Short Sale Strategies

Bad decisions and aggressive sales of unsustainable loan products have joined a lagging economy and a lackluster housing market to cause up to two percent of American homeowners to face the possibility of foreclosure.

For homeowners, short sales are an opportunity to avoid financial disaster. For investors, they can be the opportunity to obtain properties at below market values while concurrently helping a needy homeowner.

DESPERATE HOMEOWNERS
A short sale occurs when the sales price is not sufficient to satisfy the seller’s current mortgage obligations and closing costs. For example: the seller may owe $475,000 on a house he paid $500,000 for, but due to market conditions, the house is now only worth $450,000. In a short sale, the lender would agree to accept a buyer’s offer of $450,000 and forgive the $25,000 the seller could not pay in lieu of potentially losing more money through foreclosure.

Although lenders lose money when they agree to a short sale, in the end, it can be a win-win situation for all parties involved. Research from Clayton Holdings Inc. indicates that lenders lose, on average, only 19 percent of the loan amount with a short sale compared to up to 40 percent if they proceed with foreclosure.

Even so, negotiating a short sale is never easy. A mortgage company will only agree to a short sale if it makes more financial sense than foreclosing.

Before you step into the minefield that is short sales, words of caution:
1. You will be working with homeowners who are financially stressed and desperate. Integrity is often the first casualty for these borrowers who are at their wits’ end.
2. The negations will be grueling.
3. You may work for day to reach a verbal agreement only to see it unravel at any point.
4. You needs serious stamina as you will wait for your financial reward.

JUST THE NUMBERS, MAM
One lender, one trust deed: This is just a numbers game. If there is only one mortgage, it can be fairly straightforward — either the bank’s loss is acceptable to them or they will foreclose and take their chances on the market.

“The (mortgage lender in) first (position) is usually going to get his money,” said Celeste Coe, branch manager of LandAmerica Capital Title Agency. “It’s the second or third lender that is going to lose and be more willing to negotiate.”

Think of it this way. If the seller in the above example has one mortgage of $475,000 and gets an offer for $450,000, the lender may decide to take a chance selling the property as an REO. On the other hand, if there’s a first mortgage for $400,000 and a second for $75,000, it’s the second lender who risks not getting paid.

Two lenders, two trust deeds: Secondary lenders are more open to negotiations, but once there are more parties involved, the negotiations become more complicated. That’s why Coe recommends working with a short sale specialist who knows how to deal with the lender’s loss mitigators. (These specialists are often former employees of lenders’ loss mitigation departments.) You can find short sale specialists online or through referrals from realtors, title companies and others in the realty industry.

“It saves so much time working with a loss mitigation specialist,” Coe said. “If you try to do it yourself, you can spend eight hours on hold the first day just trying to find the person you need to talk to. These specialists know who to call, when to call and what to say. They know how to get the sale approved quickly.” Most work for a fee of 1 percent to 1.5 percent, paid by the bank at closing.

PRINCIPALS AND PRINCIPLES
You can also deal with the loss mitigation department yourself or rely on a realtor who has successfully negotiated several short sales. However, the seller is the most important part of the equation. Whether you are the one short selling a property or whether you are hoping to purchase a home before it is foreclosed on, the seller is the one who must convince the bank that they’re “getting the house back” if they don’t accept the short sale.

A letter of authorization will allow other parties, like a short sale specialist, to communicate on the seller’s behalf, but ultimately, the seller must sell the short sale and provide documentation to substantiate his position.

“YOU PICKED A FINE TIME….
….to leave me Lucille!” The seller’s case for the short sale is laid out in the hardship letter. The sadder the better. This letter details how the seller got to the point where they can no longer afford to make their mortgage payments. Include events like job loss, hospitalization, and divorce. Lenders will also want to see W-2 forms, bank statements, two years of tax returns and other financial documents outlining the pressed homeowner’s/borrower’s income and debt obligations.

CRY ME A RIVER?
Not likely. If that isn’t humiliating enough, I know from personal experience that lenders aren’t going to offer a sympathetic shoulder to cry on. They’ll tell you to catch up on the payments, and everything will be fine. They’ll pressure you to sell assets. They’ll even bully you and call you names. If you are considering buying a short sale property, make sure the seller is extremely motivated and won’t buckle under the negativity because, at times, it may seem easier and more dignified to just let the bank foreclose. For the homeowner’s credit consequences a foreclosure is far worse than a short sale.

A TOUGH WAY TO MAKE A SHORT TERM BUCK
Short sales can be emotionally draining, and even after hours of work and assurances from the lender that the offer will be accepted, the deal can fall through. Roger Cram of Home One Real Estate Services and his investors began looking at short sale opportunities in early 2008. He found that lenders were overwhelmed by the sheer number of short sales and often let deals slip through their fingers.

“I had one instance where the loss mitigator gave us a verbal OK, then went on vacation and didn’t complete the paperwork,” Cram said. “The house went into foreclosure before he got back.” Overall, Cram said their experiences were disappointing. Deals sat on mitigators’ desks until it was too late, and his investors became discouraged and frustrated. As a result, they’ve turned to purchasing builder spec homes. This understaffing situation is less troublesome now as lenders staff up loss mitigation departments.

Realtor Jason Campagna found that while short sale opportunities abound, it takes patience and perseverance to negotiate those deals, and now investors want properties they can close on quickly. They can take the low hanging fruit and don’t want to (or need to) make the effort for more difficult deals. “I have eight phenomenal short sales right now, but there are no calls for them,” he said.

If you are willing to make the effort, though, it may be worth it. One of my most profitable rental properties was a short sale. Not only did I realize an $80,000 payday when I sold it a few years after negotiating the short sale, but the seller became my tenant, so there were no renovation costs or vacancies. Just realize that it’s going to take a lot of work up front (sometimes for nothing, if the deal falls apart) to make a short sale pay off.

WHOLESALE “EASY” BUTTON
If short sales sound too tenuous, too time consuming and too emotionally draining, consider buying foreclosed homes from dealers.

“The easiest way to get into the game is buying from a wholesaler. Ultimately investing is not about the hunt, but the final profit,” said Andy Werner of Foreclosures4Investors.com.

Investors choose from wholesalers’ inventory of available homes. The alternative is hard work trying to find one available deal and then making it work through pre-foreclosure or other process. Or competing with the professionals at auction, almost guaranteeing as an individual bidder you will overpay. And that is just the start of the process.

Wholesale providers look for stock in bankruptcy, probate and pre-foreclosure markets. The do any needed work and sell them, now with clean title, to wholesale buyers. Because of the number of hands these deals pass through, the profit is generally 10 percent to 15 percent.

“We find that as the retail market slows, more investors are looking for longer term buy and holds,” said Chance Kruljac of Cut’n’Deals. Being able to sell leaseback with built-in tenants is attractive. Central city areas are also the most promising markets.

Meantime the buyer who bought at wholesale is farther through the investment cycle, and possibly on to their second deal.

Troy Funk of Cut’n’Deals emphasizes that this is a good market for investors. “And there will be improved spreads for investors as more stock comes. We have never seen a market like this, so we expect the market to smooth out and look like it was three years ago with 50 or so foreclosures per day.” Cut’n’Deals sees 20 or so properties coming on to the wholesale market each day that will allow them to do 30 to 40 deals a month in the Arizona, Utah, Colorado and Nevada Markets, Funk said.


RESOURCES

Short Sale
Home One Real Estate Services
www.rogerdcram.com
877-477-3340

JasonSellsInvestments.com
www.JasonSellsInvestments.com
623-643-1000

LandAmerica Capital Title Agency
480-483-3939

National Short Sale Center
www.shortsalecenter.com
800-401-4638

Secrets of the Short Sale
www.secretsoftheshortsale.com
678-303-2912

Starpoint Asset Assurance, Inc.
888-737-3347


Data Sources

Foreclosures.com
www.foreclosures.com
800-310-7730

My4closures.com
www.my4closures.com

Net Value Central
www.netvaluecentral.com
623-566-3682

RealtyTrac
www.realtytrac.com
800-306-5997
www.foreclosures.com

Wholesale – County specific providers
www.netvaluecentral.com
www.my4closures.com
www.foreclosureslive.com


Foreclosed Property Sources – AZ specific
www.az-foreclosure-properties.com
www.azinvestorsalliance.com
www.azpropertywholesalers.com
www.bidazforeclosures.com
www.buyazforeclosures.com
www.buyAZnow.com
www.cutndeals.com
www.foreclosures4investors.com
www.invest-n-homes.com

Other Wholesale Property Sources
Homevestors
www.homeinvestorsofphoenix.com
480-235-1400


NEWS YOU CANNOT USE
We briefly attended a pre-foreclosure seminar put on by an itinerant real estate guru claiming to be “the nations leading foreclosure expert.” In the 20 minutes we listened, the presenter advocated two short sale strategies that are either outright illegal or at least, unethical and soon to be illegal in a number of states. In each case, if either of these strategies is revealed to the bank, it could render any short sale, and resulting title transfer, void for fraud.

1. Not disclosing the real value of the property, any present equity or mechanisms available to the distressed party to restructure the loan. Also the teacher did not disclose in the particular state that the homeowner had rights under a mandated review and rescission rule.

2. Paying funds outside escrow. In the cited example, $20,000 was paid for an oriental rug. Payment of funds or expenses to the party under the threat of foreclosure through an “off book or side transaction” outside of escrow is limited by HUD regulations to no more than $1,000. In the event this occurs and is discovered, the whole transaction can be rescinded in favor of the defrauded bank. Any money the naïve investor has paid is in immediate danger of forfeit. Ouch!


MORTGAGE FORGIVENESS DEBT RELIEF ACT
Until recently, if a lender approved a short sale, the IRS required the lender to submit a Form 1099 for the amount of the loan it forgave. In other words, if a lender accepted an offer of $450,000 a loan of $475,000, the difference of $25,000 was considered income and subject to tax.

That changed in December 2007 when President Bush signed into law the Mortgage Forgiveness Debt Relief Act. At least, it changed for sellers who short sell their primary residence. Sellers who short sell a second home or investment property can still expect to receive a 1099. Consult an accountant or tax attorney for the new law’s application to your particular situation.


SEVEN STEPS TO DO FORECLOSURES RIGHT
Foreclosure expert Alexis McGee’s Seven Steps to doing foreclosures right:

“My advice to any investor seeking to make profits in foreclosures today, is to do it right. There is no room for mistakes! The market will no longer fix mistakes, so make sure you:

1. Buy the right product. First-time homebuyer homes, in good school districts, safe neighborhoods, quiet streets.
2. Value it right. How much would it sell in less than 60 days in today’s market?
3. Buy it right. At least 30 percent below today’s value, less repairs from value #2 above.
4. Fix it right. Repair the home just to match the condition of your sales comps from #2 above, and no more. You are not going to live in the house. Do not over-improve it!
5. Market it right. With a professional local real estate agent who markets it aggressively.
6. Sell it right. To a first time homebuyer who uses a FHA loan to close.
7. Do all of the above right. You will have a minimum of 15 percent net profit on your sales price to put in the right bank — yours!
Source: Foreclosures.com