How to attack a SHORT SALE and get the price you want

The stock market was lower in early afternoon trading as investors feared more bad news would come out as corporations report their earnings. At 1:35 PM EDT, the Dow Jones Industrial Average was down 410.83 to 8662.82, the NASDAQ was down 52.25 to 1,644.42 and the S&P 500 was down 44.93 to 910.12.

Wachovia reported dismal earnings this morning - a huge loss of $24 billion. Yes, that's billion, not million! Part of that loss was an $18.7 billion "goodwill impairment charge," a fancy way of writing down the company's value to prepare for the upcoming sale to Wells Fargo.

Storm related losses negatively impacted the earnings of Travelers Cos., the St. Paul, Minn. based commercial and personal property insurance company. Earnings dropped to $214 million versus $1.2 billion in the year ago period. Hurricanes Ike, Gustav, and Dolly cost the insurance company around $682 million.

But in a positive sign, credit markets appeared to be stabilizing today. The interbank rates continued to drop, which means that banks are lending to other banks on better terms. The London Interbank Offered Rate, also known as Libor, fell to 3.54% from 3.83%, demonstrating the credit is in fact easing.

Now on to our real estate investing educational section...

Affordability Measures & Pricing Strategies

In the past we have discussed various valuation methods above and beyond the typical "comp value" so loved and over-used by bankers and brokers throughout the nation. Today we will spend a little time covering alternative affordability measures as a basis by which to make an offer on a short sale property.

Like its cousin the comp value, determinations of affordability have typically centered on a debt-to-income ratio that makes little sense in today's market. It goes something like this...
Person X wants to buy a home and makes $150,000 per year. Their current car payments, credit cards, student loans and other obligations qualify them for a mortgage payment of $3,000 per month based upon a typical ratio of 25-35 percent.

Unfortunately, few people remain in the same job for 30 years like their parents before them and decent jobs are hard to find. The company downsizes and unemployment tops out as a miniscule fraction of their monthly income. Before long, they are behind on their mortgage. Sound familiar? It should because as a short sale investor you have probably heard this story dozens if not hundreds of times.

A common sense alternative measure of affordability is to take the "average" income for a given geographic area and correlate it to the type of earning capacity. For example, if Person X is a white collar worker located in Los Angeles their earning capacity is higher than the average earning capacity of the same job located in Boise Idaho. That does not mean individuals cannot make more money -but rather what they can expect to earn should they experience a job loss and need to replace the income. Communities and the United States government use affordability as a measure for determining whether homes are priced too high for a given area and so should you. It's a strong argument to use when working with bankers and brokers who may feel your bid offer is too low. Simply use the following steps:

1. Determine the average household income for the zip code.

2. Determine the cost of a home that would equal 25-35 percent of the average household debt at the prevailing interest rate - don't forget taxes and insurance.

3. Deduct the cost of major repairs or other required work.

4. Drop the price by 10 percent (or more) to account for reduction of anticipated fees the bank would normally incur to hold the home.
Another affordability measure that can be used to support a low bid price is rental rates. Many areas have low rental rates below the actual cost of PITI should someone opt to buy the same home. The Federal government actually uses rental rates to calculate CPI so it should come as no surprise it tends to derive a lower value.

1. Determine the average rental rates for similar homes in the area- not asking rentals but actual rentals without a vacancy.

2. Compare against the PITI, vacancy rates, repairs, HOA fees and other costs. If rental rates are lower than the cost of ownership, use the rental rate as a basis to determine the selling price.

More on Thursday!


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