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Is It Better To Be Lucky Than Good?

by Justin McHood

in Justin McHood,Mortgage Related Topics

So you think you want to buy a house that has multiple offers on it?

What I am about to suggest is called The Better To Be Lucky Than Good Plan and it’s success can largely depend on what your connection with karma is with the Gods in Charge of Decisions on Bank Owned Properties.

Step One

Once you have found a house and you realize that there is currently multiple offers in on it – maybe even at least one of them is for cash, it is time to get creative. In this case, creative is known as something called an escalation clause. The escalation clause can be worded in a number of different ways, but the essence of it is “buyer agrees to pay X% or X$ over the next highest offer.”

Step Two

Being creative can be fun, but unless you are also smart and creative, it could backfire on you. So now that you have been creative, you can protect yourself by being smart. Being smart in this case requires that in addition to your escalation clause, you also use a “subject to appraisal” clause such as this one The Phoenix Real Estate Guy stated in the comments from a post I wrote last week:

Appraisal Contingency: Buyer’s obligation to complete this sale is contingent upon an appraisal of the Premises by an appraiser acceptable to lender for at least the sales price. If the Premises fails to appraise for the sales price, Buyer has five (5) days after notice of the appraised value to cancel this Contract and receive a refund of the Earnest Money or the appraisal contingency shall be waived.

Once you have submitted your offer that is both creative and smart, it is time to sit back and let the fun begin. From what I can tell, the people who work for the Gods in Charge of Decisions on Bank Owned Properties are seldom able to turn one of these offers with an escalation clause in it down. I am sure it happens, but I just don’t see it happen very much.

Step Three

Once the offer has been accepted by the people who work for the Gods in Charge of Decisions on Bank Owned Properties, it is time to order the appraisal. Due to HVCC laws, appraisals today can be tricky and usually drive people nuts… but in this case, don’t let it drive you nuts – if the Better To Be Lucky Than Good Plan works out, you are about to save some money and be able to buy the home you want.

Step Four

If my math is correct so far, once you get the appraisal back, you will quickly realize that as a result of you being creative, you currently have an offer in that is possibly tens of thousands of dollars over the appraised value of the home.

Good thing you were also smart. Now is the time when you go back to the person who works for the Gods in Charge of Decisions on Bank Owned Properties and ask them which one of these three choices they want to pick:

  1. Cancel the contract because the property did not appraise for the sales price
  2. Get a different appraisal done with the seller paying for it
  3. Negotiate with the seller to lower the sales price to the appraised value

How do you tell if you are one of those people who think it might be better to be lucky than good?

The person who works for the Gods in Charge of Decisions on Bank Owned Properties chooses door number three from the choices above and you end up with the house you wanted at the appraised value.

It might be easier than you think to be lucky… especially if the short sale department happens to be part of the “Retard Division“.

Other Recent Multiple Offer Thoughts:

Escalation Clauses: Bad or Good?

Multiple Offers and “Winning” The Bidding War

Disclaimer: I am not a Realtor but I get to watch them work every day and most days it is more fun than not. Be sure to consult with a licensed Realtor before trying any of this at home.

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The Downside To Leverage

One of the greatest things about Twitter is it lets you peer into the minds of some of the smartest people in the world – all without them really knowing that you are listening. Just follow a few smart people and soon you will be amazed at the amount of wisdom they can share in 140 characters or less. Consider this insight shared with his followers from Zillow’s COO : After I looked up the word pernicious , I couldn’t help but think “He is right – many of the foreclosures – especially the ones that could be considered strategic can be traced right back to the degree of leverage being used by people to finance their homes.” Leverage: It Cuts Both Ways Say for a moment that you put down 20% when you bought your home 2 years ago. Even though 20% would have been considered a healthy down payment 2 years ago, that still means that you are able to live in a place that costs 4-5 times as much as you have into it in cash. Then say with the current economic problems, you have a hiccup in your income (job loss, decreased bonus, demotion, less business income, etc.) and you are unable to continue to make the monthly payment on your current mortgage. If home values in your area have went down 10%? You can still sell your home for more than you paid, and move into a cheaper living situation – either buy a smaller home or rent a place that is less on a monthly basis. But when home values have went down 50% in your area, you then have some decisions to make, and those are the tough decisions that I see homeowners wrestling with every day. Because I live in one of the sand states where foreclosures are rampant, I speak with people all the time who are 50% (or more) under water from when they bought their home just a few years ago. What is alarming about these conversations is that there really is not a solution in place to the problem of having severe negative equity in their property and a hiccup in their income – and so I am left with giving no real advice, but rather just explaining options. And the option list is rather short: Continue making your payments Short sell your house Attempt to get a loan modification that will most likely still leave you with 50% (or more) negative equity Foreclosure What Should You Do If You Have 50% Negative Equity And A Hiccup In Your Income? The short answer: If you can’t continue to do #1 (make your payments) and you want to live in the home, try #3 (loan modification) with your lender but be ready to do #2 (short sell your house) to hopefully avoid #4 (foreclosure). Leverage. I can’t think of a better word than pernicious , when values go down.

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Negative Equity and The Big Idea

Do you like to watch sports on TV? Isn’t it amazing how much money the “jocks” who play sports generate in terms of revenue and as a result get paid to just be a jock? What if I told you that the real jocks in the world who generate the real revenue and make the real money weren’t named Kobe, Tiger, Lebron or LaDanian? The real jocks who are responsible for generating trillions of dollars are the Quant Jocks . Quant as in Quantitative . As in numbers. As in the smartest-guys-in-the-room-who-wear-glasses-and-part-their-hair-on-the-side who are hired to come up with the financial models that the big banks base their entire business around. These Quant Jocks are the guys who came up with those wonderful things called CDO’s (mortgage speak for Collateralized Debt Obligation), CDS’s (Credit Default Swaps, more mortgage speak) and a handful of other three lettered acronyms that have given the country a severe case of the financial hiccups these last few years. Attention Quant Jocks: I have an idea, but we are going to need your help flexing your spreadsheet muscles to let us know if this big idea will work or not. Let’s see if we can attack the Foreclosure Crisis from a different angle and solve it. Are loan modifications working? Not really – in fact, the highest levels of government are pushing for more loan modifications to get done soon . Are short sales working? Kind of, but not really. I still hear it takes way, way too long to get a short sale done. Foreclosures? Still happening — and from the data that I can gather, more strategic defaults are happening more as more people are simply choosing to “let their home go”. The number one problem cited in the decision in strategic defaults is the amount of negative equity in a property . In many areas of the “sand states” it isn’t uncommon to see a homeowner be 50% or more upside-down in his home — which means that house he bought 3 years ago for $200,000 is now worth $100,000. And right or wrong, when property values plummet in the high double-digits in  entire zip codes, the end result appears to be mass default. Here Is A BIG Idea: If a homeowner has a LTV higher than 125%, write the current loan down to 90% of the appraised value of the home and create an equity-sharing agreement with the homeowner that you will split any equity gained in the home if they refinance or sell the home. 2 Benefits To The BIG Idea: The smartest guys in the room will quickly figure out how to turn the resulting “IOU 50% of my equity” into some kind of security that can be traded/sold if an institution doesn’t want to hold it. You might be surprised to learn how many banks have written down the value of these mortgages to 90% (or less) of the current appraised value already . Homeowners will have a lower (”more affordable”) mortgage payment – and – have no reason to become another strategic default statistic. Low interest rate + equity in home = the best chance for a homeowner to make their mortgage payment or simply sell the home and try to get the most money possible rather than short sell it for the least amount the bank is willing to take. Will it work? Let’s put it this way: I’ll bet you a can of Diet Pepsi that if implemented, it will work better than the FHA Secure and the FHA Hope for Homeowners Program – combined . I wonder what the Quant Jocks will have to say about it.

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