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Learn How to Buy in a Short Sale

Buying Foreclosure Short Sales

Short sale foreclosures are real estate interactions that occur between an investor, lender, and a homeowner who has fallen behind on their mortgage. These deals involve having the lender accept less than the full mortgage amount due on a property as a sale price.

The best way to understand this type of real estate negotiation is with an example. Let's say that a homeowner has a $300,000 home loan and is facing foreclosure because he or she cannot afford to pay the mortgage. You the investor negotiate with the lender and the homeowner to buy the property for $240,000. Everyone wins. You the investor get a $60,000 discount on the property. The homeowner avoids foreclosure. Even though the lender gets less than the total amount outstanding, the lender gets to have the money right now and can avoid the lengthy (and costly) process of foreclosing on the property.

If you want to put together a short sale negotiation, you will need very good negotiation and research skills. You will need to contact the loss mitigation department of the lender responsible for a defaulted loan and negotiate your offer. You will need to be prepared to make an attractive and reasonable offer that the lender will be able to accept.

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Starting the Short Sale Negotiations Right

Foreclosure Short Sales

The first step in putting together a good short sale deal on real estate foreclosures is to find properties that are in pre foreclosure. You can find such repo homes through Repo-Homes.com. Look for pre foreclosed properties which are not too fully mortgaged and seek out homeowners who are at least three payments late on their home loan.

A homeowner who is at least three month behind is usually very motivated to speak to you because he or she is really facing the prospect of losing the property. The homeowner at this stage has received their Notice of Default (NOD) and may be getting unpleasant calls and letters from the collection agency hired by the lender. The homeowner at this stage usually does not have many options and will likely work with you to find some solution to solve the situation.

When a home loan is three months in arrears, the lender is also usually more willing to speak with you about a home short sale because the lender is also facing the prospect of losing all or much of the money defaulted in the loan. While the lender can still choose to avoid a short sale, foreclosure can take months or even years and there is no guarantee that the lender will recoup the full amount of the bad loan. The lender usually prefers to get more of the lost money more quickly. It is just much less of a risk.

Contacting the Lender

Once you have identified a property you are interested in, you need to speak with the homeowner and do the research about the home in order to understand what a reasonable offer might be. Once you know as much as possible, call the lender. Usually, you will need to speak with the "Loss Mitigation Department", which has the authority to agree to your request for a short sale. Some lenders make it very difficult to reach the right person. If the lender does not have a Loss Mitigation Department or anyone else who can help you negotiate a short sale, move on to the next property that interests you. You don't want to waste hours or weeks chasing a lender who has no intention of agreeing to a short sale.

Once you do get in contact with a Loss Mitigation Department or the correct authority at the lender, identify yourself as a representative for the homeowner. Avoid identifying yourself as an investor, since not all lenders are willing to deal with investors seeking short sales. The lender or the representative of the lender will want some general information such as:

  • The value of the property
  • The financial status and prospects of the homeowner
  • Identifying information about the property
  • The deal you are proposing
  • Identifying information about the homeowner

You will want to request a workout packet or a short sale packet. Each lender has their own packet with all the rules, forms, and directions you need to arrange a short sale with the lender. You need this packet to put together a successful deal.

Putting Together a Workout Packet

One additional thing you will need when putting together a short sale deal is the Broker's Price Opinion (BPO). The BPO is a statement by a local real estate broker about the value of a specific property. Lenders usually hire local brokers or real estate appraisers to determine the value of properties facing foreclosure. The broker or appraiser usually considers current market values and the condition of a property to create a rough estimate of value. It is hard to overstate the importance of a BPO. The value of the BPO is the main number lenders will use when deciding whether to accept a short sale proposal or not.

If a BPO is low, that increases the chances that your short sale deal will be accepted. If someone makes a mistake and inadvertently submits an overly high BPO you will have a hard time getting the lender to agree to your proposed price.

Many lenders are unwilling to consider that a property may be much less valuable than a BPO suggests. While lenders are willing to sell at a slight discount to get rid of foreclosed or distressed homes, they are not willing to sell them a great deal below market value.

An additional item you will need to put together a successful short sale is the hardship letter. This letter outlines why the homeowner cannot pay their mortgage and why it is unlikely that the homeowner's financial situation will change soon. To get a lender to agree to your proposal, you will want your hardship to outline in the most dire terms a borrower's financial status. However, you must stick scrupulously to facts and must submit all supplementary material a lender may request. A lender may need to see a homeowner's tax records, pay stubs or other financial documentation, for example. You may want to hire a professional writer to write the hardship letter if you are not very persuasive. The hardship letter is important, so it is worth the extra money.

In many cases, you will need a HUD-1 settlement statement or other formal contract between yourself and the homeowner to show the lender that the homeowner is not profiting from your proposed deal. The HUD-1 settlement statement is a list of all the charges you and the homeowner are paying for the deal. It is important that the document show that you are paying all the costs related to the transaction. A title company or escrow company can help you fill out this form if you need assistance.

Supplementary Material

Obviously, putting together this type of real estate deal requires a great deal of paperwork. However, it is important to keep in mind that this paperwork can save you tens of thousands of dollars on the market value of a property. It is in your best interest to include as much negative information and paperwork about a property as possible. For example, you might want to include a professional assessment of the property that shows a large repair estimate and many items that need repair. While the lender is already getting their own appraisal, the optional appraisal from a professional you hire is important because it can show the lender that the property needs lots of work and will be hard for the lender to sell on the housing market.

Similarly, any news clippings about the undesirability of an area are also good news for you, since this bad news makes the lender think twice about trying to sell the property themselves. If the lender is convinced that the property is a liability and may be hard to sell, they are more likely to want to sell to you at a discount just to get rid of the property and recoup some costs.

After Submitting

Once you have submitted the completed workout packet or foreclosure short sales packet and all the supplementary material, it may still take the lender three to six weeks to reach a decision about your proposal. Once you have submitted your material, you may want to call the lender to confirm that the lender has everything needed to make a decision. You may also want to encourage the lender to call you in case there are any questions or any problems. You do not want to face additional delays because there is a form missing and the lender has failed to let you know. It is also important to call the lender is the property auction is nearing. You can negotiate to have the lender extend the auction until your offer is considered.

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