The first mistake investors make when approaching a short sale is so prevalent that it deserves its own separate article.
What is this mistaken belief?
Bogus Belief #1: Short sales are quick and easy.
This belief is bogus because banks have a tedious process they have to go through in order to agree to a short sale. They also have to explain the huge loss on the deal to their shareholders, and they have a lot less interest in seeing the deal move quickly than either you or your seller. Short sales thus take an unusually long period of time to complete.
To avoid making the mistake of believing that short sales are quick and easy, you need to understand the process and plan your timetable accordingly.
Once you have the property under contract and go to the lender to negotiate a short payoff, a number of things have to happen. First, the lender will order an appraisal or Broker’s Price Opinion (BPO). The BPO is an informal appraisal done by a local real estate agent to give the lender some idea of what the actual value of the property is right now.
The lender will also ask for a hardship letter from the seller in addition to financial information (bank statements, tax returns and more) to prove to them that the seller really can’t pay. This step alone can take four to six weeks, and only after this step is completed will the lender start the process of negotiating with you.
Every offer and counteroffer has to be ground through the gears of the lender’s particular approval process. This means that every time you want to counter price or terms you can expect to wait a much longer period of time than if you were dealing only with a seller to get an answer.
And the secret reason short sales take an unusually long period of time to complete: loss mitigation officers are notorious for not returning calls or waiting for YOU to call THEM, even when they have the information you’ve been waiting for.
So even though you might only spend 10 hours of actual time on the deal, it can easily be two to three months before you’re able to get an acceptance of a deal with the bank. That’s why you should never put a firm closing date into a purchase contract where you’re going to be negotiating a short sale. Instead, write that you will close “30 days after acceptance of purchase price by lender.” Otherwise, your contract will expire a long time before the deal is finished.
But a second bogus belief also deserves its own separate article to explain.
Bogus Belief #2: Banks Lose Money on Short Sales.
In reality, banks lose MORE money by NOT letting investors buy the property before the foreclosure sale.
For example, the typical property that I buy needs an average of $15,000 of work to be worth its after-repaired value of about $100,000. Often, this property will be subject to a mortgage of $95,000, and the seller is usually two to three months behind in payments by the time he calls me. I will offer somewhere in the vicinity of $50,000 for this property, which means that the bank will “lose” $45,000 by taking my offer.
But if the bank decides to reject my offer and take the property to foreclosure, the bank then pays an attorney to file the paperwork, make the court appearances, search the title, notify the other lien holders of the foreclosure, go BACK to court when the borrower declares bankruptcy at the last minute, etc. Total legal fees: $5,000+.
In the meantime, the bank has $95,000 loaned out that’s NOT earning any interest, and according to federal regulations, has to keep 1-8 times the amount of the defaulted loan on deposit instead of loaning it out. Since the average foreclosure in my area takes about 9 months to complete, this means that for 9 months, the bank is losing 6% interest on over HALF A MILLION DOLLARS in depositor’s money. Total lost interest at 6%: $22,275.
When the bank buys back the property at the auction-which they will, since they’ll bid $95,000 on a house with an as-is value of $60,000-$70,000-they’ ll list it with a real estate agent for sale. When it DOES sell three months later for $70,000, they’ll pay the agent’s commission of 6%, all back taxes, plus the usual seller costs.
Three more months of lost interest: $7,000.
Agent’s commission on $70,000 sale: $4,200.
Transfer taxes, deed preparation, prorated property taxes etc: $1,500.
Total sale price: $70,000.
Total expenses: $39,975.
Net to bank: $30,025.
Selling to me for $50,000 and saving a year of hassle: priceless.
Bogus Belief #3: Seller bankruptcy stops foreclosure.
Many sellers seem to believe that if they declare bankruptcy, the lender can’t foreclose, allowing them to stay in the property forever without paying.
As the investor, this bogus belief makes trying to convince the seller to cooperate in a short sale difficult. Why would they want to sell if they think they can live free forever?
So it’s your job to be aware of this myth and inform the seller that bankruptcy actually DELAYS the sale for a number of months but does not stop foreclosure. This is therefore a critical fact to remember when talking to sellers in pre-foreclosure.
Bogus Belief #4: If the foreclosure auction is less than 6 weeks away, it’s too late to negotiate a short sale.
I used to believe this one myself. But that’s because I was making the mistake I warned you about in Bogus Belief #2. However, once I discovered that banks lose more money by not letting investors buy the property before the foreclosure sale, I realized that some lenders are actually willing to delay the auction in order to complete a short sale.
By attempting to negotiate a short sale even if the foreclosure auction is less than six weeks away, you’re helping the bank save money. And you’re helping the homeowner save his credit.
Bogus Belief #5: The seller can’t get any money if you’re not paying the bank in full.
This is true. Unless you are creative.
It is true that the seller can’t get any money for the sale of the PROPERTY that might appear on the closing statement. And this could be a deal-breaker for the seller who needs that $500 or $1000 in cash to move. Only there is a way to legally circumvent this dilemma.
Simply buy something else from the seller, such as appliances, furniture or any of his personal property you can use. Then put your purchase on a separate bill of sale, NOT on the closing statement.
It’s perfectly legal for the seller to get money, but keep in mind that it is impossible to get the bank to accept a short sale when there’s money for the seller listed on the purchase contract or the closing statement.
Most bankers realize you are probably giving the seller something to get out of the house. They just don’t want or need to know about it.