As we all now know, one of the best methods of buying or flipping pre-foreclosure properties is by performing a short sale on that property. A short sale is a method of buying a property where the lender will take less than what is owed on a loan which is currently in default.
But make no mistake, the tasks required to get a short sale approved can be the most frustrating duties we as investors must handle. So we can either avoid doing short sales completely, or find out an easier way to complete the short sale. First let’s understand what a “short sale” is and some of the factors of the short sale process:
SHORT SALE: A short sale is when a lender accepts a discount on a mortgage to avoid a possible foreclosure auction or bankruptcy. You are still buying from a seller, but you are purchasing the mortgage directly from the lender for a discount.
The Components of A Short Sale Package
Not every lender requires a full-blown short sale package. And a second Mortgage holder seldom requires the components of a short sale package. Let’s look at what most lenders require in order of the most import to the least important.
I. Short Sale Offer Letter
Make sure this is coming from you as the buyer; not as an investor! Lenders have gotten sick of dealing with “investors”. Why? Because untrained investors don’t understand the business. Those investors make the contact person in “Loss Mitigation Department” go through an approval, and are not able to follow through on the closing at a later date. If you are a little unsure, don’t worry; once you are clear on exit strategies funding, a short sale is done through your quick turn buyer, a private lender, or a refinance from you.
- A good “short sale offer letter” should:
- Provide your contact information
- State your position in the transaction.
- Clarify your intentions.
- State your offer amount.
- Give good solid reasons for why the short sale should be approved (Repairs, bankruptcy issues, seller is crazy, etc…).
- Give a closing date when the lender will get paid.
- State what action you want the loss mitigation to do. Order the BPO, give you their counter offer, fax you a list of what the need to see before reviewing a short sale).
- Give an alternate way for this person to contact you other than your phone number! Such as a fax, email or e-fax
Important Tip:: If you do not own a fax machine with a dedicated line you can count yourself out of this business.
- The Broker’s Price Opinion (BPO)
The B.P.O. is the single most important part of the short sale process. In our business we have learned how critical it is that we “influence” the BPO. The BPO is ordered by the lender through a realtor or appraiser to determine the current value of the property they are considering repossessing. They base their calculations on between 80% to 100% of where the BPO value lands. Also in consideration are the repairs as indicated by the person doing the BPO. The best advice I can give you when speeding up the short sale offer process is to request the lender to go ahead and order the BPO. The lender may be unwilling to spend the extra money to order the BPO until they receive from you the completed “short sale package” components.Too many investors have put lenders to work ordering BPO’s only to never complete the short sale package. However, if the person in loss mitigation will order the BPO while you are gathering the rest of the short sale package saves time for both you and the lender. The lender will hire an appraiser or realtor to go to the house and determine the value of that property. Make sure you are the contact person who meets them at the house and lets them. More importantly, make sure you have with you some low comparables (“comps”) and contractor repair estimates. It’s your job to influence the lender’s value to the lowest comparables possible.
- The HUD-1 Settlement Statement
The HUD-1 Net Sheet shows how the money is to be dispersed at closing. The lender looks for immediately recognizable and usually unacceptable red flags, such as: excessive commissions in this transaction, no cash to seller. Acceptable entries in the HUD-1 should indicate:
- The buyer’s name (you or your trustee)
- Seller’s name
- Property address (you are buying)
- State a closing date (at least 45 days from acceptance letter)
- Show sales price (just over lender’s payoff
- Earnest money (always at least $500)
- Where the funding is coming from (cash or loan)
- Taxes being paid (call the tax department)
- Lender information (how many points)
- Insurance (approximate)
- Closing agent’s fee
- Title search
- Excise tax (call you registrar of deeds to get this)
- How much your pest control or abatement guy would charge
You must create this Preliminary HUD-1 Settlement Statement. Again, this is only a “preliminary” HUD-1 and you should write that on the HUD-1 itself. Anyone intending to do this business needs to own a program that can create this HUD-1 or have your title company or attorney prepare one for you.
- The Financial Statement (of the borrower/seller)
Get this from the lender. It has to be on their particular forms and they will fax it to you, or the lender may require that it be sent directly to the seller.
- Hardship Letter
Tells who and how the seller got into financial trouble and conveys the basic message that the seller can’t make payments. You should review this document to make sure the homeowner is not telling the lender they now have a great job or have just won the lottery. In this step of the short sale process, the worse the situation seems for the seller, the better it tends to work for you!
- Paycheck Stubs
This is not often required. If you can’t get them from the seller, tell the lender they are unemployed and have none!
- Bank Statements
Not often required. Many times if these are hard to get, I’ll tell the lender customer’s credit is so poor a bank wouldn’t open an account for them.
- Broker Listing Agreement
This is seldom required– unless you are dealing with Countrywide or Wells Fargo. If it is a requirement, find a way to get around it.
II. Understanding the factors that influence a lender to take a discount
Many times you will discover First Mortgage Lenders require more components in a short sale package than a second mortgage holder. Understand this—The reasoning behind a bank collecting this package is to determine answers to several concerns from the lender’s perspective. These concerns might be:
- Based on financial statements: does the homeowner truly deserve a short sale?
- Is it in the bank’s best interest to take a short sale or repossess the house and sell through a realtor?
- Are there any hidden factors, which might affect the lender’s decision during the short sale process? The point behind this: the lender will always want to verify if the seller can truly not afford the house payments prior to justifying a short sale.
Also included in the mix: What is the biggest factor that might affect the lenders ability to be made whole if they opt to repossess? REPAIRS! This is an extremely powerful negotiating tool in a case where the lender is to receive discount offer. Get at least two construction or remodeling contractors to give you written estimates. Make sure these estimates are not coming from the cheapest guys in town. The repairs estimates are one of the best negotiating tools one can use along with influencing the BPO, which we will cover later. So what happens when the property needs no repairs? You can’t use this strategy!
III. Preliminary Contact to Determine Feasibility of a Short Sale.
When you get ready to start communicating with the person at the lender’s loss mitigation department, you must fax them a completed and signed “Authorization to Release”. Always call the person who is handling the account with three main objectives in mind:
First, to confirm they got the authorization. Second, to find out how receptive the lender might be to a short sale. Third, to find out what items of short sale process will need to be submitted before they can render a decision. Request that they fax you the short sale package.
Because we all know just how tough it is to get through to people in loss mitigation, make your preliminary call is productive. The reason I do this first call is to test flexibility.
Example on a First Mortgage:
Investor: I tell the lender: “I am the buyer and am going to need a bit of discount to pay the account off.” (If it is a major discount, I will to tell them this up front.) “I’ll need a substantial discount on this mortgage to pay it off; do you see this in the realm of possibility?”
Lender: If the lender responds: “It depends on the BPO”
Go ahead and request them to send out someone to do the BPO, making you the contact person. Give them your cell phone number so you don’t miss their call. You know there is a strong chance for a substantial discount, especially because you will be there to influence the BPO’s value. Don’t name a number until you have analyzed the short sale possibilities on the 2nd mortgage.
Example on a Second Mortgage:
A normal strategy would be to say to the lender: “We normally generate about 10% to 15% of the balance, does this seem possible?”
Do not contact the lender a second time until you have faxed them your written “offer” and the components of the “short sale” package.
IV. How to Fast Track Your Communications:
Once your initial call has been made and you feel comfortable you want to proceed, the short sale offer letter and a HUD-1 Net Sheet sent directly to the lender will always get the lender’s attention.
You’ve got to understand, lenders have every Tom, Dick, and Harry calling and leaving stupid messages filling-up their voice mail. Because loss mitigation specialists receive bonuses based on the number of defaulted loans they resolve, they know their efforts are more productive when they focus on deals that appear most likely to be resolved through a successful closing. I always communicate via fax with short to the point notes such as:
- Did you get my HUD offer?
- Has the BPO come back?
- Who has to sign off on this approval?
- This is my third communication I will loose the funding on this deal if you don’t give me an update!
- Are you going to get this approved?
- Also, I find the best time to call loss mitigation specialists, most days, is between 8:00 a.m. and 9:00 a.m. –in the lender’s local time zone. Ask them when is the best time to call them; and follow through!
In conclusion, the more times you speak to the lender’s loss mitigation people, the more skills you will develop in order to handle the most expedited answers to close the deal!
Don’t be shy, timid or intimidated when speaking with the bank. They are people just like you who are doing a job. Be friendly and courteous and you just might make a new acquaintance that can help you make a lot of money!
Thank you for letting me express my views and I sincerely hope it helps you in your real estate investing career whether it is full time or part time!