HB 2791

In February 2008, the HB 2791 was passed. It further confirms what we've been saying all along about the dangers of "deed assumptions" and "leasebacks" for investors.


Equity skimming is defined. "Equity skimming" practices are used to obtain title to properties for the purpose of either taking the equity out of the property or obtaining rents or payments on the property without satisfying any of the underlying obligations that may exist on the property.


A distressed property conveyance is a transaction in which: (1) a foreclosed homeowner transfers an interest in the distressed property to a distressed property purchaser (DPP); (2) the DPP allows the foreclosed homeowner to occupy the property; and (3) the DPP or a person acting in participation with the DPP conveys or promises to convey the property to the foreclosed homeowner; or provides the foreclosed homeowner with an option to purchase the property at a later date; or promises the foreclosed homeowner an interest in, or portion of, the proceeds of any resale of the property.


A DPP must either (1) ensure that title to the property has been reconveyed to the foreclosed
homeowner; or (2) make payment to the foreclosed homeowner so that the foreclosed homeowner has received consideration in an amount of at least 82 percent of the fair market value of the property as of the date of the eviction or voluntary relinquishment of possession of the property by the foreclosed homeowner. "Consideration" is defined, and includes unpaid rent owed by the foreclosed homeowner before the eviction or voluntary relinquishment, reasonable costs paid to independent third parties necessary to complete the distressed property conveyance transaction; payment of money to satisfy a debt or legal obligation of the foreclosed homeowner, or the reasonable cost of repairs for damage to the distressed property caused by the foreclosed homeowner.

A foreclosed homeowner has the right to cancel any contract with a DPP until midnight of the
fifth business day following the day the foreclosed homeowner signs the contract, or until 8:00 AM on the last day of the period during which the foreclosed homeowner has a right of redemption, whichever occurs first.

Alternatives to Foreclosure: Short Sale Strategies

The strategy on a short sale is to negotiate a discount with the first mortgage and let the first mortgage negotiate the Junior Liens for you.

In a foreclosure, Junior Liens face a different situation. Typically, auctions require all cash buyers. The terms are usually 10% due immediately and the remainder due in a few days (or the 10% down is defaulted on). With so much cash required, usually only sophisticated investors attend auctions. In distressed "buyer" markets, most of these cash buyers seldom buying Junior Lien mortgages, which would require paying off the 2nd and 1st mortgage. Why buy out a 2nd mortgage and 1st mortgage when you can buy simply buy out the 1st mortgage?

In reality, the junior liens can deny the first mortgages demands for small settlements. They have the option to purchase the property at auction. However, in distressed markets, most second lien holders are unwilling to do this unless the property has substanstial equity.

Lenders are more likely to negotiate if 1) your offer is within 80% of the BPO(Broker's Price Opinion), 2) if the property needs a lot of repairs and/or 3) if the selling market is weak.

Scope of Work for Contractors

When dealing with contractors, it is absolutely necessary to define for your contractor exactly what they job duties are. If you do not, they will "change order" you to death. Be sure to include things like clean-up and pulling permits in your scope of work. Over the years, I have developed a Work Breakdown Structure (WBS) that details each type of construction task.

For example, I have a WBS for installing Anderson windows, including removing the current window, window jam prep, level and shim, vycor, brick moulding, flashing, insulation, silicon caulking, hauling the window away, trim, screens, hardware kits, etc.

Other important steps include pre-qualifying subcontractors including reference check and verifying license, bond and insurance, including getting your contractor to fill out an insurance indemnfiication and add you as an "additional insured." Set-up a schedule for payments and never pay 50% down-payment up front. Make sure you get a certificate of occupancy, final inspection and mechanical lien indemnfication before giving the last and largest final payment.

The 10-year trends before the Great Depression

Does history repeat itself?

Here are some trends of the Roaring 20's before the Great Depression.

1. New Federal Reserve in 1914
2. Post World War I Inflationary Pressures
3. American Protectionism
4. 10-year boom with a 34% increase in GDP over nine years and a 200% increase in capital investment infrastructure spending
5. Residential and Commercial Real Estate Boom
6. 10-year bull market, investment speculation and investing on margin
7. Severe Recession in 1920 followed by a nine year bull market
8. Relatively low interest rates

Short Sale: BPO Tips

The BPO (Broker's Price Opinion) is the most important part of the short sale packages. Most banks will not go lower than 80% of the BPO. A real estate broker is paid $50 to go out and do their Price Opinion on the house. However, many real estate brokers are not professional appraisers and make the same common mistakes.

1) They often do not know how to do construction cost estimates on a home. You need to have estimates with you probably from a licensed contractor.
2) They often use the wrong comps. A rambler should only have rambler comps. They will often mix split-level, rambers and two story buildings.
3) They often do not calculate the effective age correctly, which is typically 50% of the age of the house and way less depending on the remodels and repairs done.
4) They often do not use houses within 10 years before or after the comps

Get educated on the appraisal process so that you can double check the most critical aspect of your short sale package. For questions, contact me at 206.832.9590.

A broad perspective on real estate ownership from 11,000 years ago to now

In the last 11,000 years, only a few societies evolved into food production communities, starting in China, Fertile Crescent and Mexico. Interestingly, populations grew, started to create "divisions of labor," and lead to government states. Before these trends towards plant and animal domestication, populations banded in small tribes as hunter/gatherers. Invitably, modern societies developed the trend of private property, real estate and the Have and Have-nots. The Haves then wrote laws, hired police forces and military to protect and promote their economic interests first through colonization and later through international corporations and franchises.

Short sale and fraud

I'm doing a short sale today where this lady somehow got 4 2nd mortgages on her property. She wants to avoid any criminal "fraud" prosecutions. I am introducing her to an attorney who can help her out. With the attorney's approval, I am thinking we can negotiate with each lender and ask if we can give them a settlement for indemnification. We'll see how it goes.