Short sales are a lucrative business in a down market

Although many businesses are experiencing the negative ramifications of a tough real estate market and high number of foreclosures, the economic conditions spell opportunity for Louisville-based BGS3.

Short for Bigger Gains Short Sale System, BGS3 offers a Web-based application that teaches real estate agents how to tackle short sales. (See related item at right.) BGS3 also provides leads and processes the transactions for real estate agents nationwide who subscribe to the service.

The business model seems to be working. In its first year, BGS3 is on target to generate $3 million in revenue, and steady growth is expected to continue.

Jeremy Bowman, president of BGS3, said he and his partners began testing the concept in August 2007 and launched the business in January.

Since then, the company has gone from five employees to 35 employees. It also has doubled the size of its offices, moving into 10,000 square feet on Whittington Parkway.

Along with the rapid growth, BGS3 has attracted $1.14 million in capital.

Larry Powers, former CEO of The Genlyte Group Inc., invested $500,000. As part of his agreement, Powers received a 2.5 percent ownership stake in the company. He also said he is considering a second investment of that size.

The balance of the infusion was from another private investor, whom Bowman declined to identify.

Monthly fees for online services

About 230 real estate agents nationwide have subscribed to the BGS3 system at a cost of $195 to $595 per month, depending on their plan.

The premise of BGS3s system is that it trains Realtors to become Program 3648 representatives, a name that the company derived from 2007 legislation, H.R. 3648, that eliminated the requirement that homeowners pay income taxes on the forgiven portion of the loan in a short-sale transaction.

Along with online instruction and coaching, BGS3 provides 50 to 200 leads per month of local homeowners who likely are behind on their mortgage payments and marketing materials to pursue those leads. BGS3 also oversees the short-sale process, negotiating terms with the lender and documenting each step online.

To ensure that Realtors have access to quality leads, BGS3 guarantees exclusivity within a specified market.

BGS3 also offers another option, aimed at brokers, in which the company processes an unlimited number of short sales for a $395 per month. The broker program is not exclusive because it does not include access to leads.

Realtors can earn credits

BGS3 generates revenue from Realtors subscriptions as well as fees it charges to home buyers and lenders involved in the transactions.

As an incentive to Realtors, BGS3 credits 20 percent of the buyers fees back to the Realtor, up to the amount of the monthly subscription.

So Realtors who generate a high volume of short sales, in theory, could access the BGS3 services for free.

Naples agent embraces concept

Jason Hannan, owner of The Hannan Group real estate firm in the Naples, Fla., area, was one of the first Realtors to sign up with BGS3.

He did so about a year ago after seeing the shift in the market.

The rules of real estate have changed drastically, Hannan said. Homes are selling but what is selling are short sales or foreclosures.

That is particularly true in Naples, a resort town that saw one of the largest real estate bubbles in the country.

Some homes there are selling for 30 percent to 68 percent less than their prices in 2005.

Hannan said he thinks it easily could be another couple of years before market conditions change.

So Hannan has focused on short sales, which now account for 40 percent to 50 percent of his business.

Hannan said BGS3 has been a vital component in the growth of his short-sale division. Although he could have tackled this sector on his own, he said, the investment and time involved would not have made it worthwhile.

Instead, with the resources and staff at BGS3, its a team effort, Hannan said.

Leg up on competition

BGS3 plans to hire about 20 workers in each of the next three years, Bowman said.

The new positions include managers, processors, transaction coordinators, sales representatives and client relations specialists. Salaries will start at $21,000.

The partners also plan to launch a mortgage company and a title company in the coming months. Like BGS3, the other two businesses will be subsidiaries of the parent company, Bigger Gains LLC.

Powers is confident in the partners ability to reach those goals.

He has invested in at least one other Bowman-led venture, real estate investment firm Strategic Home Buyers LLC.

Powers also is an investor in a technology firm, Synerge Systems LLC, that is working with BGS3 to develop software for the real estate industry. BGS3 will have exclusive rights to the short-sale component of the software.

Powers said he was attracted to BGS3 because of the quality of the leadership team and the significant potential for growth.

Theyve got a good, solid business concept, said Powers, who will work with the company in an advisory role.

Although others will jump on the short-sale bandwagon, Powers said, he believes that BGS3 is the first to introduce a national model. That timing means a leg up on the competition, he said.

Being first in the market gives you a certain advantage, Powers said. Other people have to catch up to what youre doing.

The skinny on short sales

Short sales are becoming an attractive alternative to traditional real estate transactions because they provide a way for distressed homeowners to avoid foreclosure. These transactions occur when a mortgage lender approves the sale of a distressed or repossessed home for less than the amount owed.

Short sales can be beneficial for the homeowner, lender and buyer. But they also can be time consuming and complicated, which is why many Realtors steer clear of short sales.

But in todays turbulent times, some lenders, such as Freddie Mac, offer compensation for short sales and other programs that circumvent foreclosure.

As of Aug. 1, Freddie Mac agreed to pay $2,200 double the previous amount of compensation to mortgage servicers who work out a short sale related to a delinquent, Freddie Mac-owned mortgage.