9 Key's To "Short Sale" Success
By: Glen A.
Submitted: 07:18AM on Thursday 21 August 2008
The author has permitted the reprinting and redistribution of this article.
Do to the credit crisis foreclosures have been on the rise since 2006. If you’re doing any marketing whatsoever you’re going to run into sellers who are facing foreclosure. You must know how to do short sales in order to take advantage of this ever growing market. There are huge paydays if you understand and know how to get short sales completed.
So let’s start out with what is a short sale? A short sale is when a lender agrees to accept less than what’s owed in exchange for a full payoff. This is what’s called a short sale. In order to get a short sale on a property the seller or homeowner must be in foreclosure or at least several months behind before a lender will consider doing a short sale.
Our best prospects obviously are people in foreclosure. I’ve also had lenders except short sales on properties that were behind on payments and not yet in foreclosure. But most lenders will not speak to you about a short sale unless they’re in foreclosure. OK, what exactly do you need to get a short sale excepted? First off… there’s nine must get documents that we’ll cover.
Number 1… you need to get 2 purchase and sales agreement signed by the seller. Why 2 purchase and sales agreements? Because one is between you and the seller and the second one is between you the seller and the bank. I know this can be a little confusing so let me explain.
One contract is signed between you and the seller. The second contract is a blank contract that you also get the seller to sign. You’ll fill it in when you figure out what exactly you’re willing to pay for the property. Just tell the seller that you don’t know what the bank will except yet that’s why this paperwork is blank.
The seller signs this blank contract and then you just fill in the numbers when you know what you can pay to make this a good deal for you, the second contract goes to the bank only.
Number 2, you must also get an authorization to release lending information signed. You must get this signed and fax it to the lender so that you may speak to them about this property. If you don’t get this signed the bank will not speak to you. When you contact the lender you want to ask for the loss mitigation department. Tell them that you are a third party trying to fax in an authorization to release form. Ask them what fax number they’d like it faxed to, and how long it will take to get this in the computer system.
It’s usually within 72 hours. Some are quicker some are slower.
Number 3, you must get the sellers last payment coupon or most recent loan statement so you can get the phone number to their lender. If you forget to get this from the seller you have no way of contacting the lender to get a fax number to send in the authorization to release lending information.
Number 4, you need to get a hardship letter from the seller. The bank will want to see this so they can determine if there is any reason for the short sale. They will also take this into consideration, if they decide to hold a deficiency judgment against the homeowner. They want to know that there is a good reason for them to do a short sale and not hold a deficiency judgment against the seller.
The hardship letter should state why the seller was unable to make the payments on the house. Like… job loss, Divorce, Illness, any unforeseen circumstances that might have occurred to cause the sellers to be delinquent.
Number 5…. You need to get the sellers last two months bank statements.
Number 6… You also need to get the last 2 months pay stubs.
Number 7… You must also get the last 2 years w-2 tax returns. It’s the first page of the tax returns not the entire tax return.
Number 8… You may or may not have to fill out an asset sheet. If the bank requires it, they will send you one to give to the seller, to have filled out.
Number 9… You need to send them a Net sheet. Your Title Company or Attorney will supply this to you.
The lender wants to make sure that the seller is not receiving any money at closing from the property.
Any of the above 8 documents that the seller can not provide, needs to be explained why in a short letter and sent in with the rest of the paperwork. For example... if the seller can not produce the last 2 months pay stubs because their unemployed then you need to state that in a short paragraph and send it in with the rest of the paperwork.
Lets talk a little about talking to sellers in foreclosure.
When I speak to a seller on the phone and I immediately know this is not a deal unless I can get a short sale on the property. I ask the seller if they’ve tried to list the property with a realtor. If they tell me they don’t have enough equity then I’ll ask them what they were hoping I could do with the property if there isn’t any equity.
Shut up and listen…then I tell the seller that I might be able to do a short sale, meaning the bank may except less than what’s owed in order to stop the foreclosure. The bank doesn’t want your house they want the payments. I’m always up front and honest, so then I ask the seller... If I can’t work out something with the bank what will you do with the property? The seller says in most cases… I guess it’ll go into foreclosure.
I then say well the bank can still come after you for a deficiency judgment. What is a deficiency judgment? A deficiency judgment is the loan balance minus what the bank excepts as a short sale. Let me give you a quick example. If there’s 100 thousand dollars owed to the bank and they agree to take a short sale for 70 thousand dollars then there is a thirty thousand dollar deficiency owed to the lender. Some times the lender will want a deficiency and some times they won’t, but it is up to the lender.
So I then say to the seller, If I can get a short sale excepted they can also hold a deficiency judgment against you. The reality is the bank can hold a deficiency against you no matter what you do. We always ask for a full release but it is the lenders decision. I can try a short sale if a deficiency judgment to you is better than a foreclosure.
If the deficiency judgment is a problem and you’d still like me to do all the paperwork and submit it. I will do it for $500.00 dollars. I will let you know what they decide about the deficiency judgment. Then you can decide for yourself if you want to proceed any further or just let the bank foreclose on the property. "I’m sorry to say, but I can not spend all those resources on getting a short sale excepted and then have you say that I’m not interested any more". That’s what you’re going to explain to the seller.
I lost so much money doing short sales. That one paragraph is going to save you a lot of wasted time and money. If the seller is worried about the deficiency you mine as well know now before you do all the work to submit the paperwork and then have them say… I think I’ll let the property go to foreclosure. Just make sure you get the 5 hundred dollars up front before you do any work period.
Once you’ve decided to make an appointment to see the property make sure you tell the sellers that you will be collecting this information when you come out to view the property. (that information would be the 7 documents we mentioned above) Make sure anyone on the original loan documents signs all the paperwork.
If you’re getting them to sign the deed over to you at the kitchen table you must have a notary to witness the signatures or go down to a bank, were they have a notary. You must get the entire deed package filled out and notarized. Most areas have a traveling notary. I used one on several occasions for $50.00 dollars. After you’ve collected all the paperwork. You then will call the bank ask for the loss mitigation department and get their fax number. Fax all the documents. Make sure you put the loan number on all documents that are being faxed. Follow up within 7 days to find out if they received the paperwork.
After the bank reviews the information they will set up a BPO or what’s called a brokers price opinion. The broker will contact you to gain access to the property. The broker will come out to take picture of the property and also to do a comparable analysis of the neighborhood. If you know of anything that might affect the value of the property let the broker know. Make sure he/she sees all the problems with the property. I’ve had some brokers who just wanted to do a drive by appraisal. If the house needs work make sure they walk through and submit pictures to the lender.
This will give you your best chance of getting a great deal. By any chance the seller is receiving money from you at closing. The only way that a seller can receive money from you is by way of a "Bill of sale". This allows the seller to sell any personal property that is their’s like a lawn mower, refrigerator, the corvette in the driveway, the motor home or anything else you see of value.
Lets move on to what are the best candidates for a short sale. The best short sales are the ones with first and second liens. Why, because you can takeover the first mortgage and payoff the seconds for pennies on the dollar. I’d much rather pay 5K – 10K thousand dollars at closing to take over the first mortgage then to have to pay off a first mortgage all cash. Let me explain... When you find sellers in foreclosure with only a first mortgage, if you short sale the first mortgage you have to bring all cash to closing. Let me give you an example. Let’s say you have a seller in foreclosure with a loan balance of 100 thousand dollars.
You get the bank to except 70 thousand dollars. You either need to wholesale it to another investor or you need to come to closing with 70 thousand dollars out of your pocket or someone elses. Now if you had the same 100 thousand dollars with a first mortgage and a second mortgage. The first being 70 thousand and the second being 30 thousand. You would only need to short the second lien holder down to 1-3 thousand dollars. Bring the first current and only be out of pocket 5-10 thousand dollars, depending on what kind of work need to be done to the property.
It’s easier to find private lenders willing to loan you 5-20 thousand dollars than there are people willing to lend 100 thousand dollars. Second mortgages are easier to negotiate. If the first mortgage is foreclosing on a second mortgage, the second mortgage gets nothing in their inferior position. That’s why they’ll always take some money instead of no money. That’s why I prefer only shorting second mortgages and taking over firsts. Your benefit is that you can sell it several different ways and make money with little at risk.
When you short sale only first mortgages you have to pay all cash. Would you rather pay 70 thousand dollars for a property worth 100 thousand or pay 5-10 thousand for a property worth 100 thousand. It’s a pretty easy decision I hope. You can short sale residential or commercial it doesn’t matter. If you come across properties in foreclosure that have multiple liens you can discount them as well if you can locate the lien holders. Short Sales are huge money makers for the select few who know how to do them correctly.
If a lender says no to your offer be it a first or second mortgage holder the only thing you need to do is show the bank how you came up with those numbers. If they still don’t want to work with you move on. In most cases they call back right before the auction date to see if you’re still interested. Let me warn you. If you only have a few leads coming in a month, sooner or later you’re going to pay to much for a property that you shouldn’t have. If you keep plenty of leads coming in, you get to pick and choose the best deals that will make you the most money.
My final and maybe the most important thought on short sales. If you’re not closing these through an attorney you had better get title insurance or at least a preliminary title search to make sure there are no more liens on the property. You had better do this before you bring it current.
"THE ARCHITECT OF YOUR DESTINY IS YOURSELF"
"SUCCESS WALKS HAND IN HAND WITH FAILURE"