When doing a short sale the debtor may receive a form 1099-C for the amount of the lender’s losses. This is considered loan forgiveness in the eyes of the IRS and the lender may issue a form 1099-C.
Continue reading What Are The Tax Implications Of A Short Sale?
Foreclosure is the equitable proceeding in which a bank or other secured creditor sells or repossesses a parcel of real property (immovable property) due to the owner’s failure to comply with an agreement between the lender and borrower called a “mortgage” or “deed of trust.” Commonly, the violation of the mortgage is a default in payment of a promissory note, secured by a lien on the property. When the process is complete, it is typically said that “the lender has foreclosed its mortgage or lien.”
A short sale is one of many ways a homeowner can prevent a foreclosure. Whether you are an investor or homeowner faced with a foreclosure we believe you should know and understand all of your options. A short sale is often the best option available to the homeowner but knowing all options is in the best interest of all parties so an informed decision can be made.
For the purpose of instruction we will assume you are a homeowner facing foreclosure.
Rule #1: Contact your lender right away to discuss your options.
Rule #2: Never ignore the lender’s letters or phone calls.
Rule #3: Ask the lender for a reinstatement or repayment plan.
Rule #4: Know your options
Reinstatement might be possible when you are behind in your payments but can promise a lump sum to bring payments current by a specific date. Call the lender and ask to speak with the workout department. The lender would prefer to have the loan reinstated and have you stay in the home then to foreclose on the property.
If your account is past due, but you can now make payments, the lender may agree to let you catch up by adding a portion of the past due amount to a certain number of monthly payments until your account is current.
Example. You fall 5 payment behind on your house
A Private Money Loan at a high interest rate is often the best solution for the homeowner because it allows them to bring the other loans current. Although the interest rate is higher it is usually cheaper to pay a higher interest rate on a small loan and keep the existing financing in place compared to refinancing a large new loan at a higher interest rate(because of bad credit and a pending foreclosure). Most private money lenders require a total loan to value ratio below 75% and are equity based lenders meaning more importance is placed on the house securing the debt than a personal credit rating. Make sure you are dealing with a private money lender and not a mortgage broker, bank, or hard money lender(all of these may charge exorbitant points and fees costing you more money). With a private money lender you keep the ownership of your house, borrow only what you need, and can repair your credit over time. Unfortunately private money lenders are difficult to find.
If 1, 2, & 3 are not an option then you can sell your house to an investor. On average a seller nets 85% of the sales price after taking into consideration all selling, closing, & misc. expenses. An investor will expect to make a reasonable profit but can close quickly with cash or may take over existing debt & bring the loan current. A credible investor closes quickly which starts rebuilding your credit immediately and may put cash in your pocket depending on your equity. If you have little/no equity see #6.
This is a very popular option and must be done by a willing investor. Typically the investor takes over the existing debt or gets new financing then gives the seller the option to buy the property back at a later date for a higher amount. The seller gets to stay in the house and make reasonable lease payments while rebuilding their credit. Done right this can be a solution but the disadvantage is you lose ownership of the house and tax write offs. Another option that may be less expensive is getting a Private Money Loan. If you have little or no equity an investor may be able to do a short sale(see #6) then lease option the house back to you.
NOTE: We are not a big fan of lease optioning the home back to the owner because unless it is done correctly there is too much that can go wrong at a later date. We mention it here to cover all the options.
A short sale is when an investor purchases a property conditioned upon the lender discounting the loan(s) to a lower amount. This may be the only solution for sellers that have little or no equity or are over financed owing more than the value of the property. Make sure you work with a credible investor experienced in short sales. Do not do business with anyone that guarantees or promises results- they simply can’t because there is no way of knowing what discount a lender will accept. Many times acceptance will not occur until just before the foreclosure date. Note: If you have little or no equity it is important to start working with a credible investor ASAP because the short sale process takes time.
This is the option of last resort. FACT: there are thousands of houses listed on the MLS that Realtors can’t sell. Average days on the market continues to climb! The foreclosure process limits the time you have to sell. You simply don’t have the time. Realtors do not understand options 3, 4, 5, and 6. Realtors increase your costs with exorbitant commissions and most seasoned investors avoid working with Realtors on short sales.
Short Sale: In real estate, a short sale is when a bank or mortgage lender agrees to discount a loan balance due to an economic hardship on the part of the mortgagee. Continue reading What is a Short Sale defined
For many, the word foreclosure has a negative connotation. People think that the house is in bad condition and that the folks who lived in it were horrible people but more times than not, that’s not the case at all. Usually, the owners just fell on hard times and the houses actually are in decent shape. So get the negative out of your mind. Think positive because you are about to learn why buying a foreclosure can be a real estate investor’s best decision.
Their talk is good but their results don’t measure up! Here’s the sales pitch for using a loss mitigation company to handle your negotiations:
“Effectively negotiating a Short Sale requires knowledge, skill, and is very time consuming. As a real estate agent or investor, our service allows you to use your time wisely and not spend hours upon hours on the phone communicating with the mortgage companies. By becoming a member of our Short Sale Negotiation Program, we will negotiate all of your Short Sales.
A major short sale concern of the lender is investing the time and effort in negotiating a short sale then having the buyer not close on the short sale. Because of this possibility you can expect the lender to request a “Proof of Funds” or a “Mortgage Commitment Letter” as a required part of the short sale package. Continue reading Closing the Short Sale
It is very common for short sale deals to come together in the midnight hour leaving precious little time between the the day you and loss mitigation agree on a price and terms. This can put you in a difficult position to fund and close the deal for a variety of reasons.
Many guru’s and so called experts advise you to be a friend or somebody that is helping the owner with the short sale. This is the worst advice they could possibly give you! First, it’s lying. Second, there will come a time after the short sale has been accepted where it is revealed that you are the buyer or being compensated.
The question is how do you go from helping the owner with the short sale to being the investor buying the property or flipping it to somebody else. At this point you have lost all credibility with the lender not to mention your own personal integrity.
From the beginning you should always be the investor. Not only is this the right thing to do, it also gives you more options throughout the negotiations.
The stronger your relationship with the loss mitigator the better your chance of getting a short sale accepted. This is a people business and you will earn more paydays by increasing your communication skills.
The loss mitigator has an interesting job. They may be working 200-300 files at any given time so time is a very limited commodity.
Next, ask yourself what type of personality is likely to be a loss mitigator? Somebody that loves to talk and is very chatty? Somebody that is very empathetic and understanding? Not likely!
Most often a loss mitigator will be direct and to the point. But don’t mistake the loss mitigator for somebody that’s revealing all of their cards. Many are paid on commissions so they will play hardball in the negotiations as long as possible.
In the initial call with the loss mitigator I will be very pleasant and easy going. My goal is to establish rapport and find out their preferred way to communicate. I’ll ask “Do you prefer to communicate by phone, fax or email?” All have their advantages and disadvantages.
Phone: Get their direct number and that of their supervisor in case they are out for any reason. The phone is very efficient if you can get through to the person directly without going through a prolonged messaging service and pushing 100 buttons.
FAX: Hands down the best way to communicate with loss mitigators. Lenders keep a log of faxes so be sure to log the number and time of your call. If faxing to a department fax expect 24-48 hours for a response. Always ask if the loss mitigator has a direct fax number. If so you are golden.
eMail: Personally this is my favorite way to communicate in the modern day world. Fast. Decisive. Available anytime. Some loss mitigators like to communicate through email and it can be very efficient. Always ask if the loss mitigator has an email address. However, do not rely on emails for short sale communications. 1) the email may not go through. 2) If the loss mitigator changes positions in the company the address could be terminated and you’ll be left wondering what happened. Email are great… but if you use them be sure to also use the phone and fax so there are records of your communication.
At a bare minimum you should communicate with the loss mitigator at least once per week. Let’s assume you have twelve weeks to negotiate a short sale before the property is lost to foreclosure. We’re talking about communicating with the loss mitigator a whopping 12 times. That is certainly not to much to ask for the amount of money you can make in this business.
After the initial communication with the loss mitigator you may need to get them a few items or you might just be in the ‘hurry up and wait’ part of the ballgame. The loss mitigator might be saying we need an offer at market value or we are not intersted.
They are interested but you have to play the time game. touch base with them weekly to see if anything has changed on their end. My favorite way to contact them is with the Status Request Fax shown below.
This let’s them know you are there and interested in working the short sale.
As the foreclosure date approaches you will want to speak directly with the loss mitigator and become for assertive with the negotiations.
It was not that long ago when we mailed short sale packages to the lender and included pictures of the property. The times have changed.
These days lenders receive their BPO’s and Appraisals online. Most lenders have a website for the person completing the BPO or Appraisal to submit everything online in one convenient location for the lender. In today’s world the loss lenders want to receive everything electronically and anything you send to them will be scanned and the originals are normally discarded.
True Story: I was recently working with a lender and sent them an original signed warranty deed that needed their signature. I was shocked when the lenders representative told me she only had a copy because everything they receive is scanned with the originals destroyed.
These days the lenders rarely want anything via snail mail. The best bet is to fax anything that is needed or in special cases send something via certified mail.
Still, there are times when a picture is worth a thousand words. In such situations let the loss mitigator know you would like them to see some pictures of the property and ask for the best way to send the pictures. Sometimes loss mitigators have an email address you can use and other times email addresses are internal to the company where they literally can not send or receive standard email messages from outside the company.
There will be times when you are not making any progress with the loss mitigator. This could happen for a number of reasons including:
If you are not satisfied with the direction of the short sale negotiations request to speak to their supervisor. This is an avenue you have available and one you should always take when needed.
Will it offend the loss mitigator? It may, but this is not your concern. Your goal is to negotiate a successful short sale and if a loss mitigator is not returning calls and not working with you then you have very few viable alternatives.
It may be that the lender is unable to accept your short sale offer or anything remotely close. But you have to find out and when things stall with the loss mitigator you must go over their head.
And, you should do it with confidence! The facts remains if the lender ends up taking the property back as an REO it is likely they will net less than if they accept a good short sale offer. Help the supervisor see the light because you have everything to gain and nothing to lose.
I wish I could tell you that every short sale will be a joyous experience and that the loss mitigators will return all of your call and faxes in a timely manner. The hard cold truth is many loss mitigators are so overworked they simply can not service all of their loans. There will be times when you have to be aggressive!
Realize this is a negotiation process and the amount of money you earn depends on your ability to negotiate. There will be times when you have to be blunt with a loss mitigator. There will be times when they may be offended even though no offense is intended. There will be times when you have to go over their heads. There will be times when loss mitigators are operating without the full functioning power of their brains and you will have to politely direct them to a mathematical understanding of foreclosures.
Most investors do not know that some loans require the lender to negotiate with the borrower in ‘good faith’ for a mortgage modification and repayment plan. Many government backed loans include this as a requirement when they underwrite the loan.
Unfortunately loss mitigators have learned they can run over most investors by acting as if they know everything, pushing around their rules, and telling investors it is the lender’s way or the highway.
What you don’t know is that the lenders train their staff to avoid certain situations and from doing certain things. Here’s one way to get the lender to negotiate in good faith. Your conversation could go like this…
“Is this call being recorded?”
“Great. I just wanted to ask you a question on the record is that OK?”
“I hold the Power of Attorney for Mr. Smith and it was my understanding that you had a legal obligation to NEGOTIATE WITH THE BORROWER IN GOOD FAITH for a mortgage modification, repayment plan or short sale. Is this true?”
(by the way we slipped in short sale into negotiating in good faith)
“Well, I’ve been trying to negotiate in good faith with you and to date I have not had a written response or counter offer to the short sale package I’ve submitted. I’ve done my part and I was hoping you could negotiate with me in good faith.”
Please understand this approach is not going to make friends or build brownie points with the lender. But if you are up against a lender that is not responsive you have to get aggressive. I guarantee this will get their attention.
Note: All lenders record the conversations and you can use this to your advantage in hard line negations. Again, I prefer nice negotiations but will use whatever tools are available to complete the job at hand.
When considering a short sale the lender must take into account the current condition of the property. If the property does not sell at foreclosure sale they will be left with the property and the decision to repair the property or to sell the property at a discounted price. As a general rule lenders do not like to invest money into REO’s and do not want to sink more money into repair costs.
It’s your job to list all of the repairs needed so the property can compete the the large number of homes on the market that are in near perfect condition. So Guru’s and so called experts will tell you to exaggerate your repair costs to better serve you goal of a low purchase price. Consider the source and their integrity.
When estimating repairs you should use number that are realistic but on the high end of the estimate spectrum. Home Depot is a great resource. Simply find out the cost to have Home Depot do the work (if applicable) and these numbers are realistic, albeit on the high side. In practice you would want to contract the work through a different source at a much lower price. Still, this allows you to use accurate repair numbers and maintain your integrity.
See the sample repair cost estimate below.
The bank is going to order a Broker’s Price Opinion or an Appraisal on the property to help them determine the current market value. The lower this value the better for your short sale negotiation. Continue reading Using Comparable Sales To Help Justify Your Short Sale
The following cover letter comes from my short sale system which automates the entire short sale process. With this system you can literally complete an entire short sale package to a lender in under 5 minutes.
The following letter can be used when working with sellers as a way to get all of the information needed to start the short sale without having to actually meet the seller in person. My personal choice is to have a phone conversation with the seller then let them know I will send over all the paperwork by email or fax. This is the most efficient way to do short sales.