Big in Shorts: Firm Scores by processing high volume of short sales
Published in the Los Angeles Business Journal | Publish Date 12/5/11 | Reported by Alfred Lee
On the second floor of a Woodland Hills office building, Eli Tene has built a factory that churns out a particularly profitable type of real estate deal: short sales.
At his Peak Corporate Network, employees handle hundreds of short-sale cases at a time. Starting at 6:15 every morning, one group takes calls from property owners, another negotiates settlements with lenders and yet another closes escrow. Bulky folders are passed down the line as a case moves its way through.
“We created an assembly line,” Tene said.
Though foreclosure filings nationwide have plunged since last year, times are still booming for short sales, or transactions in which lenders allow property owners to avoid foreclosure by selling properties for less than what they owe. Tene’s is one of several short-sale services that have popped up around the country since the downturn.
In California, short sales now make up more than 20 percent of all home sales, up from less than 10 percent at the beginning of 2009, according to the California Association of Realtors. New laws, including one passed in the state this year, have been enacted that encourage short sales, seen as a better alternative to foreclosure.
It’s a profitable business: The commission for closing a short sale can be nearly double that of selling a home out of foreclosure. The market has attracted competitors from individual real estate agents to other local companies such as L.A. City Short Sales, 360 Realty and Short Sale People.
“It’s a huge difference in profits,” said Ben Salem of Rodeo Realty, a real estate agent who has handled foreclosure sales and some short sales during the downturn. “It can be a very successful venture for an agent who knows what he’s doing.”
Still, Salem said that though lawmakers and lenders have tried to make the process easier, they remain a headache. Hammering out a deal between emotional sellers, impatient buyers and multiple lenders is no easy task. Salem closes only a couple of dozen short sales a year, but focuses more on foreclosures, which are a more straight-ahead process.
That’s where Tene comes in.
Short sales typically are handled, start to finish, by one real estate agent. But Tene said most agents aren’t used to negotiating with lenders, unlike his negotiators, many of whom are trained from scratch and not even licensed until they join the company. What’s more, splitting up the complicated process is more effective because each step is handled by someone who specializes in that task.
Indeed, while most clients are homeowners, some are independent real estate agents who don’t want to negotiate with banks and offer to split the commission. He closed just under 1,000 short sales last year, and said requests from property owners have doubled since then.
“We have a lot more competition than we used to, but there’s no business tougher than short sales,” he said. “And I don’t think there’s many people who know more about it than I do.”
Short sales have been Tene’s bread and butter for decades. When he and partner Gil Priel, who is co-managing director and principal of Peak and other companies they co-run, first got into business together 21 years ago, the first deal they ever did was a short sale – on Priel’s underwater office property in Westwood.
Tene had immigrated to Los Angeles from Israel just a few years prior in order to study, but was sucked into the real estate world before he ever earned an undergraduate degree at Cal State Northridge. He and Priel quickly found a niche handling short sales for the local Jewish community. They completed thousands of commercial and residential short sales during the real estate downturn of the mid-1990s.
“When I called Countrywide (Financial Corp.) in 1991 to try and negotiate a short sale, they didn’t even know what I was talking about,” he said.
From there, they expanded to found several other real estate companies – everything from escrow services to loan modifications. But in 2006, Tene believed the overheated housing market was about to bust and got geared up for short sales again. He founded a new company, I Short Sale Inc., and to streamline the process, he hired Raffi Tal, a jewelry manufacturer in West Hollywood without much experience in real estate.
“It was important for me to have someone who could set up an assembly line, and not someone who thought like a real estate agent,” Tene said.
Today, the short-sale unit is, along with a group that processes foreclosures for lenders, Tene’s biggest money-maker. His team has done short sales in all 50 states.
But two competitors said that it was unheard of for a short-sale company to be closing anywhere near 1,000 deals a year, like Peak claims to have done. One doubted it was even true.
“I don’t believe it’s a realistic number,” said Eduard Khachatryan, who runs competitor Short Sale People in Glendale. “I don’t know any company that could handle 1,000 files a year.”
Tal, however, insisted that it was correct, which would make Peak one of the biggest players in the business.
“We’ve been in the business for a very long time, and in order to last that long you have to be efficient and have the volume. And we have the volume,” he said.
One client the company did close a deal for is Yvonne Cruz, who bought a home in Sylmar in 2004 for $501,000, taking out a $500,000 loan from GMAC Mortgage. But she wasn’t able to keep up with payments, and by 2009 was facing a likely foreclosure.
She had heard about Peak through a friend, and handed over financial information and drafted a letter of hardship. One of the company’s in-house real estate agents listed the property and found a buyer, who made an offer on the home for $396,000. The company negotiated with GMAC, and got the lender to agree to take a loss of about $150,000. The whole process took about four months.
Rather than waiting for the sheriff to show up, Cruz was able to move herself, her husband and three children into a family-owned property in North Hills.
“It saved our credit, and saved us from embarrassment,” she said. “There were foreclosure signs going up all over the neighborhood, and my husband and I didn’t want that to be us.”
New laws have passed in order to encourage short sales. This year, the California Legislature passed SB 458, which prevents junior lenders – usually banks that have provided a second mortgage – from going after borrowers following a short sale. In some cases, banks hadn’t forgiven loans and had gone back to borrowers for money years after a short sale.
Last year, California passed a similar law that also prevented primary lenders from doing the same thing.
“Most of the legislation at the state and federal level is designed to create a situation easier to keep someone in their house, and if they have to get out of the house, to avoid foreclosure if they can,” said Stan Wieg, a lobbyist at the California Association of Realtors who pushed for the new law.
Tene said new laws have helped, but have had unintended side effects: Since lenders know they can’t go after borrowers after a short sale, they ask for more money up front. And in some cases, the law has pushed lenders to opt for foreclosure. But it also has led more real estate agents to turn to Tene’s business to serve as a negotiating arm.
Todd Bernstein, one of Salem’s colleagues at Rodeo Realty, recently partnered with Peak on a short sale in Woodland Hills. “It takes away the pain and suffering from negotiating with the banks,” Bernstein said. “That’s not my job. I sell real estate.”
But the ride won’t last forever, said Paul Habibi, a professor at the UCLA Ziman Center for Real Estate.
“It’s a little bit of a flavor-of-the-month-type industry,” Habibi said. “Right now there’s an onslaught of enterprises looking to capitalize on the new trend, which is homeowner distress. But that’s a game that’s only going to last so long.”
Habibi expects the spike in short sales to last only another two years at most. Tene doesn’t disagree the business is short term, but believes it will last perhaps twice as long. Indeed, a study published last month by the Mortgage Bankers Association said that though fewer houses are underwater, an additional 3.6 million homes across the country are likely to fail, meaning the housing market isn’t even halfway through its current crisis.
When the market does turn, Tene said he’ll rely on his other services for revenues, such as escrow services and hard-money lending. The 12 companies under the Peak Corporate Network brand generate less than $50 million a year, and no single company accounts for more than one-quarter of revenue.
“It really gives us the ability to see trends and adapt,” he said.