Chicago Real Estate Investors

During your investment travels you will come across dozens of properties in foreclosure with little or no equity.  The seller owes close to or more then the property is worth. In cases like this lenders are sometimes willing to accept less than the full amount  this is known as a “short sale” or “short pay.”  Short Sales are one techniques used for discounting real estate loans.  A short sale can create a huge investment opportunity and is a technique you need to understand to remain competitive in real estate investing. First and foremost in the process is get the deed. Many times, new investors will skip this  step. Why would we want the deed? The reason is often the homeowner will change their minds, or want to back out of deals because they are scared, or they want to re-negotiate. If you do not have the deed then they can back out of the deal even after you have spent hours working and negotiating with the lender about the property. To be sure once this has happened to you once, you will not let it happen again.  The key point to remember is that when the homeowner signs the deed over to you, you now have control of the property and you can go to work by calling the bank.

The best time to do a short sale is when the property is in pre-foreclosure. You can do a short sale when the bank owns the property, but your profits will likely be smaller. Breaking it down there are two stages in pre-foreclosure process. The first being when  individuals are just behind on payments and the second is when they are behind and have received a notice of default. To be successful in working with short sales, you need to locate homeowners who are more than 3 payments behind on their mortgage. As soon as the notice of default has been recorded, banks tend to become more motivated, so you are more likely to get a discount. Until the notice of default has been filed the bank will rarely if ever discount a mortgage. Think about it why would they? The homeowner still has time to bring the loan back current by making up the back payments.

First we need to find the sellers that need help. These are truly motivated sellers.  So look at the following suggestions and then think of ways that you feel could added to the list:

1. Watch the newspaper Classified Ads -"Must Sell", "Vacant", "Motivated". "For Sale By Owner", "Lost Job".

2. For Sale By Owner - Watch for yard signs, Ask at garage sales, unkept properties.

3. Advertise - "I Buy Houses!"

4. Professional Contacts - Attorneys, Mortgage Brokers, Accountants, Insurance Agents.

5. Neighbors, Letter carriers, Handymen, Family, Friends, etc.

Once you have contacted the owner and successfully put a deal together with a signed contract and the deed has been signed over to you.  Remember do not forget to get the deed. You will need the current owner to sign a document stating that you are authorized to talk to the bank about the mortgage.  Without this document the lender will refuse to discuss the mortgage and they are required to.  Would you want anyone to have the ability without your knowledge to go to your bank and find out about your dealings without your permission.  Enough said.

Once you have all of your paperwork ready its time to contact the lender.  Remember there is a certain process for calling the bank when doing short sales. When you call the lender request a short sales packet. You need to request the "short sales packet" or "workout packet" that the lender uses.  Each lender’s packet will likely be different then the last. Remember you are working in their sand box use their packet.  When the packet arrives it will tell you what you need to make this short sales deal successful.

Actually negotiating a short sale with the lender can be a difficult process.  First you have to find a bank officer who has the authority to accept a discount. You will have to call around to locate the lender’s “Loss Mitigation Department.” Many times, each lender you deal with will have a different name for the department.  Be patient and prepared to listen to music while you locate the person you need.  You can expect the process to involve a lot of waiting on hold and being bounced around numerous automated voice mail systems. Once you locate the right person, then the negotiating begins. Look at it form the lender’s perspective, a short sale saves many of the costs associated with the foreclosure process. In a short sale the lender is able to cut its losses. Your job as the investor is to convince the lender that it will fare better by accepting your proposal.

The lender will want information about the property, the borrower and the deal he has made with you. In other words before proceeding the lender wants to know what the  property is worth. The lender will contact a local real estate broker or appraiser to evaluate the property (called a broker’s price opinion or “BPO”). 

What this means is a real estate agent will come out and give their opinion on what the house is worth. This is the most important part of the short sale. It’s the key. If the BPO comes in high then the bank will not accept your short sale. The lower the BPO the better. It may take some trial and error to get good at this. The good thing about this process is the cost to you is about the same no matter what the property is worth. Many short sales fall through if the BPO comes in too high, which is often the case. You can’t pull the wool over a lender’s eyes - if the property isn’t is need of serious repair, it is unlikely you can convince the lender the property is worth a whole lot less than the appraised value.

You can also submit your own comparable sales information. You will want to offer as much specific negative information about the property as possible (Get Pictures). Also, include information about the neighborhood and the local economy if things are bad. A contractor’s bid for repair estimates should also be submitted. The lender will also ask for financial information about the borrower. They want the borrower to prove that he is broke and unable to afford the payments. Also the borrower must show that he has no other source of income or assets to repay the loan.

The lender will usually request a hardship letter. A hardship letter is a document telling the lender why the homeowners are not making their mortgage payments. If the bank feels the need they will request a bank statement, pay stub, income statements, and any other document that they feel needed to prove that the homeowner cannot make the .payments. Be ready to send them everything they ask for, if you don’t they can refuse to accept your proposal.   They will ask for a copy of the purchase and sales agreement. When looking at your contract the lender wants to make sure the seller isn’t walking away with any cash from the deal. Normally the contract should be written so that the buyer pays all costs associated with the deal. This way the net cash to the seller is the exact amount of the short pay to the lender.

A preliminary HUD-1 settlement statement is often requested.  This may be hard to get because many title and escrow companies will not prepare one in advance of a closing. If you can find one that will great, if not then you can prepare your own HUD-1, and simply write “preliminary” on the top.

It does not matter what type of house or condition it's in, all mortgages can be discounted. The best properties to perform a short sale on are the ones that need a lot of work and repairs because lenders will not want to have to deal with it. They become "don't wanters".

Disclaimer: The foregoing is not intended to be given as legal, financial or tax advice, but intended for instructional use only. If you require legal, financial or tax advice you should seek the assistance of a qualified professional.