By
Tom Bukacek
April 4 2009
A short sale is not named as such based on the amount of time needed to complete the transaction as the average short sale may take anywhere from 3-9 months. Rather it is named based on ‘shorting’ a bank on the amount due on a given mortgage.
Short sales are generally used when the seller is both behind on payments and owes more than the property is worth.
Your goal as an investor is to gain control of the property, negotiate on behalf of the seller on a discount, and purchase the property with cash. Banks will want an immediate cash transaction in exchange for discounting the mortgage.
Therefore, future short sale investors will need to have access to sizeable quantities of cash. Remember, the cash doesn’t have to be your own. You may have access to good hard money lenders, private lenders, or other people’s retirement accounts. It will generally not be a conventional loan as banks don’t want to wait 90 days for their money when providing a discount. But if you do not have money yourself or access to other people’s money, then this is not the strategy for you.
Performing short sales is not the most pleasant of tasks either. Speaking to distraught home owners can be emotionally taxing for some people. Dealing with the absolute inefficiency of banks can be frustrating. Organizing all of the necessary paperwork can be quite a task as well.
But if you have great organizational skills, patience, and empathy, then you may be a great fit for short sales.
Why would homeowners be willing to allow someone else to perform a short sale? Well, declaring bankruptcy or allowing a home to go into foreclosure can be devastating to a person’s credit for anywhere from 7-10 years. However, having a short sale performed on your house may only hurt a homeowners’ credit score for 2 years. So if the homeowner is in danger of losing their home anyways, they will save themselves a great deal of money by allowing an investor to try to negotiate with the bank on their behalf.
It is important to note that the homeowner cannot perform a short sale on their own home, nor are they allowed to financially benefit in anyway from a short sale. From the banks perspective, they are willing to take a loss and rid themselves of a non-performing asset as long as the homeowner is not profiting from the transaction. In this case, the bank requires a ‘lose-lose’ transaction, where both parties must make sacrifices. This means that an investor cannot offer to split the sales price with the homeowner. Once the homeowner agrees to a short sale, they are selling the house, they are not allowed to profit, nor are they allowed to live in the house after the transaction.
There are some other potential pitfalls that an ethical investor should inform the Seller. Except for certain conditions pursuant to the Mortgage Forgiveness Debt Relief Act of 2007, be aware the I.R.S. could consider debt forgiveness as income. There is also no guarantee that a lender who accepts a short sale will not legally pursue a borrower for the difference between the amount owed and the amount paid. In some states, this amount is known as a deficiency. A lawyer can determine whether your loan qualifies for a deficiency judgment or claim. Finally, the bank may decide to call the entire note due by invoking the due on sale clause. While these consequences are rare, it is always a good idea to let the Seller know about the possibilities.
As stated earlier, there is a great deal of paperwork needed for a short sale. The best advice is to get with your team, specifically your attorney, and title company, to come up with the necessary forms. Also, when you first speak with the bank, find out if they have a short sale package of requirements for you to fill out. I learned the hard way that some banks have different requirements than others. Going back to a homeowner and having them fill out paperwork multiple times is unprofessional and unnecessarily painful for the homeowner. Do your homework and have them go through this process only one time.
The following are some of the forms generally needed to perform a short sale:
• Authorization to release information. Required form for bank. Seller authorizes my staff, partners, Title Company, and I to talk to the bank, creditors, and/or lien holders on the sellers’ behalf. The banks will generally not even speak with you unless they have received a copy of this form. Limited Power of Attny. Limited, or specialized Power of Attorney may be used in place of Authorization form. This form is ideal if Seller is not able to attend signing for whatever reason. Must be signed by both parties and notarized.
• Real Estate Sales and/or Purchase Contract. Required form for bank. Outlines sale of house between buyer and seller. Generally best to use the most commonly approved state form.
• General Warranty Deed. A general warranty deed is a type of deed where the grantor (seller) guarantees that he or she holds clear title to a piece of real estate and has a right to sell it to you. This form is given to title company showing that Seller is serious about selling property. It is in escrow pending approval. Your Title Company and Attorney can advise you when to file.
• Escrow Payoff Authorization. If there is any money left in the escrow acct, this would apply to the loan. Signed copy goes to the bank.
• Hardship Letter. This letter should be hand written by the Seller detailing the situation they are in and why this short sale would be beneficial to them. In order to validate this information, the bank will require basic
financial information from the seller.
• Basic financial information. The banks will generally want to see back taxes, pay stubs, bank statements, and other financial information to determine the financial situation of the Seller. Having template of a Profit and Loss Sheet, or a Balance Sheet will greatly assist you in the timely completion of gathering this information.
I recommend creating with these forms with your attorney and having the Seller sign these forms and keeping a notarized copy in your own file:
• Short Sale Disclosure & Acknowledgment form. This form lists some of the things that could go wrong, such as the events listed above. This signed document may assist you if an upset Seller ends up having to pay taxes a year later and claims you defrauded them.
• Due on Sale Acknowledgment form. This form states that the banks, during the process of the short sale, may decide to call the loan due. Since the Seller is agreeing to sell their house and has stopped making payments, this tactic by the bank doesn’t make much sense. But it may occur. It is always a good idea to prepare the Seller for the worst case scenario.
Once the bank has all of the documents in hand, it will then authorize a
Brokers Price Opinion (BPO). The BPO will determine the value of the house based on it’s condition and based on the market value of comparable houses in the neighborhood. YOU WILL ALWAYS WANT TO BE PRESENT DURING THE BPO INSPECTION. Why? To help influence the BPO! Point out everything wrong with the house. State what you feel the low value is. The lower the BPO, the lower you will pick up the house!
Once the BPO is received by the bank, they will either accept your offer or make a counter offer. This part can be really frustrating for many investors! I have spent 4 months on short sales only to have the bank counter my offer with a price higher than any of the comparables on the block! Banks are not always reasonable on what they are asking on a house. Going back to the Seller and telling them the deal is not accepted, as well as the fact you just worked 4 months for free, can be disheartening.
Now, there are ways to counter a bank. First, provide pictures of the property showing all the flaws. Second, provide estimates on how much it will cost to get up to market value. Thirdly, provide any other stats that would influence the bank, such as crime rate, foreclosure rates, average Days on Market for the area. Fourth, go over in detail the amount of time and money it will cost the bank to go to auction, and how your offer will greatly benefit them. Remember; make it about the bank, not about yourself and your effort! You want to make the bank give that property to you out of fear that they will have to repair and hold onto the property for a long time. Since this is not what the bank is in the business of, the more you focus on that aspect, the more success you will have with acceptance of your counter offer.
Once you finally agree on a price, you may start marketing the property. During this time, you will need to arrange for the Seller to vacate the property if he or she has not done so already. Then you must acquire the cash necessary to close on the deal and schedule the closing. Finally, find a buyer for the property and reap the profits of your efforts!
The following would be an example of a successful short sale.
• Market value of property: $200,000
• Seller owes: $210,000
• After submitting all documents to the bank and influencing the BPO, he or she comes back with the following value: $180,000
• Bank discounts 80%- $ 144,000
• Investor resells within 30 days - $185,000
• Investor profit- $41,000 minus fees
Imagine performing 1 short sale a year. Would that improve your finances? How about 2 a year, or 1 a quarter? Or how about 1 short sale a month? The potential for making money in short sales is great.
After all, regardless of the market or economy, if you can purchase a house low enough and market it far enough under market value, you will sell the house and make a profit! Short sales do allow you to create equity where it otherwise would not exist. It’s a ‘Win’ for every party. The seller is happy because they didn’t go through the foreclosure process and can repair their credit within 2 years rather than 10. The bank is happy because despite the write off, they removed a non-performing asset from their account and can start lending more. And you are happy because you successfully performed a profitable transaction!
So if you have an empathetic personality and great patience and organizational skills, then this may be the perfect strategy for you!
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