What is a Short Sale?

Foreclosure short sales are a way of purchasing distressed pre-foreclosure properties for less than their full market value. Although this method of buying distressed properties takes some negotiating with both the lender and the homeowner and requires a formal written proposal as well as paperwork, the extra effort can land you a great property with instant equity and savings.

Short Sales: How it Works?

Foreclosure Properties

To understand how a short sale works, it is useful to consider an example. Let's say that a homeowner owes $300 000 on a mortgage and has fallen behind with payments. The lender considers the mortgage in default because payments are so late and the homeowner is being threatened with foreclosure or repossession of the home. The lender faces the prospect of losing money on the home and the homeowner faces a ruined credit rating as well as the loss of the home. An investor negotiates with the lender and the homeowner and offers $250 000 for the mortgage. The lender accepts the money, selling the property to the investor at that price. This is known as a short sale.

Short sales are a very attractive solution to a foreclosure problem because they have something to offer everyone. In the above example, the investor gets and instant $50 000 discount on a property, which means instant equity and value. The homeowner gets to avoid foreclosure and a ruined credit rating and gets to walk away from a home which he or she can no longer afford. The lender gets to avoid the foreclosure process and is guaranteed to get some of the money on the bad loan back, without having to try to resell the property.

Getting Started with Short Sale Foreclosures

Foreclosed Homes

A short sale begins with identifying a potential property that would make a good opportunity for a short sale. Looking for pre foreclosure properties is a good idea, because these homes are not on lenders' books as distressed bank owned foreclosures yet, and this means that lenders are often more motivated to negotiate in order to avoid having another official bad loan on their books.

When searching for a property, it is a good idea to find a property where the homeowner has already been given a Lis Pendens or a Notice of Default (NOD). In most states, this indicates that the homeowner is at least three months behind in home loan payments and foreclosure is imminent. In this situation, homeowners are willing to work with investors and are often willing to walk away from the house in order to save their credit rating and get a fresh start. At this stage of the process, as well, lenders are anxious that may lose some of their money and may be more willing to consider a short sale.

Researching homes upfront is important, because as soon as you contact a lender, a lender will want to know a great deal about the property. You will want to know the condition and assessed value of the property, the homeowner's financial situation, the amount owing on the mortgage, any title or lien problems with the property, and more. You will of course want to know about any problems with the property and you will want to research the community carefully.

Once you have your information gathered, you will want to contact the lender. Generally, you will need to speak to a representative in the "Loss Mitigation Department", as these are the representatives who handle short sale proposals and requests. Once you have contacted the correct person representing the lender, you will want to identify yourself as a representative of the homeowner and you will want to request a workout or short sale packet. The representative will likely have some basic questions about the property, homeowner and the proposed deal at this point as well.

The Workout Packet

The workout packet or short sale packet is a crucial thing to secure when speaking with a lender's representative because this is the packet that offers you all you need to close a short sale with a specific lender. Workout packets are different with every lender, but all include the forms, procedures, and instructions you must follow to meet a specific lender's short sale proposal requirements. It is hard to exaggerate the importance of getting this packet and filling out everything in the packet accurately and completely. Without doing this, you simply have very little chance of success.

Although workout packets vary, they generally include a few basic elements:

1) The Broker's Price Opinion (BPO).

This may or may not be included in the packet, but it is vital for you to understand the BPO when assembling the required material. The BPO is the evaluation and assessment submitted by a professional appraiser or real estate broker to the lender. The lender requests this information about each property in pre foreclosure to determine a fair value for the property. Most brokers and appraisers consider the home's condition and the market when setting a value on the home. The BPO determines how fair a lender thinks your offer is. If a BPO is set unreasonably high, for example, your short sale offer may be rejected, even if it is quite reasonable. If there are any errors in the BPO it is often hard to convince lenders of this. If you do not know what the BPO is on a property or if you think the BPO might be incorrect, it is important that you include a detailed, professional assessment with your workout packet, even if it is not required. You need to hire a professional and qualified assessor or inspector for this.

2) Hardship Letter.

Many workout packets require a hardship letter, which is really a statement that outlines why a homeowner has fallen behind in home loan payments and why the homeowner cannot make payments now. The letter must essentially prove that the homeowner cannot afford the mortgage and is unlikely to be able to afford the home loan in the near future. You need to write a detailed description of the homeowner's financial situation. The letter must be detailed, accurate and must portray the financial situation in the most dire terms. Some investors hire professional writers to create the most compelling descriptions possible. In addition, the sales packet may require that the homeowner submit taxation documents, pay slip information and other proof of their inability to pay. Everything a lender requests must be submitted exactly as requested.

3) HUD-1 Settlement Statement.

A preliminary HUD-1 settlement statement or form outlines the charges that you have paid for the real estate transaction and shows all the money being exchanged in the real estate transaction. This document shows that you have an agreement with the homeowner and shows the lender that the homeowner is not profiting from the deal. It is a good idea to have an escrow or title company to help you with this form. It is important that the form shows that you pay the costs associated with the deal and that all the monetary amounts add up exactly.

Optional Short Sale Materials

It is important to submit all the material a lender requests in the short sale packet exactly. However, it can also be in your best interests to submit supplemental material, especially if that material can support the idea that the home needs a lot of work or is worth less due to problems. If you have any evidence or any statements from inspectors or assessors that the property has any major problems or requires key repairs, be sure to submit copies of this. If you have any newspaper clippings revealing unflattering news or information about the property or neighborhood, submit this information as well.

After Submitting your Workout Packet

Once you have submitted your workout packet, you may wish to contact the lender to confirm that the lender has received your packet and that everything is present and in order. Make it clear that the lender can always contact you in the event that there are questions, problems, or missing information. Most lenders take six weeks to review a workout packet and you don't want further delays - or a rejection of your proposal - because something has gone missing.

There is another good reason to call the lender. If the auction date of the property is close, you can ask the lender to delay putting the property up for auction until your foreclosure short sales proposal has been considered. As long as your proposal is reasonable, most lenders will comply with this request. However, you do need to ask since you don’t want the property to be auctioned off through an oversight.

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