When a home owner finds themselves in a position of failing to meet mortgage payments, there is an option that does not include foreclosing on the home. A short sale is a home sale where the lender is willing to accept less than the amount owed on the home. While some lenders do not offer short sales for the loans they have secured, and other lenders may choose a foreclosure as being more financially beneficial for the loaning party, others will allow a homeowner to enter into a short sale if all paperwork is filed properly and on time.

The paperwork involved in setting a short sale in motion is the not so short part of the sale. For obtaining permission to begin the short sale process from a lender the homeowner will need the following documents.

• Letter of Authorization. The letter of authorization will need to include the property address, the loan reference number provided by the lender, the name of the home owner or the person holding the loan, the date of the request, and the agents name and address. The agent may be a real estate agent or a lawyer dealing with the financial matters in the case. The letter of authorization will give the lender permission to speak to any outside parties listed in regards to the homes loan and the home loan status.

• Preliminary net sheet. The preliminary net sheet is a financial document proving the amount of money you expect to receive from the sale of the home. The amount of the total sale, any fees, late charges, and real estate charges. The real estate firm handling the short sale will be able to address the preliminary net sheet. To ensure the approval of the short sale, the bottom line of the net sheet should show zero profits going to the seller of the home.

• Letter of hardship. This is one of the most important documents the homeowner will provide to the lender. This letter should read as real and honest as possible. If there are extenuating circumstances surrounding the sale of the home or the loss of income leading up to the late mortgage payments, the lender will need to know these facts in detail.

• Financial documentation. The lender will also need copies of all financial statements and proof of all income and debt. These statements will include assets, income, bank statements, credit card statements and any monetary statements available at the time of the short sale request. Financial statements that prove the homeowner is not in debt will cause the lender to instantly deny the short sale.

• Purchase agreement. The lender will want the listing agreement and purchase agreement agreed upon by the seller of the home and the buyer of the home. The lender has the right to refuse any and all payments in association with the sale of the home that are not required by law. These may include inspections of the home and home protection plans, depending upon the laws of the state.

A short sale will be highly followed by the lending institution. While this sale will certainly remove the burden of an over expensive mortgage from the homeowner, it will leave that homeowner in the hands of the lender. At any time during the short sale proceedings, the lender can choose to remove the authorization and simply foreclose on the home.

Short Sales

Often times when talking with a Seller they ask, “Why would a lender agree to a short sale?” The short answer is, “It’s in the lender’s best interest.”

Whenever a borrower stops paying on a mortgage that loan becomes what the lender calls a “non-performing asset.” It’s a liability. It is money on which they are earning no interest and what’s worse is that they must now put back up to eight times that amount in reserve. This is additional monies on which they earn no interest.

Since earning money is what they are in business for, the lender stands to lose less money by accepting a short sale. Then they can put the money back into circulation to earn even more money.

A study conducted in 2002 by Craig Focardi of the Tower Group estimated the entire costs of a foreclosure to the lender was $58,759 and took 18 months. You can understand why the loss of a short sale is less than the cost of foreclosure.

If the lender takes the property through foreclosure that property becomes bank owned. You have heard properties described as REO. That stands for real estate owned. The more REO properties held by the lender the worse it looks for the lender and the more reserves they must carry.

Bank owned property is a headache for the lender. Now they have to cope with property maintenance, utilities, and HOA fees. They then must list the property with a Realtor® and pay a commission. They also must insure the property and deal with the possibility of vandalism by the previous owner or others.

If I am current with my mortgage, will the lender consider a short sale?

Most lenders will NOT accept a short sale unless the borrower is delinquent. If you are only one payment behind you may only be able to speak to customer service or the collection department.

In this declining market some lenders are considering a short sale even if the borrower is current with their payments. If the borrower can demonstrate a true hardship and show the inability to make future payments, some lenders are open to negotiation.

In my next article about short sales I’ll discuss the Hardship Test.

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For those of you who are new to the Short Sale arena or new to real estate investment, let’s first define what a “short sale” is and what it’s SUPPOSED to accomplish. A short sale is the process of negotiating with a Mortgage Lender to convince them to accept less than the Homeowner’s mortgage balance as payment in full for the property in order to prevent foreclosure, eliminate the nonperforming loan from the Lender’s balance sheet, and allow savvy real estate investors to profit from purchasing property below market value. A Short Sale is generally a great strategy to use when a Homeowner is behind on their payments and owes close to or more than what the property is actually worth. The state of being “Upside Down” (Debt > Equity) is the ideal situation when targeting short sale candidates and getting these deals done successfully on a consistent basis.

Negotiating a short sale is SUPPOSED to help the Lender and the Homeowner in default by preventing the foreclosure, wiping the slate clean for the Homeowner, and providing that Homeowner with an opportunity for a fresh start–and providing the investor with a substantial discount vs. Fair Market Value (FMV) to earn a reasonable profit on the immediate sale or on a fix & flip sale down the road. However, it doesn’t always work out that way. Experience has taught me that these 3 Key Factors are HUGE components of the harsh reality you can expect throughout the short sale negotiation & completion process.

KEY SHORT SALE FACTOR #1:

In spite of the reality that we’re in the midst of a tremendous foreclosure tsunami, some Lenders are still irrational and downright idiotic in their decision-making process. Case & Point: GMAC will only accept short sales that come in @ 90~100% of fair market value (FMV). So, they’ve effectively taken the “short” out of “short sale”! Now ain’t that just dandy? OK, time to whip out your calculators and see how much profit we real estate investors can bang out buying short sales @ 95% of FMV. Hello! Time for a reality check!

KEY SHORT SALE FACTOR #2:

Regardless of the fact that we always include a line item on our Purchase & Sales Agreement (PSA) stating: “This offer is contingent upon Buyer arranging for [Lender] to accept $________ as full payment WITHOUT pursuit of a deficiency judgment against Seller for the mortgage that Mortgagee holds on the Property”, some Lenders completely IGNORE that contractual line item. For example, HSBC is notorious for NOT waiving deficiency judgments.

Buried among the standard jargon on HSBC’s short sale acceptance letter is “HSBC Mortgage Services will retain the note on this loan. The customer shall be responsible for any deficiency remaining on the balance. All terms of the original note shall remain in force.” Wait a minute! So, HSBC agrees to do the short sale so long as they don’t end up short? They’ll discount their lien as long as they get the whole thing!? Wow! What a deal! The bottom line is that after you’ve painstakingly negotiated to get HSBC to agree to accept a short sale you realize that you’ve been hoodwinked because the deal is contingent upon the fact that it’s NOT really a short sale at all. Welcome to Crazy World!

The slick tactic here is that HSBC is making a brazen attempt to get your clients to bind themselves contractually to pay the deficiency as part of this “short sale” (ya know, the kind where they’d still owe ‘em everything). C’mon guys! We’ve gotta stand firm and do like Nancy Reagan on this one–JUST SAY “NO”! In spite of the existence of less-than cooperative Lenders with unhealthy attitudes, this HAS to become the Golden Age of Short Sales because Lenders simply can NOT keep being idiots and stockpiling REOs in perpetuity. Something’s gotta give!

KEY FACTOR #3:

There’s one document that none of my colleagues ever seem to include in their short sale packages perhaps because I’ve never seen it on the documentation list of HOW TO DO SHORT SALE programs. Since that document didn’t exist, I just had to invent what I call the Offer Price Determination (OPD), which basically walks the Lender through the process of exactly how we’ve determined our offer price. A sample of our unique, Radiant Properties OPD is available to you for FREE on our website, with which I’ll provide you below.

For those of us who’ve endured the short sale process, we’re aware that influencing the BPO (Broker’s Price Opinion) is perhaps THE most critical aspect of getting our short sale offer accepted and closing the deal. When I personally meet the BPO Broker at the subject property, I hand her or him the BPO Packet that I’ve carefully prepared just for them. That BPO Packet generally includes:

Comps @ or near our offer price Detailed Rehab/Repair Estimate Homeowner/Seller’s Hardship Letter PSA OPD

For many of you, the mounds of required documentation is the scariest aspect of short sales. To alleviate that fear, Real Estate Profit Pro (REPP), an indispensable tool created & developed by my mentor, friend, and confidant–mega successful real Estate Investor, GERALD ROMINE is THE system that all PROFESSIONAL real estate investors should use to quickly & efficiently prepare short sale paperwork AUTOMATICALLY. So when the foreclosure glut causes the mortgage industry to implode (more acutely than it already has) as a result of the Lenders’ own greed & lack of foresight, since YOU will have access to this information and powerful tools like Real Estate Profit Pro, you’ll be fully prepared to swoop in, clean up the bloody mess, then reap your profits using REPP–your powerful secret weapon to complete massive short sale packages in just minutes!

When you’ve made the wise decision to have REPP & real estate investment superstar Gerald Romine on your side, you too will be armed & ready to locate & complete the REAL Deals with the Lenders that will eventually be FORCED to become flexible enough to work with you to help them put an end to the foreclosure glut and CREATE WINNING SITUATIONS for Homeowners, Lenders, YOU, and your real estate investment business!

Since many Lenders are still in SERIOUS denial about this foreclosure mess that THEY created, realistically, some short sales will work–others won’t. So, the idea is to be sure to have a system in place to analyze deals and make offers quickly. Since I’ve been fortunate enough to have direct access to Gerald Romine and Real Estate Profit Pro since my very first real estate investment deal, I must admit that I’ve been operating at a tremendously unfair advantage vs. my competition. The GREAT NEWS is that when you visit the Radiant Properties website, you too can access this powerful REPP unfair advantage!

When you arrive at the Radiant Properties website, just look on the left menu, then click on the link to check it out. While you’re there, you can also click on the menu link to get your FREE sample of our unique, proprietary Offer Price Determination document that will MAKE YOU MONEY by giving you an unfair advantage over your competitors within the short sale investment arena. When you apply this new knowledge and Real Estate Profit Pro to your real estate investment business, you’ll certainly notice the difference in your bottom line soon enough. Since we intend to include the OPD worksheet in an upcoming short sale system that will soon be FOR SALE, the OPD Sample will only be available for FREE on our site for a VERY limited timeframe. So you’d be wise to hurry!

Finally, now that you’re fully aware of these 3 Key Factors Gurus NEVER Tell You About HOW TO DO SHORT SALES, just visit our Radiant Properties website listed below, get the REPP and FREE OPD info you need, then go negotiate & CLOSE a PROFITABLE short sale deal! Short sales aren’t easy, but you can successfully close these deals on a consistent basis–when you have the right tools…

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As an investor and a coach I am getting more and more questions concerning short sales with banks. I get as many questions as a realtor by regular clients as well.

There’s a lot of confusion out there regarding the bank’s decision to take a discount or not and then – if they do – how much will they take?

The market in most areas has simply sunk below what is due on many home owners’ loans. As a result, there are a number of variables that go into a lender’s decision about whether to discount a loan and then, of course, how much discount they’ll take. Now, I know most of us think – heck, why won’t they take simply what the home is worth and be happy with that rather than having to foreclose on the property to eventually get to that point anyway?

Whether you are an investor or a home owner, please understand that there is some basic preparation you can and should do before the lender will even discuss a short sale with you.

• A signed purchase agreement

• A letter of permission from the seller allowing the bank to discuss the loan with you as investor or realtor.

• Make sure that you’re talking to the right person at the right bank-sometimes the place that the seller is sending his payments is not the lender at all, but just a loan servicer. On top of that, if it is the bank, the person answering the phone for your payment typically has no decision authority. There’s typically one person within a given bank or lending entity who has the authority to take offers, so discussing your offer with anyone else is could prove to be a total waste of time.

• The attorney handling the foreclosure – if in fact it made it that far – has nothing to do with this short sale typically so don’t waste your time there.

• On that note above, where is the loan in the foreclosure process. If the borrower is just a few months behind-or if the auction is happening in 3 days-the bank might not be terribly motivated to take a major discount. They may assume, for example, that they can work out a payoff with the owner and if not, they may have already invested a great deal of money in legal fees, and may feel that it’s better to take their chances on getting the property back and reselling it on the open market. I know to most that doesn’t make sense due to the market being in what I call a trailing downtrend, but that’s reality.

• What condition is the property in? Most lenders are hesitant to take back a property that needs major work or that has code violations. I always tell clients, the uglier it is, the better the chance that the lender will entertain your offer

• The lender’s position as creditor is very important. Are they in 1st, 2nd or 3rd. The latter two are usually much more willing to discount-and discount much more than a 1st mortgagor would. Think about it: the seller may have no equity thanks to a 80% 1st mortgage and a 15% 2nd, but the 1st mortgagor has 20% equity if he or she has to take the property back.

• The requirements of the lender’s private mortgage insurance company or of FHA and VA insurance can also influence its decision.

• How is the housing market at the point in time you’re dealing with this deal?

• Rules and regulations by state – make sure you speak with a competent attorney in this area.

• Number of bad loans the bank is dealing with already.

• What is the likelihood that the owner will declare bankruptcy

Now, what if you get through all this and do all this investigatory work and the bank still says NO.

Please go into this deal or client relationship realizing that you’re only going to get about 60%-75% of your short sales accepted. Don’t take any of this personally. It’s simply a numbers game and if you know that going in you won’t be frustrated when 6 or 7 out of 10 go through and the others fall apart.

The bank may say no for several reasons: high BPO, an inexperienced loss mitigation rep, or possibly a foreclosure sale date that is just days away. One of the most common reasons the bank will say no is because the BPO came in too high and the bank feels the property is worth more than it actually is.

Before we go further, let’s define what BPO is? It means “Broker’s Price Opinion.” When a short sale package is submitted, the bank will send a real estate agent or Broker to the property to judge its value. When I was an active agent, I would get these requests. Many times the BPO is simply a drive by. To insure a low BPO – an accurate BPO, I strongly urge you to meet the agent at the property with your own comparables and a complete short sale package. In addition to comps for the agent, give copies of pictures, list of repairs documented by a contractor on their letter head, and walk the agent through the house room-by-room. Usually, agents and appraisers are asked to value properties at the high end of the scale. Most homeowners trying to purchase a home need top value in order to qualify for the loan. Therefore, it is unusual to ask for low numbers. This is why I like to meet the agent at the property; without doing that it’s very tough to expect them to see the true picture.

If the bank said no because of the BPO, your first step is to challenge it and request a second opinion. My suggested script for you with the loss mitigation department would sound like this: “My friend (or “I am”, or “An appraiser said…”)is an agent that works specifically in this neighborhood. I think your BPO might be sending you in the wrong direction. It would be a shame for your bank to take the property at auction, only to lose money. Why don’t we do the right thing and schedule a second BPO. I’m sure if you choose someone who actually works this neighborhood, that person will agree with me that the property is only worth what I’m finding out to be it’s true value. Your bank is not in the business of losing money, is it? I didn’t think so. When is the best time to schedule another BPO, today or tomorrow at 5:00?”

Your bottom line goal here is to insert doubt in the mind of the loss mitigator and the fear that they may be wrong in their company’s eyes if they don’t reconsider. Once you schedule a second BPO, run through the above steps again.

If, after a second BPO, you still can’t get the bank to see it your way, what should you do? PASS and take pleasure in saying NEXT. I tell investors in our training program (www.R-E-A-N.com) the same thing I tell realtors I train: put enough deals in the funnel and you won’t be attached to any of them.

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Of course they do. The real question that people facing this question really want to know is, “How bad do short sales hurt your credit?” The answer to that question is not simple. It depends on a wide variety of influencing factors to include, number of missed payments, credit score before mortgage delinquency, lender policy, and other credit factors. To be comprehensive, this article will focus on the two real issues that borrowers facing foreclosure should be concerned with: their credit score and their ability to get a home mortgage in the future. These are two completely separate issues that are commonly confused when this discussion occurs.

With regards to credit scoring, their are two main factors that affect a delinquent borrower’s credit score. The first factor is the accumulation of missed mortgage payments. Credit agencies do not view missed mortgage payments in favorable light. After a payment is 30 days passed its’ “due” date, it gets reported as a 30 day late. After the payment is 60 days late, it becomes a 60 day late, and so on. The more delinquent the payment, the more is hurts the credit score. Here is the part that most people do not realize, a 120 day late payment gets factored the same as a foreclosure. Yep, you read that correctly. I will write it one more time, a 120 day late payment is scored the same as a foreclosure. It gets recorded as a Score Reasoning Code 22, serious late or delinquent account. There is no specific reason coding for foreclosures, short sales, deeds in lieu of foreclosure, etc…They are all treated the same. The reasoning is that a late payment is considered a default because it has not been paid as agreed.

A corresponding but separate issue for challenged borrowers to consider is their future ability to get a new loan. The majority of loans are written in order to comply with Fannie Mae guide lines. This allows the new loans to be sold to investors, and thus makes them “liquid”. Historically, Fannie Mae did not differentiate between foreclosures and short sales. They were both considered situations in which the borrower did not repay the loan as agreed. Therefore, Fannie Mae required borrowers with a foreclosure or short sale in their history to have these closed accounts “seasoned” for four years before becoming eligible for a new loan. In other words, in addition to repairing their credit the borrowers were sent into a type of mortgage “time out” for four years until they could get a new loan.

In June of 2008, Fannie Mae issued new guide-lines which formally recognized that short sales are in fact different than foreclosures. The new rules stipulated that those with a foreclosure in their past had to wait five years before getting a new loan, while those with a short sale have to wait two years before getting a loan. This measure will go to great lengths to incentify borrowers to seek an agreeable solution to foreclosure with their lenders.

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