OfflineThe Basics of “Short Sales”
by Bill Bronchick
You will likely come across dozens of properties in foreclosure with little or no equity, that is, the seller owes at close to or more than the property is worth. In these situations, lenders are sometimes willing to accept less than the full amount due, commonly referred to as a “short pay” or “short sale.”
Negotiating a short sale with the lender is a difficult process, generally because it is a daunting task finding a bank officer who has the authority to accept a discount. You will have to call around to locate the lender’s “Loss Mitigation Department.” More than likely, each lender you deal with will have a separate name for this department, so be patient when calling. Much like getting your phone bill corrected, you can expect the process to involve a lot of waiting on hold and being bounced around an intricate maze of automated voice mail systems. Once you get in touch with the right person, then the negotiating begins.
From the lender’s perspective, a short sale saves many of the costs associated with the foreclosure process - attorney fee's, the eviction process, delays from borrower bankruptcy, damage to the property, costs associated with resale, etc. In a short sale scenario, the lender gets the property back faster, so it is able to cut its losses. Your job as the investor is to convince the lender that it will fare better by accepting less money now.
The lender will want some information about the property, the borrower and the deal he has made with you. Specifically, the lender wants to know what the property is worth. The lender will generally hire a local real estate broker or appraiser to evaluate the property (called a broker’s price opinion or “BPO”). You can also submit your own appraisal or comparable sales information. In addition you will want to offer as much specific negative information about the property as possible. Also, include some relevant information about the neighborhood and the local economy if things are bad (copies of newspaper articles with “bad news” may help). A contract’s bid for repair estimates should also be submitted, which, of course, should be the highest bid you can obtain!
The lender will also ask for financial information about the borrower. Sort of a backwards loan application, the borrower must prove that he is broke and unable to afford the payments. The borrower must show that he has no other source of income or assets to repay the loan. This process may involve as much, if not more paperwork than an original mortgage application! The borrower should submit a “hardship letter”, which is basically a sob story about how much financial trouble the borrower is in. This may require a little literary creativity, and some help on your part. Don’t lie, just paint a picture that doesn’t look good.
Finally, the lender generally wants to see a written contract between you and the seller. The lender wants to make sure the seller isn’t walking away with any cash from the deal. Generally, the contract must be written so that the buyer pays all costs associated with the transaction, so that the “net cash” to the seller is the exact amount of the short pay to the lender. A preliminary HUD-1 settlement statement is often requested, which can be difficult, since many title and escrow companies simple won’t prepare one in advance of closing. You can prepare your own HUD-1, and simply write “preliminary” on the top.
Don’t be surprised if your short sale bid is rejected. Lenders aren’t emotionally attached to their properties, so they aren’t as likely to give you “steal.” Many short sales fall through if the BPO comes in too high, which is often the case. You can’t pull the wool over a lender’s eyes - if the property isn’t is need of serious repair, it is unlikely you can convince the lender the property is worth a whole lot less than the appraised value.
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Is there a way to get a short sale under contract with the intent to assign or do an instant equity exchange? If so, what if the short sale of the property is being handled by the seller's real estate agent. How should i approach this deal(after doing comparatives and other due diligence, it looks like a good deal!)?
For example: Say the property I want to invest in not only has a senior lien from one lender, and a junior lien from another; but there also exists a deed of trust which was previously recorded at the county recorder's office stating that the current homeowner; which is the same person who appears on title and on the deed of trust, borrowed $X.00 from him/her/company and that debts still exists? Do I also have to contact that third party to negotiate? In addition, do I have to state that on the HUD1? Does this even mean anything to the first and second lender? Can they still foreclose on the property? Who gets priority? Thanks?
Thanks for taking the time to re-inforce the process of short sales. Much sucess to you...........Lubertha
"GOD IS STILL IN CHARGE, HE IS THE AIR WE BREATHE"
Mike,
I can tell you that I've experienced resistance from banks to accept any " and/or assigns" offer of mine. In fact they did like/accept my offer however they sent me back a stack of addendums stating that I agree to retract the "and/or assigns" clause from my offer and they imposed several other of their demands.
This would make the Instant Equity Exchange technique interesting in the sense that I've seen them asking for Proof of Funds (POF), Deposit, sometimes even a Pre-approval lender from the "buyer" immediately upon submitting the offer. These banks aren't playing around right now. So, if you already have those things in place, I suppose that would put you in a different class than some of us here.
- Tommy
From what I found out is if you have 2 loans on the property and short selling, depending on the sale price, you might have to negotiate with both banks. There is always a first loan and the second loan. The first loan takes precidence and gets paid first. If it is not getting paid in full, then they have to accept the sale price, while the second mortgage holder is nto getting anything. But, again, there has to be negotiations with both of them
Hope it helps.
Yuri
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If there is a short sale that has more then one lien all liens will need to be cleared up before the transaction can take place. The title needs to be clear of all liens in order for it to be transfered to a new owner. The power you have with a short sale is if the property does go into forecloser the liens that are further down run the risk of not getting any money at all. The first lien gets there money first unless there is an IRS lien on the property and then they get money first, whatever money left goes to the next lien holder until the money is gone. You can offer a small amount of moeny to a lien holder to get the lien taken off the property, because a little money is better that no money.
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Tommy, i really appreciate your input. I now understand what needs to be lined up before "dealing" with the banks. Thank you!
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eroberts, and the rest of the members. Nice way to put it.
I also would like an answer to this question as i have come across several short sale properties that are represented by an agent. I asked in another thread but remains unanswered. Can i/ should i call or mail the sellers without asking the agent and try to negotiate with them or should I just negotiate with the agent? If i do end up negotiating for less and have a buyer lined up do i buy then assign, or do I just let the buyer deal with it and just collect some sort of finder's fee?
Needs some serious motivation...Should i contact agents with short sales or the sellers themselves, Have the address but only agent's number.
Check out the forum at... http://www.deangraziosi.com/node/8713 Anita's doing the very thing overthere
Likewise... Am seeking the same info...
Who is subjegated to the HELOC's and or 2nd's...???
I am attemptinhg to buy a primary mortgage note from the lender but am concerned about the HELOC coming after me for satisfaction... Isn't the HELOC different than a 2nd in that the original borrower is solely liable... He has no equity and is contemplating "Bankruptcy"... What will 'that' do to any agreement I make either with him or the lender(s)
Who becomes responsible for the HELOC's, Taxes, etc...???
My sister is upside down and facing foreclosure. Is there any restriction on a family member buying her house on a short sale? I am thinking about buying and then having her lease from me so they can stay in their home.
Jim
The info i have on short sale anyone else can try and get a short sale done as long as the bank has ultimately the final decision with the loss mitigator.The seller your sister has to show no money gained in the transaction.MichelleNicole
you can sure do that, that is a way to keep your property in the family