Short sales information
Overview on Short Sales and Foreclosures
The Basics of “Short Sales”
by William 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 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.
If you are interested in these properties please contact
me and I can
furnish you a list of properties
