Newbie Short Sale Questions.

The property is in distress and needs 30K in repairs due to their tenants trashing it. I have been in good contact with the owners about purchasing the property for my business' office (zoned commercial/residential). Neither I or they have an agent. They want out (They have 2 other properties in distress and are looking at bankruptcy and cannot afford the payments), and are ready to give the property to the bank at the end of this month (March).

They bought the property for 158K in the summer of 07 and still owe 150K. I won't pick up the 150K with the amount of work needed so I suggested a short sale. Problem is I have never done a short sale so here are my questions:

1. Their concern is not having to pay the bank the difference but from what I have found, I can create an addendum that waives their obligations, correct? (if they accept it)
2. I think I have a good understanding of how the process works from reading here and various other sources but am I biting off more than I can chew as my first REI?

Any help is greatly appreciated.

Edited: 06/26/2010 at 07:34AM

Dave P.

Real Estate Consultant

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Mar 13 '09, 05:01 AM

I'm sorry to say it is not that simple Matt. It is not up to you to waive their obligation to pay back their original lien holders.

If you desire not to use an agent then you will either need to get written permission from them or convince them to take the lead and begin communication with the bank.

The bank will require that they submit a short sale packet and it will consist of the following (at a minimum):

-last two months of bank statements
-last two years tax returns
-last two pay stubs
-hardship letter
-etc...

The next step would be to enter into a written contract with the distressed seller with a purchase contract. This contract is for the amount that you are willing to pay for the property. This agreement is then forwarded to the bank and they will decide whether it is a deal worth taking or not. They do not have to allow the sale to go through.

They will hire an agent to conduct a broker price opinion. The purpose of the BPO is to determine "market value" of the property. If this value falls within their parameters, then they will take the deal. If it doesn't ,then they may or may not....depending on how good of negotiator you are.

Assuming you reach a deal with the bank, this does not necessarily mean that the seller is off the hook. The bank may or may not seek a deficiency judgment against the borrower...but that is a whole other topic.

Edited: 06/26/2010 at 07:34AM

Jon Holdman

Real Estate Investor · Wheat Ridge, Colorado

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Mar 13 '09, 05:14 AM

Even if you get the bank to not pursue a deficiency judgment, they will likely get stuck with a tax bill for the forgiven debt. Changes have been made to avoid this for principle residences under certain circumstances. But an investment property is very likely to generate a 1099 and the accompanying tax bill.

Edited: 06/26/2010 at 07:34AM

Jon Holdman, Flying Phoenix LLC

Tracy Venezia-Royce

Real Estate Investor · Phoenix, Arizona

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Mar 16 '09, 04:08 AM

If you're looking to purchase a property as a personal investment, being new to this, there are easier ways. There are enough REO's (homes the banks have already taken back) on the market at rock bottom prices you could potentially focus on, instead of dealing with the headache of going through a short sale.

There are also wholesalers (like ourselves) that have inventory that we already have short sale approvals on and are in prime re-sale condition.

My insight would be to do very very thorough due diligence, in whatever you decide to do. Now is not a favorable time for (new) investors to make assumptions or mistakes. Do your homework first and best of luck...now IS a great time to buy if you know your stuff.

Edited: 06/26/2010 at 07:35AM

Matt Gill

Excavation Contractor · Chehalis, Washington

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Mar 16 '09, 07:00 AM

Thanks for all the insight. I have decided to just wait the deal out (maybe pick it up as an REO) rather than stick my neck out there on this one. In the meantime, I will continue to educate myself.

Edited: 06/26/2010 at 07:36AM

Coretta Richmond

Wholesaler · Little Rock, Maumelle, Conway, Arkansas

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Sep 22 '09, 03:38 AM

Hello all! I am a newbie investor with experience in residentials only.

When doing a short sale on a commercial property, should I use my standard option contract (used for residential) or is there a different contract that should be used? I'm assuming the process is basically the same. What has worked best for you guys are which are your favorite banks to short commercial deals with? I have a prospective 4-story office building with Regions that I'd like to short and wholesale. Any advice would be greatly appreciated!

Edited: 06/26/2010 at 09:47AM

Scott Hubbard

Rehabber · Tucson, Arizona

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Sep 22 '09, 02:27 PM

Originally posted by Coretta Richmond

Hello all! I am a newbie investor with experience in residentials only.

When doing a short sale on a commercial property, should I use my standard option contract (used for residential) or is there a different contract that should be used? I'm assuming the process is basically the same. What has worked best for you guys are which are your favorite banks to short commercial deals with? I have a prospective 4-story office building with Regions that I'd like to short and wholesale. Any advice would be greatly appreciated!

You can use a letter of intent to purchase with a proof of funds and authorization to release. Personally, I would get these documents together and make some phone calls to the lender seeking out the loan portfolio manager handling this account. They will likely require additional documentation and will want to verify funds before they will even consider a short sale.

Ultimately, you will want to bring in an experienced attorney and title company unless you have purchased commercial properties before. If the property is distressed, then there are likely several liens or assesments which will need to be sorted out.

I have done one commercial short sale and it was quite a project. I had city, county assesments, an IRS lien to work through just to get to the seven mechanics liens. When you have liens on a short sale it is like found money if you can get the claimants to settle for less.

Good luck!

Edited: 06/26/2010 at 09:48AM

Coretta Richmond

Wholesaler · Little Rock, Maumelle, Conway, Arkansas

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Sep 23 '09, 04:35 AM

Thanks so much Scott for your input. I'll send that letter of intent, proof of funds letter, and ATR to the seller asap.

So I'd guess I should have a preliminary title search done to unveil any lien(s) on the property.

On a hunt now for an "experienced" RE attorney in Arkansas. Sadly enough, many that I've spoken with simply don't have a clue.

What documents should I request from the seller (ie. lease agreements, recent repairs or property disclosures, appraisal, etc.) since the property is partially leased?

I expect it to be quite a project, but I wouldn't mind as much if it turns out to be quite a return!!! LOL

Edited: 06/26/2010 at 09:48AM

Scott Hubbard

Rehabber · Tucson, Arizona

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Sep 23 '09, 10:41 AM

Originally posted by Coretta Richmond

Thanks so much Scott for your input. I'll send that letter of intent, proof of funds letter, and ATR to the seller asap.

So I'd guess I should have a preliminary title search done to unveil any lien(s) on the property.

On a hunt now for an "experienced" RE attorney in Arkansas. Sadly enough, many that I've spoken with simply don't have a clue.

What documents should I request from the seller (ie. lease agreements, recent repairs or property disclosures, appraisal, etc.) since the property is partially leased?

I expect it to be quite a project, but I wouldn't mind as much if it turns out to be quite a return!!! LOL

Your going to need the financials to show the property is not performing with a summation of vacancies, any non-performing tenants, leases coming due, lack of renewals, requests for rental reductions, etc.

If the owner is an individual as opposed to a group or partnership, you can also have him create a hardship letter provided he personally has one. Medical, divorce, loss of income, IRS etc. Incorporate bankruptcy into the letter if applicable.

If it is a partnership, some of the above may apply plus infighting, death, lawsuits, etc.

Good luck

Edited: 06/26/2010 at 09:48AM by Scott Hubbard