely mentioned in association with tax certificates is the issue of a clouded title or lack of proper recording. Remember, tax certificates only earn those great interest rates if they are actually redeemed - otherwise, you could be stuck with a property you never expected to own and which could cost a small fortune to obtain clear title, pay off existing liens, bring the property up to par in order to sell or even “unload” if excessive environmental or other concerns are noted.

Value Matching - Selling What Matters Most

There is a new trend hitting America that every real estate professional and short sale investor should use to their advantage; getting back to basics. You’ve seen the credit card commercials with feel good family values that claim conspicuous consumption is dead or the big box stores touting stay-cation’s rather than expensive European getaways….but how can you make it work for real estate?

It’s simple once you understand the basics about value matching. Keep reading to learn more:

1.      Don’t Pigeonhole. Value matching is not about putting labels on people; in fact, that is a sure-fire way to fail. Instead, it is about learning what values are important to your target population then meeting their needs by providing the best “fit” possible. Real estate is one of the most important investments most people will make during their lifetime. Aside from the large dollar amount, it is often a critical decision which will define the future of their family and social standing for years to come.

2.      Listen. Value matching requires the ability to listen in order to understand the needs, hopes and desires of the buyer (or seller). It’s imperative to find out what matters most to each client then sell those factors - forget about the typical trappings of success (unless that is indeed what matters most to your client) and instead focus on what they value most. The typical family will fall into several distinct categories including:

*       Family - Young married couples searching for safe, affordable family oriented neighborhoods. Schools, cost, local amenities like parks and safety take top priority.

*       Empty Nester’s - Convenience typically trumps everything else. Low maintenance yards, access to hospitals/grocery/shopping/golf and good neighbors get their attention.

*       Sanctuary - Freedom, privacy and safety is of utmost concern for some; don’t be too quick to put a label since these come in all shapes and sizes. From high net worth individuals seeking solitude to good-ole-boys that want to practice commando moves in their back yard, those seeking safety and privacy will pay a premium for the right property.

3.      Build Relationships - The future will require the ability to build meaningful relationships even for temporary transactions like those of real estate. Trust has become a bigger issue than ever as people feel uncertain about whether or not they are getting a good deal or will encounter trouble later down the road. Word of mouth marketing has always been a real estate agents best friend but now, investors are recognizing the benefits as well.

4.      Position as a Problem Solver - Become more than a sale person or investor by positioning yourself as a problem solver with solutions to people’s most urgent housing related needs. People have an inherent need to feel unique and a growing grudge about paying for simple ‘paper shuffling’. On the other hand, everyone is grateful when someone solves their most pressing problem…even if the cost is higher. Remember, its part of the value you bring to the table during any transaction.

The Real Estate Short Sale - The Top Most Frequently Asked Questions

Q:  What is a short sale?

A: A short sale takes place anytime a property is sold for less than what is owed on the mortgage and the lenders who own the underlying mortgages accept less than full payoff as a settlement. This allows the property to transfer to the buyer even though the lender did not receive the full amount that they where owed.

Q: How does the short sale process work?

A: short sales usually take place during the foreclosure process when a buyer is trying to buy a property and the purchase price will not cover the payoff of the mortgages in full. Most often these properties are bought and sold after the foreclosure process has started but before the process is completed through a sheriff’s or trustee’s auction sale. This stage is called the pre-foreclosure stage.

Q: Who Qualifies for a Short Sale?

A: Once a homeowner misses a payment and then moves on to missing a second and a third, the lender files the foreclosure notice. To qualify for a short sale the homeowner must be able to show through some recent hardship; job loss/income loss, divorce, sickness, death, etc. The homeowner must also verify they have tried to sell the home on their own or through the aid of a Realtor, tried to work out a repayment plan through a Forbearance, Loan Modification, Partial Claim or exhausted considerations of the option of a Deed-in-Lieu.

Q: What are the benefits of short sale?

A: The main benefits of a short sale for the homeowner is it will not be as damaging to there credit as would a foreclosure. They will more than likely be able to considered for a home mortgage again in about 2 yrs. versus 7 yrs. The other benefits are the lender will save anywhere from 40 thousand to 60 thousand in legal fees and holding costs from the time they foreclose on the property to when it is eventually sold. The neighborhood benefits since the market is stabilized with a quicker sale rather than another REO driving their homes value even lower.

Q: How does a short sale affect my credit?  Will it hurt my credit?

A: The homeowners credit will take a hit but nowhere near the effect a foreclosure would have on it. The difference in time to be credit worthy could be as much as 7 yrs.

Q: Will A Short Sale Stop A Foreclosure?

A: If the lender is contacted by our team of negotiators with the completed short sale pkg. presented in a timely fashion during the pre-foreclosure process and accepted then a foreclosure is on hold till the final negotiations are acceptable to the lender and buyer through a letter of intent.

Q: How do I  Write a Hardship Letter?

A: We provide a sample outline of one that we recommend you follow. This all part of the Homeowner Short Sale Submission Pkg. you will receive from us after our initial meeting. It only needs to be a one page letter explaining your current situation and why you can no longer afford to make payments on your home.

Q: When is the best time to start a short sale? Should I wait
until I fall behind on payments?

A: The best time to initiate a short sale is when you realize you are not going to be able to make the monthly mortgage payments any longer and you have sought to sell the home and have gone through the other possibilities mentioned in the answer to question # 2 above. If you are behind already on a payment or so that is fine but please don’t call us and expect a miracle if you are 14 days from the sheriff’s or trustee’s auction date.

Q: Can I short sell multiple properties?

A: You can short sell multiple properties but your primary residence will have the least back end consequences. Most lenders are not pursuing a deficiency judgment at this time but we always recommend getting advice from your lawyer or tax adviser.