Monday, February 9, 2009

STEPS TO DOING A SHORT SALE

STEPS IN SHORT SALES: A short sale is another twist on a subject to transaction. However, instead of bringing the existing financing current and leaving it in place, the goal is to negotiate a discounted pay off with the lender. A "short sale" involves four basic steps.
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1. Gaining Control of Title; Authorization to Release Information. One of the most important steps in the short sales process is getting the deed. Without the deed, the homeowner can back out of the potential short sale even after you have spent hours working on their property. When the homeowner signs the deed over to you, now you control the property and you can go to work by calling the bank. If you cannot secure a deed, you must have a contract with the seller that specifies the terms of the transaction with a discounted mortgage pay off – e.g., closing is to be as soon as possible, but expressly contingent upon a successful short sale on terms approved by the buyer.
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The other essential document is a signed Authorization to Release Information signed by the sellers. Without one, the lender will NOT talk or otherwise discuss the seller’s loan with you.
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2. Contacting the Lender. When you call the lender, you never want to tell them you are an investor. This is one of the biggest mistakes rookies make and will almost always result in the lender not accepting short sales. Therefore, when you call the lender, to request a "short sales packet" or "workout package," indicate that you are the buyer or that you represent the homeowner. Sometimes they may ask if you are a real estate attorney. Just restate what you told them before. Then you'll want to request the "short sales packet" or "workout packet". When the packet arrives it will explain exactly what you need to make this short sales deal successful. Generally among the things you will need to document are distress concerning:
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(A) The distressed nature of the seller (see paragraph 3 below).
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(B) The property: list out all defects to the property and needed repairs to make it marketable (including price estimates). Photos of any major defects can speak volumes to a lender.
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(C) The neighborhood where the property is located: is there a crime problem? What are the number of days on market for sales that have occurred and are they below assessment and/or past sales? One web site that may help in checking comparables is http://www.zillow.com. The other option is to secure comparables through a realtor who is experienced working with investor properties. Remember that many of your big established real estate companies may NOT be familiar with short sales, so do your homework on any realtor you decide to use.
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(D) Itemize in detail the lender’s cost of not doing the short sale: (1) foreclose costs, (2) bankruptcy costs if the sellers file either a Chapter 7 or 13 under the Federal Bankruptcy Code, and (3) the costs the lender will face if it ends up bidding in the property at foreclosure: (A) repair costs, (B) costs of marketing and selling the property, including realtor commission, and (C) carrying costs, including insurance and real estate taxes.
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Lenders do not like to end up owning property, so the more data provided in 2.(B), (C) and (D), above, the more apprehensive the lender will be of holding out for a full payoff amount.
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3. Hardship Letter. A hardship letter tells the lender why the homeowner is not making their mortgage payments. If a job loss or family illness is the cause, explain it in detail and make the lender feel sympathetic, and seek to secure for the seller a Waiver of Deficiency – i.e., a no-collection agreement where the lender agrees to write off of any discounted balance and not pursue collection against the seller. The letter should suggest that the seller is contemplating filing bankruptcy, but would prefer to avoid doing so, if at all possible. Be prepared to provide documentation: sometimes lenders will request bank statement, pay stubs, income statements, and so on to document the hardship.
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Remember, you must be prepared to send them everything they ask for because if you don't, the short sale will not be accepted. They will almost always ask for a HUD-1 and a real estate purchase and sales agreement. Have your real estate attorney’s office prepare a draft HUD-1 and make sure that you have included all amounts payable by the seller for judgments, delinquent taxes, if any, and any other liens (e.g., homeowner association dues). Send everything the lender asks for back ASAP. It usually takes 3 weeks or more to get an answer back from the lender, so you can't afford to wait. If the foreclosure auction is approaching, you can ask to extend the auction which in most cases they will, if they know it is a legitimate offer.
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4. Broker's Price Opinion. Basically a real estate agent will come out and give their opinion on what the house is worth in the form of a Brokers Price Opinion ("BPO"). The key to short sales is the BPO. A glib letter will not suffice. The BPO needs to be documented and show supporting market time to sale and final sale information as available. You want to try everything you can to influence the BPO to come in as low as you can in order to induce the lender to discount the loan payoff.
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5. Letters of Recommendation. If you have successfully closed short sales previously, obtain a letter from the lenders involved that will help convince the current lender that you can deliver.
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6. How Much to Offer. Part of the answer to this question is a function of what you intend to do with the property. If the intent is to rehab it, then the offer should be calculated to allow for satisfactory rehab costs and a profit margin after sale. If the intent is to wholesale the deal, then the offer should be lower to build in an assignment fee and still leave in factors for rehab costs and a profit margin for the ultimate purchaser under the short sale.
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NOTE: A much more complete article with sample forms is available upon request.

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