Speed up the Short Sale Process

As we all know certainly the most appealing aspect of the pre-foreclosure business is the concept that lenders will take less than what is owed on a loan in default. Oddly enough, the tasks required to get a short sale approved can be the most unappealing duties we as investors must handle. So we have two choices: "A": Avoid Doing Short Sales, or option "B" Figure Out the Easiest Way to Complete this Process. I'm assuming, for illustrative purposes, we have all chosen option "B". Thus, lets begin some important observations about the short sale process:

I. Understanding the Concepts of Lender Discounting
II. The Components of a Short Sale Package
III. Preliminary Contact to Determine Feasibility of a Short Sale
IV. How to Fast Track Your Communications

I. Understanding the Concepts of Lender Discounting. 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 the following three concerns from the lender's perspective. Lender Concern number one:

1. Does the homeowner truly deserve a short sale?

2. Is it in the bank's best interest to take a short sale or repossess the house and sell through a realtor?

3. Are there any hidden factors, which might affect our ability to recoup a loss assuming a lender must repossess.

For example, I once negotiated a $20,000 discount on a first mortgage with "EquiCredit". The Lender had verbally approved my request from original loan balance of $148,000 to a discount of $128,000-not too shabby! Especially because the house value exceeded over $200,000. Just prior to faxing my approval letter the lender pulled the seller's credit and only to find a $90,000 Mercedes Benz being financed. Oops! I kind of felt like I got kicked in the shorts. Do you think they thought this guy deserved a discount? I never quite understood how this seller's Wal-Mart salary bought the car till I realized the math alone meant something had to be done.

To make matters worse payments on the Mercedes were current! As it turned out, I got the short sale once we proved the vehicle was co-signed for a sibling. The lender will always want to verify if the seller can truly not afford the house payments prior to justifying a short sale. Lender Concern number two:

Accept a short sale or repossess the property? Behind the decision to accept a short sale is heavily scrutinized values, repair costs, realtor commissions, and holding costs. Other mitigating factors have absolutely nothing to do with our world. Some of these factors include:

1. How many properties does the lender currently have in default?
2. How flexible is the investor backing this loan?
3. Is a third party servicing this loan?
4. What is the demeanor of the knucklehead in loss mitigation with whom you are dealing?

Don't expect a lender to accept a discount just because it sounds good to you. If the lender thinks they will get a higher payoff by taking back the house the lender will turn you down. Remember, on a second mortgage offering 10% of the mortgage balance is not unreasonable. That is a good starting point. If the second mortgage is instigating the foreclosure the 10% offer might have to be substantially increased. ALWAYS play with the lender's resistance and start the negotiation with low offers.

If the 1st mortgage lender gets a specific value from their appraisal or real estate broker (called a BPO), many times they will want the value of the BPO. There is an exception to this point, which leads into the next major lender concern:

Lender concern number three: What hidden factors might affect the lenders ability to recoup if the lender 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 ain't 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! (More on this topic later--)

II. The Components of A Short Sale Package. Not every lender requires a full-blown short sale package. A second Mortgage holder seldom requires the components of a short sale package. Be ready to generate the following items: From the most requested to the least requested:

A. "Short Sale Offer Letter" - make sure this is coming from you as the buyer; By the way, this is important: I submit my position as the buyer. NOT AN INVESTOR!

Lenders have gotten sick of dealing with "investors". Why? Because dummy investors don't understand the business. Those investors make the contact person in "Loss Mitigation Department" go through an approval, only to not be able to close the deal later. 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. Our "Mr. Preforeclosure" seminar goes through these exit strategies in detail.

A good "short sale' offer letter" should: SEE EXHIBIT "A"

1. Provide your contact info.
2. State your position in the transaction.
3. Clarify your intentions.
4. State your offer amount.
5. Give good solid reasons for why the short sale should be approved (Repairs, bankruptcy issues, seller is crazy, etc...).
6. Give a closing date when the lender will get paid.
7. 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).
8. Give an alternate way for this person to contact you other than your phone number!

(*Just a footnote: If at this point you do not have a fax with a 24/7 dedicated line it is advisable for you to consider going back to a job!)

B. 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 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"). It's your job to influence the lender's value to the lowest comparables possible.

C. The HUD-1 Settlement Statement (also called "net sheet").

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:

1. The buyer's name (you or your trustee)
2. Seller's name
3. Property address (you are buying)
4. State a closing date (at least 45 days from acceptance letter)
5. Show sales price (just over lender's payoff
6. Ernest money (always at least $500)
7. Where the funding is from (cash or loan)
8. Taxes being paid (call the tax department)
9. Lender information (how many points)
10. Insurance (approximate)
11. Closing agent's fee
12. Title search
13. Excise tax (call you registrar of deeds to get this)
14. 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. (See. HUD-1 Order form to fill out and fax to us we will process the order and have this piece of software shipped directly to you.)

D. The Financial Statement (of the borrower/seller):

Get this from the lender. It has to be on their particular form(s) and they will fax it to you, or the lender may require that it be sent directly to the seller.

E. Hardship Letter:

Tells who and how the seller got into financial trouble and conveys the basic message that the seller can't make payments they now have a great job or 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!

F. 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!

G. 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.

H. 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.

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"