Short Sale Tips: Negotiating with the Bank

First, always remember that it is in the best interest of the bank to avoid entanglements with the actual property and pay off the loan.  Even if this means taking a loss. Sometimes a smart loss is very smart.  To go through with the foreclosure means the bank would have to spend money on legal costs, foreclosure expenses, advertising the foreclosure sale, trustee’s fees, and all sorts of insurance and miscellaneous expenses.  The total could easily be over $4000 for any house. This doesn’t even include holding costs, repairs and fix up, and maintenance which can easily at another $6,000. And if they must rely on a realtor to make the sale there is always a hefty commission to be paid. Banks would like to sell someone the house, even if it’s at a discount.

Second, remember that the bank’s negotiating position changes on whether or not the loan is insured. Various governmental and private companies back mortgages and insure the banks against default.  These private mortgage insurance (PMI) entities include the FHA, VA, Fannie Mae, Freddie Mac and others.  When banks lend money and create mortgages they technically takeout insurance to cover the difference between what they can sell the house for and what’s still owed at the time of the foreclosure.  In short this means that banks don’t lose any money if they give you a discount on insured loans. How do you find out if the mortgage is insured?  You ask.  You ask nicely.

Third, don’t ever bother negotiating with a bankruptcy attorney.  Just take my word for it: you’re wasting your time.  As important as they are in the general scheme of debt repair, bankruptcy attorneys can rarely be of much value in getting a short sale done.

Fourth, get to know the loss mitigator. A loss mitigator is a specialist at the bank, trained to negotiate bad debts and hold the bank’s losses to an absolute minimum.  In short sales you will always negotiate with the loss mitigator, and they have the final say on the disposition of your proposal. They are assigned to you when you submit your short sale package.

It’s easy to imagine a loss mitigator being an intimidating, larger-than-life character within the bank. After all, they have the power to make deals on behalf of the bank.  The reality is quite different than this. It might surprise you to know that loss mitigators sit in cramped, isolated rows of cubicles and talk for 8-10 hours a day to people just like you.

Loss mitigation is not a high paying profession and they are extremely overworked. Politeness, consideration and professionalism go a long way with these folks.  Since they hold all the cards in the disposition of your offer, they can easily put you to the bottom of the list or sabotage your good efforts if they grow to dislike you for some reason. How can you avoid that?  Keep it simple and treat them like you would like to be treated. Be kind and you won’t have any problems at all.

Putting Together the Short Sale Offer: How Banks See It

Understanding the short sale offer from the bank’s perspective is a huge advantage in negotiating these deals.  It will help you immensely in communicating with loss mitigators and other short sale decision-makers.  The better you understand these people the more likely they will be to accept your short sale offer. There are 12 factors a bank or lending institution will consider for a short sale deal.

1.  The number of non-performing loans currently on their books.

Banks consider loans to be assets.  It continues to be listed as an asset as long as payments are being collected.  If the payments stop that loan is considered a non-performing asset. If a bank or lending institution has too many non-performing loans on its books they run the risk of getting in trouble with federal regulators and investors.  You can expect that as the real estate market cools banks will experience an increase in their number of non-performing loans.  Your short sale offer gives the bank an opportunity to get a non-performing assets off the books.

2. The lender’s overall financial condition

Federal regulators give banks a set amount of time to turn a non-performing asset into a performing asset before requiring them to list it in their financial statement as a liability. This grace period is typically 180 days. Shifting what was an asset over to a liability is a bad thing for a lender.  If the bank can do a short sale on a non-performing loans before the grace period ends they don’t have to consider it a liability.  This is a helpful piece of information to keep in mind and as you negotiate this deal with the bank decision-makers.

3. The financial condition of a third-party investors

Most banks operate in what’s known as the secondary mortgage market. This means that when they loan money they can “sell the paper” (the actual mortgage agreement) and get their money back, which they can then re-loan.  The mortgage is of course now owned by the third-party investor. The Federal National Mortgage Association (known as Fannie Mae) and the Federal Home Loan Mortgage Corporation (known as Freddie Mac) are two examples of third-party investors. They are both stockholder owned corporations, created by Congress to support homeownership and rental housing.  If these third-party investors are experiencing high rates of foreclosure on non-performing loans they become motivated to do short sales, and often use the original bank to service the transaction.

4.  The third-party investors’ loss mitigation department

Once a foreclosure has begun on a loan backed by a third-party investor, their loss mitigators can and will act quickly to conclude a short sale.  For example, Freddie Mac will often approve short sale offers of 90% of the brokers price opinion, and take just two to three weeks to get processed.

5. Servicing lenders that work for third-party investors

Servicing lenders are organizations that collect payments for the third-party investor organizations.  Though the servicing lender cannot make a decision on the short sale, you must deal with them in submitting your short sale offer.  Find out if a service lender is handling your mortgage, and who the contact person is.

6. The borrower’s finances

The lending institution may want additional information on the borrower’s finances.  You need to be the go-to person to get this information, assemble it in the proper documents, and get back to the bank in a timely manner.  Just remember the rule that your job to be persistent and to make a short sale happen.

7. Mortgage insurance

Because of the complexity arising of third-party investor participation, the issue of mortgage insurance will need to be handled through the service lender.  Just be aware that there may be issues related to the mortgage insurance that will need to be handled by you.  Your service lender is the point person for having those questions answered.

8.  The as-is value of the home

The as-is value of the home is considered to be the current value of the home with no repairs or deferred maintenance completed.  Typically two broker price opinions are ordered and compared against the original appraisal to see if there has been any deterioration in the value of the property.  Broker price opinions are typically used in the place of a formal appraisal.  The lender relies on these appraisals heavily.  When dealing with the service lender for third-party investor, the service lender orders the broker price opinions.

9. The costs of repairing the property for resale

Real estate contracts on homes requiring repairs require an explanation if the owner is unable to complete the work.  To written bids for the work must accompany the short sale package.  These repairs may be presented and negotiated with the lender.

10. The after repaired value

In a short sale offer, the “after repaired value” (ARV) of the home gives the lender some idea of what the house would be worth if they foreclosed, repaired the house and put it back out on the market themselves. Banks would do this if they thought they could recoup the defaulted loan balance, all the back payments, foreclosure costs, and repair costs.

11. Securing and maintaining the property

Securing and maintaining a home includes protecting it from vandals, repairing broken windows and doors, and maintaining the water and utilities.  It also includes such things as removing trash and debris, lawn care and keeping all the mechanicals of the house in good working order.

12. Holding costs and expenses related to selling the property

A lender must estimate the cost of taking back a foreclosed home and maintaining it until a suitable buyer can be located.  In a short sale offer, this is known as holding costs.  Holding costs can include making repairs, painting, replacing damaged or broken appliances, water heaters, air conditioners, furnaces, floors and carpet, insurance and property taxes.  This can get very expensive.  In addition to that, locating a buyer through a typical real estate professional can take up to six months and sometimes longer. Always remember: banks are not in the housing business, they are in the paper business.  These holding costs and other expenses are a horrible inconvenience to banks, and in most situations they will take big discounts to avoid the hassle.

Short Sale Package: Document List

Once you’ve gained permission to contact the lender about the homeowner’s mortgage the fun begins. From this point out you will have very little interaction with the homeowner again.  The deal is primarily between you and the lender.  The paperwork of the “short sale package” and understanding its role is key to your success in negotiating shorts sales.  As I mentioned earlier a short sale offer is a package of paperwork is usually made up of up to nineteen (19) ingredients including:

1.  A Short Sale Proposal letter (also called an Offer Page)
2.  Purchase sales agreement
3.  Settlement Statement
4.  Authorization to Release Information
5.  Borrowers Signed Short Sale Payoff
6.  Hardship Letter
7.  Financial Statement
8.  Owner Financial History
9.   Payroll stubs
10. 2 years tax returns
11. 6 months bank statements
12. Credit Report
13. Unemployment benefits
14. Medical bills
15. Divorce Paperwork
16. Short Sale Purchase Contract
17. Comparables
18. Repair Cost Estimates
19. As-is photos

Let’s explore each of these individually.

1. Your short sale proposal letter (also referred to as an “offer page”)

The beginning of your short sale package should have the offer page.  The top of the offer page needs to have your logo/name, address, phone number, and fax number. You may also want to put in your email. Then you put the name of the person with the property and the property address and phone number.

You should note note any deficiencies in the property in the offer letter.  You should paint a bleak picture for the lender and briefly outline everything that requires repairing or replacing. You should also note that most lenders will not discount based on cosmetic repairs.

On first mortgages we offer 60 to 65% of the loan balance. Sometimes, you may get more aggressive and offer only 40%, but most of the time we offer 60 to 65%. On second mortgages, we offer them 10 to 15% of the loan balance and do the same for any other junior liens.

2.  Purchase and Sales Agreement

On your purchase and sales agreement you need to set your closing date for 60 days beyond the date that you are submitting your short sale package. Your prices should also reflect 60 to 65% of the loan balance.  In the stipulations or special conditions section of your sales contract, it should state that this is contingent upon the lender accepting less than full payoff.

It is very important to make sure that any and all homeowners sign your purchase and sales agreement.  Now with this being part of the short sales process, this tells the lender that the homeowner is in agreement with selling the property at a discount. Remember, your Purchase and Sales Agreement should not be any different than any other agreement.

Note:  In the Agreement below you’ll notice a company name listed as the buyer of the property.  Some lenders will not allow a company or entity to purchase the property through a Short Sale. If that is the case, you may be required to use an individual as the purchaser of the property.

3.  Settlement Statement

A HUD-1 is a requirement of the short sale package because the lender wants to know what they are going to net in the end if they go along with your proposal. All you have to do is fill in a few numbers and you’re done with it.  The final HUD-1 will be done by your title company, not you. The HUD-1 that you complete will always be a preliminary HUD-1.

4. Signed authorization to release information

I spoke of this a while back and just add it here for emphasis.  A lender cannot legally talk to you without this authorization.

5. Borrowers signed short sale payoff form

This application is provided to you by the lender.  You must have your client sign this and submit it with the short sale package.  On rare occasions a lender will only provide this to the borrower after receiving the submission package.  If this is the case, help your client fill it out, make sure they sign it, then fax or mail a copy to the lender.

6. Hardship letter

The hardship letter will be generated by the homeowner. I recommend that the homeowner handwrite it and it should be one page. Since this is a very emotional time for them, it may be longer and that is fine. In this letter, the homeowner needs to tell what has happened. Here are some of the possible reasons that people may be going into foreclosure:

Loss of job
Medical
Divorce
Relocation
Bankruptcy
Death
Arrest, incarceration
Drugs Abuse
Gambling
Overextended themselves
Predatory Lending

Then we want to make sure they include these next items: That they attempted to sell their house with no success and that you or your company were the only serious buyer willing to buy the property. Urge the bank to work with you or your company in this transaction because the seller is doing everything he or she can to avoid bankruptcy.

7.  Owner financial statement

For a short sale package, an owner financial statement can be created very simply.  This statement lists all the owners assets, such as real estate, stocks, bonds, mutual funds, collectibles and bank accounts on one side of the piece of paper.  On the other side, liabilities are listed.  These liabilities can include such things as the current real estate loan that is in arrears, personal loans, credit card debts, lawsuits, judgments, alimony and IRS liens.

In most pre-foreclosure situations, the owner’s liabilities usually exceed their assets.  Sometimes the difference can be substantial.  When your liabilities exceed your assets, you have what is known as a negative net worth.  In some cases the lender may want all monthly expenses included in addition to assets and liabilities.  This would include car payments, utility bills, credit card payments, medical bills, insurance, child support, food, clothing or anything that the borrower pays monthly.

8. Owner Financial History

Mr. Doe’s financial history has been poor.  He has been in the financial doldrums for several years. He had lost his job and his unemployment benefits had run out.  He was paying one credit card with another.  He was of course behind in his mortgage and contemplating bankruptcy.  If you encounter and owner who is in bankruptcy, the short sale plan needs to change; ultimately the bankruptcy court judge is the person who has final say on your short sale.

9. Owner payroll stubs

Include the pay stubs in your short sale package.  In a normal situation you include your client’s pay stubs to verify his monthly income.  If your client has not been working, a brief note to this effect should suffice to explain the missing pay stubs.

10. Two years’ tax returns

Lenders will almost always require two years’ tax returns of the borrower accompanying your short sale package. The reason is that the lender is trying to get a complete picture of the borrower’s financial situation.  Is their income going up or going down?  Will the homeowner be able to make payments if they reconfigured the loan? Does the homeowner even want to make the loan right?

11. Six months of bank statements

For the same reason the bank wants tax returns, they also want six months of bank statements within the short sale package.  Again this is for the purposes of verifying income.

12.  The credit report

Your client’s credit report will be pulled by the bank and included in the offer.  Sometimes homeowners will have a copy of their credit report.  A lender will almost always want a current report, and will order one themself.

13.  Unemployment benefits

As a general rule unemployment is a strong motivator for the banks to do short sales.  Banks are under political pressure to help the unemployed. But when it can be demonstrated within the short sale package that your client is both broke and is going to be broke for a long time, a short sale becomes a great option for the bank.

14. Medical bills

It’s a sad truth of medical problems can be a major cause of people getting behind on their mortgage payments.  Medical hardships, particularly unexpected medical hardships, are easy for banks to understand.  Banks are typically inclined to help out the medically unfortunate by approving short sales and relieving them of a mortgage burden.

15. Divorce paperwork

As I mentioned earlier, divorce is one of the leading causes for people bailing out of home loans.  The expense of maintaining two homes becomes backbreaking, and something has to give.  Though both partners in the divorce would certainly love to keep the home, it becomes a financial nightmare to manage all the additional costs.  If your client is divorcing or recently divorced, include the divorce decree.

16.  A short sale purchase contract, signed by the borrower

This is obvious, but I’ll make the point anyway.  It’s a unique agreement that says the owner of the home is agreeing to sell you the house at a short sale price, and gives you the permission to negotiate with the bank. Just for clarity, remember that since the bank doesn’t own the home the bank cannot sell you the home.  The homeowner must sell you the home.  That requires an agreement.

17.  Comparables

After the bank receives the short sale package it will order two Brokers Price Opinions (BPO). The purpose of this is so that the bank can get a realistic and unbiased opinion on the real value of the home today. In today’s world it seems as though most of the homes in foreclosure situations are newer.  This makes assessing the value of the home much easier, and creates a situation where your estimates will likely lineup with the broker’s estimates.  Where you get into trouble is on older homes where there may be a wide variance between what you think the value is at the brokers opinion.  You can and should offer your own market comparables to make your case of a lower price if you think a broker is going to come in with an unrealistically high number.

18. Repair cost estimates

Any repairs that need to be done on the home should be listed as a separate item encouraging the bank to quickly conclude the short sale.  These are good faith estimates of what the bank will need to spend to make the house sellable.  If you like, you can include these costs as an expense to the lender on the HUD statement.  They may just pick up the cost of these repairs.

19. As-is Photographs

For inclusion with your short sale package, take pictures of the home and the neighborhood, and try to make them as unflattering as possible.  You are not trying to downgrade the value of the home or the neighborhood, but you are trying to get the lender aware of the true value of the property.  Any money that you will have to spend to get the property into sellable or rentable condition should be factored into the short sale offer.

Short Sale Course: Typical Seller Objections

Anybody who does short sales knows that there are always questions and objections.  It’s just the nature of business life.  Here are some standard seller objections that I encounter and what you can say to overcome them. I would strongly urge you to memorize these replies and repeat them over and over until you can say them thoughtlessly.  That practice can be worth millions to you, so do it.  Use a tape recorder, a bathroom mirror, live people…just practice and perfect your replies.

“I’m not sure if I should deed you my house” or “I will not deed you my house.”

You then have an option to buy their house or just get their house into contract.  In a practical sense they’re the same thing except that you don’t have 100% control. They’re refusing to deed it to you but you can still do a short sale. However you run the risk of them being able to take the deal to someone else if they choose to because you don’t have 100% control.

I don’t do options and I wouldn’t suggest you do them either, at least at the beginning. If you don’t get their deed, move on. I need 100% control. I’ve been at the place where I’ve negotiated deals and gotten down to the wire, needing that money badly and having the homeowner walk away from the deal.

“I want my attorney to look at the paperwork.”

I’m not going to give you my documents to take to an attorney that doesn’t understand what I do. Is he going to give you a place to stay when he says no? When attorneys don’t understand things, what do they say? They say no. Like any other confused mind. A confused mind always says no and lawyers are really confused. This is true. Keep in mind as well that attorneys are trained to find problems, even when problems don’t exist.  It’s how they get paid.  They are the ultimate deal killers.

“My house is listed with a realtor.”

How long has it been listed? Can you get out of the contract? If they will be out of the contract soon enough, then you can wait it out. If not, and they can’t get out of the contract, then this is not a deal for you.

“I want all my equity.”

If you have $40,000 in equity and there’s $30,000 in repairs, there’s your equity. So, either I have to spend the money to fix up the house to sell it, or you do. Do you have the money? Apparently not because you called me. You can’t make the payments.

So we fix that for them by letting them know that’s where their equity is. Your equity is in the 11 year old kitchen that needs to be replaced, not just upgraded. Another portion of the equity is in the bath that needs to be replaced. And in the new carpet and the paint and the new fixtures. And the new furnace that needs to be replaced along with the A/C. Those are things you need to point out to them. Somebody’s got to spend the money and that’s where the equity is.

“I’m going to refinance.”

In order to refinance, you are going to have to show that you are more credit worthy than when you got the first mortgage. If that were true, then you wouldn’t be in this predicament now.

“My wife won’t sign.”

I’ve heard this one a number of times. There’s a divorce and he says she’s a real you- know-what and she won’t cooperate. “Well, let me talk to her and let me see.” And when I talk to her and explain everything to her, she’s saying what an SOB he is and I’m just nodding my head. “Yeah I can understand that. Sign right here.” And typically they will work with you.

Now there are some cases where one spouse could care less what happens. Or they do care, but as long as they’re “sticking it” to the other spouse they don’t care what happens to their credit.

“I don’t want to be responsible for the difference.”

The difference they’re referring to is the difference between the discount you get and the balance they owe. So let’s say you have a $100,000 house and you’re able to negotiate a short sale for $60,000. The bank says we’ll take the $60,000 in full. There’s a $40,000 difference. That $40,000 difference is known as a “deficiency.” That’s the amount of money the bank is losing by accepting your $60,000 deal.

At this point, the bank has the right to do one of two things. The first thing they can do is sue the homeowner for that $40,000 difference. They take them to court and sue them. If they win, it now becomes a Deficiency Judgment against the homeowner. It is unsecured debt but the homeowner has to pay them $40,000.

The other alternative is that the lender can send a 1099 for that $40,000 difference. It now becomes earned income to the homeowner. It becomes phantom income. In other words the homeowner can expect to pay taxes on an additional $40,000 above and beyond what they made. Now that could put them in a different tax bracket but typically it doesn’t since they are typically without a job or not making much income – thus the situation they find themselves in. If the homeowner can show a “negative net worth,” the taxes they would have owed on the $40,000 can be forgiven by the IRS.

The prevailing method is that the lenders are submitting 1099s to the homeowners rather than going after them in court. And here’s why: most lenders have adopted a policy that if they’re voluntarily taking a discount, how can they go into court and sue the homeowner for the balance? They’ve said they would voluntarily take the $60,000.

Now if the house goes to sale on the courthouse steps, that defensive thinking no longer needs to apply, and they can sue the homeowner for the difference. It ends up being an incentive for the homeowner to work with you rather than to let it go to sale on the courthouse steps.

You need to explain that to the homeowner and let them know. Even if they can’t get out of paying the taxes, they would much rather have to pay taxes on $40,000 than to owe somebody $40,000.  Sometimes they still say no.  You can never tell.  Just keep making offers.

If they agree to a short sale buyout they need to give you a signed release allowing you to talk to the bank about their situation.  A bank will not discuss the specifics of this mortgage without that written authorization.  I use the standard authorization to release information form but you may find that some banks use their own authorization form.  What I have found works best is calling the lender on the spot, asking them what forms they require, and having them fax them in immediately if needed.  It’s also helpful to have the homeowner give me the last four digits of their social security number.

Once this written authorization is completed, the fun begins!

Short Sale Process: Meeting with the Homeowner

How to handle the short sale process of dealing with distressed sellers and setting up short sales in three (3) steps:

1.  Pop the Question
2.  Gather Information
3.  Set Up a Face-to-Face Meeting

If you begin doing some of the techniques I suggest, the phone is going to start ringing with desperate homeowners.  You need to learn how to handle these people.  In short, when a caller contacts you, you need to develop a pattern of questioning that fits you.  I offer an extensive set of transcripts and one-on-training to hone your conversations to a sharp edge, etc.

Always start off the initial short sale process phone call with a good morning/afternoon/evening and your name.  You may even say your company name if you like.  Some callers will try to talk your ear off right out of the gate, especially if they think you can help them in some way. Don’t let them do this!  It’s always best to take control of this conversation early and get to the “How can I help you?” question as quickly as possible. You just haven’t got the time, though you will naturally feel a great deal of compassion for people in some of these situations. Keep control of the conversation by asking questions related to your deal. This is the kindest way to take control of the conversation so you can move forward in your qualifying process. Follow these steps when conversing with a caller:

Step #1:  Pop the Question

Your first questions in the short sale process are what determines what route you’ll take with helping the homeowner solve the problem. The first questions should be:

“What would you like to see happen?”
“What if that plan doesn’t work?”
“What are you willing to sacrifice to keep your home?”
“On a scale of 1-10 how bad do you want to keep your home?”

The short sale process begins here if they are interested in selling.  In most cases, homeowners who want to sell have either made up their minds that the property is no longer wanted and they simply wish to sell, or they have tried some of the more popular means if solving their problem by either attempting to refinance or selling through a real estate agent.

If, on the other hand, they want to keep the house, this is a good place to discuss whatever workout options they may have and help them explore those. Share with the homeowner that they have basically eight (8) options to handle the foreclosure.  They are:

•    Renegotiate the loan
•    Reinstate or redeem the loan
•    Give a deed in lieu of foreclosure to the lender
•    Seek a legal delay
•    File for bankruptcy
•    Sell the property
•    Do nothing

Other “workout programs” (designed to help the homeowner keep the property) are available but cost the homeowner money that they may not have.  For example they can renegotiate their loan but that costs money to get the loan current. If they want to hire an attorney and seek a legal delay, that also costs money.  If they have the time they can sell the property, but their debt swells with late charges and penalties.

At this point in the short sale process you can be assured you’ve demonstrated you know more about the foreclosure process than they can ever hope to know.  You’ve positioned yourself as a trusted adviser, and potentially a solution to the problem.  Now it’s time to offer a creative solution.

The easiest, most inexpensive solution is for you to buy the homeowner’s equity.  This of course assumes that the homeowner has equity, which in today’s market is becoming less and less a given.  If the homeowner has little or no equity then you propose doing a short sale with the owner and the lender.

This patient and helpful approach will endear you to the homeowner and certainly sets you apart from other would-be investors that might want the property.  Besides, in 80% of the cases that are re-worked, the homeowner still defaults and gets right back into the same problems they had before.  Who do you think they’ll call when that happens?

Step #2:  Information Gathering

After you determine that the homeowner wishes to dispose of the property, it’s time to get the necessary information to begin the short sale process.  It begins with the simple question:  “Will you be willing to sell the property for what you owe?” If the answer is yes, you keep going. If the answer is no, ask these questions in this order:

•    How much above what you owe will you sell for? (Don’t be worried about unrealistic numbers. Just accept their number and move on. You won’t be able to tell if it’s in the ballpark until you’ve gathered more information).
•    What will the house appraise for?
•    What repairs does the house need?
•    How many payments are you behind?
•    What’s your interest rate?
•    How much are your monthly payments?
•    Who’s your lender?
•    How old is it?
•    How long have you lived there?
•    Have you made any repairs or updates to the house since you moved into it? (If they’ve lived there a long time then the answer to repairs is going to be yes, even if they stated no).
•    Square footage?
•    Does it have a garage?
•    Does it have a basement?
•    Size of the lot?
•    Is the house currently vacant? If not, how soon will you be moving?
•    Is the insurance up to date or do you have force placed insurance? (Force placed insurance is placed on the property when the homeowner fails to keep it insured. The lender will then put insurance on it and that insurance is typically two to three times higher than if we got it ourselves).
•    Is it listed? Can the listing be canceled? How long have you had the listing?
•    When is your foreclosure date?
•    Why did you call me?
•    What are your needs? What are you looking to do?

Once you get all of this information, then you set an appointment date and time to go see them.  Your purpose on that visit will be to convince them of the good sense of giving you their headache and just leaving the mess behind for you to clean up.  In other words you’ll get them to complete some paperwork including deeding the house to you, giving you written permission to talk to the lender and commencing the short sale procedure.

Step #3:  Have a face-to-face meeting

As you know, nothing in real estate is done on a handshake.  If this short sale process is going to happen you’ll need to get some paperwork signed.  That’s the purpose of a face-to-face meeting.

It should be self-evident that putting together all this paper work and getting the proper signatures will require the cooperation of the homeowner.  So this first meeting is vital in assessing and establishing that cooperative relationship. Having a plan in mind for this meeting is important.

Short Sale Training: How to Find Short Sale Deals

To find short sale deals, a real estate investor needs to understand the situation that leads to foreclosures and short sales.  In other articles, I’ve discussed the definition of a foreclosure, how the foreclosure process unfolds, and how you can buy homes at a discount during this process through a short sale.  This is a terrific way to buy homes for cheap.

Part of the reason this is such a great opportunity is because so many people are defaulting on their mortgages.  Today 2 of every 100 mortgages is a foreclosure.  According to the Mortgage Bankers Association 550,000 to 650,000 mortgages nationwide are either delinquent or in foreclosure.  That number will surely grow in the coming years because of the aggressive lending practices of banks in refinancing houses over the last few years, over financing, negatively amortized loans, the cooling of many real estate markets, high debt through credit cards, the rising divorce rate, the shifting job market and other factors.  The opportunities for short sale experts are going to explode in the next several years.

You can find short sale deals wherever foreclosures are going on and homeowners are distressed. But this begs a big question: “How do I find homeowners facing foreclosure?” I’m going to give you several ways to find distressed homeowners.  What you need remember is that in terms of sheer work, this is about as hard as it gets.  Short sales are remarkably easy to do once you learn the system. Be proactive in finding these people and you will make a lot of money.

Unfortunately there is no official public record of property owners facing financial difficulty.  Distressed homeowners blend well to their surroundings, and like all of us are careful not to show signs of financial stress.  But believe me, they are hiding in plain sight. The extent to which you search for and find short sale deals depends on how proactive you want to be.

Some of your options include:

•    Driving around looking for distressed homes
•    Door knocking
•    Letter writing
•    Foreclosure signs
•    Newspaper ads
•    Foreclosure service
•    The internet
•    Local court records
•    Mortgage broker referral
•    Local REIA groups
•    Bankruptcy attorneys
•    Run your own ads

1. Driving around looking for distressed homes

The boldest action people use to find short sale deals is driving around certain neighborhoods looking for homes with signs of distress. You can actually train yourself to start spotting distressed owners by just driving around this way.  When somebody is in the midst of financial calamity their life starts to show cracks.  Houses are left unkept, lawns go uncut, mail, door-to-door mailers and newspapers pile up, shrubs and gardens look unattended, broken windows don’t get fixed, and houses begin taking a look of being unwanted.  My first house “buy,” a crack house, is the most extreme example of what I’m discussing.  Yet houses like that one are everywhere.

2. Door knocking

The extent to which you find short sale deals depends entirely on your own comfort level. If you’re feeling really bold you can talk directly to the owners by knocking on their doors.  Or you may wish to contact neighbors are perhaps network with door-to-door delivery companies or local utilities to get in touch with the owners.  As a last resort you can use a professional skip-tracing service.  These are all great ways to get direct and instant contact with people who may be facing financial difficulty.

3. Letter writing

Most new investors are not comfortable conducting a face-to-face encounter with a distressed homeowner. I don’t blame you, and in fact would discourage you from that kind of contact until you have more experience.  Finding the homeowner (either through a neighbor or through using the county records) and sending them a letter would be a much better option.

4. Foreclosure signs

When you want to find short sale deals and decide on a good area you might like to farm for leads, place “Stop Foreclosure” signs at busy intersections in the neighborhood.  Keep in mind that nice neighborhoods have the same if not worse foreclosure problems than poorer neighborhoods, so shoot big and get those signs out.  They work.

5. Newspaper ads

Without question one of the best source of finding distressed and motivated pre-foreclosure sellers is the newspaper itself. (Online editions of most newspapers do not carry complete classified listings.  You need to get a real newspaper.)

6.  Foreclosure service

Because of the growing number of foreclosures, services have been formed to provide information about who is receiving their NOD (Notice of Default) and even who is missing payments on a regular basis and falling behind.  For a fee, you can have a lot of detective work done for you.

7.  The internet

You can find short sale deals by doing a great deal of detective work online. For example, most local newspapers now have online editions.  You can very easily scan the legal notices for divorces, lawsuits, and legal actions of all kinds.  Those are typically great telltales of foreclosures in the making. You may also be able to access your local legal news (online or off), which also has extensive listings of lawsuits, divorces, probate’s and other legal procedures that hold opportunities.

8.  Local court records

The local courts are required to keep good records of foreclosure proceedings in your county.  You can hire paralegals and court employees (who are knowledgeable about the system) to work for you on off-hours collecting any information you may want.  This is a superb source of information.

9. Mortgage broker referral

Find short sale deals through mortgage brokers, who know a surprising amount about their past customers.  Develop relationships with some of the successful brokers in your area and you can tap into a great source of “insider” information about who is in foreclosure trouble or who may be heading that way.

10. Local REIA groups

This is an invaluable source of leads for all sorts of investor related needs.  Begin attending these meetings to share ideas and hear the lastest news on what’s emerging in your area.  This is a rich source of action you can’t afford to miss.

11.  Bankruptcy attorneys

Bankruptcy attorneys are an excellent way to find short sale deals because they deal with your target market everyday.  Develop a relationship with several of these, define the sorts of clients you’re looking for and they can funnel select cases that meet your qualifications.

12.  Run your own ads

Be sure to use very direct copy such as “Stop Foreclosure”, “Avoid Foreclosure”,
”Beat Foreclosure”, “Escape Foreclosure” and so on.  Perhaps you could offer a free report to spur calls.  This approach works and should be used along with other tools you are using.

Short Sale Training: The Banks’ Perspective on Short Sales

Short sale training will teach an investor about the short sale as viewed by banks. As long as a homeowner is actually paying on the loan, the lender views this as what’s called a performing asset – meaning the asset is generating the anticipated principle and interest payments from the homeowner. But when a homeowner gets in trouble and stops paying (because they lost their job, divorce, someone in their family getting sick, disability, etc.) the asset becomes what we call “non-performing.”

Banks hate non-performing assets, because remember, performing assets are the main way banks make money. When an asset is non-performing, the goal is to either 1) get the asset performing again, which would require the homeowner to be able to make payments as agreed or 2) dispose of the asset quickly so they can salvage whatever funds are available and get the money back out in circulation in the form of new loans.

Through short sale training, you can come to understand this really important point: banks are not in the real estate business – they are in the paper business. When you buy a house and give the bank a mortgage in exchange for a loan, you are allowing the bank to create paper that has value. The mortgage and promissory note the homeowner signs are valuable documents to the bank. It represents future principle payback and significant interest profits to them, if the homeowner keeps paying on it.

Short sale training will show you that once a homeowner stops paying and the paper becomes non-performing, two things happen. First, the lender is required to set aside what’s called a “cash reserve” against the non-performing debt. This cash reserve is set aside to protect the bank investors from significant losses. Here’s the important thing to know: the amount of cash reserves the bank must set aside is usually the equivalent of 3 to 8 times the amount of the defaulting loan.

Let’s say a homeowner owes $100K on the mortgage and defaults and stops paying completely. The lender is required by federal law to set aside anywhere between $300K and $800K as a cash reserve until that bad loan is resolved. This means these amounts get frozen and cannot be loaned. The blood supply of the bank is completely tied up! Think about banks with hundreds, even thousands of loans in default at the same time, and how much money is tied up in those cash reserves.

Banks hate the defaulted loans and will do almost anything to get them off the books quickly. Can you now see why banks are so eager to erase a bad debt as quickly as possible, even at a significant loss? Short sale training will show that the future interest potential on performing loans far outweighs the short-term losses the bank will suffer by selling for .50 or less on the dollar. Banks understand this principle, and you need to as well.

The second thing that happens is the non-performing loan goes on the bank’s books as bad debt. Federal regulators see it, bank examiners see it, and yes, the investors themselves see it. Nobody likes this scenario. Bad loans are bad news for the bank. Not to mention that it also affects the banks ability to grow and lend out even more money.

Short sale training shows the upshot of all this. Write this down:

The average investor views a loan in default as a difficulty.
Short sale investors view a loan in default as an opportunity.

Understand this simple idea and you can make a killing in short sales.

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Short Sale Definition: What is a Short Sale?

The short sale definition is simple: a house is sold for less than the amount due on the mortgage loan. The process, however, is much more complicated. Short sales are considered under certain conditions, and usually only come about as on option when it is clear to a lender that the full value of the mortgage will not be recovered. Getting the lender to realize that this is the best option for all involved is tricky and takes some knowledge of the requirements as well as finesse in the buyer.

Because the short sale definition means money lost to the lender of the mortgage as a result of financial difficulties on the part of the borrower, short sales often have many players involved. The home seller is looking for the best possible way to get out of the house that is no longer affordable. The lender wants to recoup the mortgage amount that was loaned for the initial purchase. Sometimes there is a lender that owns a second mortgage that was borrowed by the seller. Utility companies or even the IRS can become involved when bills go unpaid and liens are put on the property for unpaid taxes. Of course a buyer is part of the mix; someone who is looking for a great deal on a home that was previously out of reach or an investor looking to make a profit on the purchase and future sale of a property.

With the current markets as they are, the short sale definition is an invitation to investors that are wanting to benefit from these real estate trends. Investors find themselves to be in a position that is often more advantageous than people who are hoping to inhabit the home for sale. Because this type of home sale has so many individuals and companies involved, the terms have to be agreed upon by more parties. In turn, this makes closing dates more fluid and adjustable than traditional home sales or foreclosures. The elusive closing date is taxing on buyers that need to coordinate moving days with the sale of their current home or ending leases on rentals they’re staying in temporarily until a home is purchased.

The short sale process can be confusing and complicated for the uninitiated. Research is important, as well as finding a mentor that knows what to expect and how to handle the bumps in the road.

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The Short Sale Process

Many people are curious about the short sale process when considering real estate investment. Specializing in short sales and pre-foreclosures is an excellent way to become a successful investor, but the steps can be daunting to the inexperienced. The best way to get through the learning curve is to find a competent short sale mentor who knows what to expect and how to manage the obstacles that may get in the way of a smooth deal.

The short sale process itself has many stages. Once an investor has decided to pursue deals in short sales, the initial step needs to be finding a home that is in danger of being foreclosed on. There are many ways to find a home that is in the state of pre-foreclosure and would be a good candidate for a short sale deal. Finding a successful short sale expert who can guide an investor through the various ways available is an excellent idea. While it sometimes takes months for a bank to take foreclosure actions, it can begin the works as soon as the day after the second missed payment on the mortgage. Pre-foreclosure officially begins when the lender files a public default notice.

Once a home is found that is in a suitable situation for a short sale, it is necessary to talk with the homeowner and begin the paperwork required for a short sale package. There are many different documents that a bank or other lender will need to see in order to consider a short sale, and it is imperative that they be organized properly. Some of the documents need to be collected and submitted immediately, and others won’t be turned in until the entire package with an official offer is ready to go to the bank.

The short sale process will take several weeks to conclude. As soon as the real estate investor has permission from the homeowner to act on his or her behalf (and the document stating so in writing), the bank will take some time to review the case. Before any offers are made, the bank needs to know what the house is valued at in comparison to the amount of money owed through the original loan that has now been defaulted on. The banks use a BPO (or Brokers Price Opinion) to determine this value, and this is a crucial step in making an offer on the home that will be acceptable to the lender as well as most profitable to the investor.

As soon as the BPO has been determined, it is time to gather and present the entire short sale package. While it’s important for a homeowner to be at least peripherally involved throughout the short sale process, this is the step in which their efforts are most needed. Part of getting a bank or other financial institution to accept a short sale offer is proving that the homeowner is beyond the ability to pay the mortgage. They need to write a letter of hardship stating the circumstances that have put them in the unfortunate financial position they are in now, as well as include financial documents which show the contrast between their income and expenses.

At this point, the short sale process shifts to offers and counter-offers between the bank and investor. Once an agreement is reached in regards to the price, the investor moves on to a different phase of real estate investment: what to do with the property.

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Should You Pay for a Short Sale?

http://www.veoh.com/videos/v19052642RsanWEpg

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