How can I create a win win for a pre-foreclosure?

20 Replies

I'm trying to gain a deeper understand on how deals are typically put together with individuals that are going through a pre-foreclosure. I'm grasping the concept on how to reach them but not sure how to create a win win situation? For example it seems as if most of the "deals" that I'm finding are similar to the below example: 

-Current Home Value- $250,000

-What the individual owes on the mortgage- $300,000

Wouldn't this individual be stuck? Would it just be better for me to wait for the home to be auctioned off and purchase it at the courthouse? Thank you all for any help and guidance you can provide! 

In situations where the homeowner owes more than the property is worth, you could buy it as a short sale. In this situation, the homeowner’s lender would need to approve the sale and allow the homeowner to sell the property for less than what is owed. It’s beneficial for the homeowner because they can avoid foreclosure, it’s beneficial for the buyer if they’re willing to wait through the review and approval process, and it’s beneficial for the bank who (although they’re still losing money) they’re getting a settlement instead of going thru the whole foreclosure process to probably get even less at foreclosure sale.

Thank you Alexis for the advice! How long does a typical short sale process take? Do banks find value and help speed up the process if the borrower has a purchaser lined up?... I'm sure that this is a rather loaded question but wanting to gain a deeper understanding before I approach someone that's in distress. 

Short sales are better than foreclosures for multiple reasons for many borrowers, without elaborating too much on each reason see below:

  • Less credit impact
  • Reduce liabilities potentially for deficiency judgment. 
  • Reduce potential tax liabilities
  • Potentially get relocation money
  • Increase chances of foreclosure postponement

etc

Originally posted by @Eric Drum :

Thank you Alexis for the advice! How long does a typical short sale process take? Do banks find value and help speed up the process if the borrower has a purchaser lined up?... I'm sure that this is a rather loaded question but wanting to gain a deeper understanding before I approach someone that's in distress. 

By Federal rule, it's supposed to be 30 days maximum. That assumes all parties are doing what they are supposed to do, when they are supposed to do it, they way they are supposed to do it. It rarely happens that way so, it's rarely 30 days. Usually more.

No, banks don't find value and it doesn't speed up the process if the borrower has a purchase lined up. That's where things start to go south quickly. The property has to be listed on the open market, through the MLS, and open to all eligible buyers.

@Eric Drum As a buyer of non-performing notes, short sales are rare for us because most borrowers aren't interested. We find that a lot of our borrowers are trying to stay in their houses for the longest time possible while paying the minimum amount necessary. This minimum amount doesn't all go to us necessarily, especially when the borrower files Ch 13 BK. 

I would suggest not wasting time on these types of borrowers. Why should they short sale their house for a few thousand bucks when they can stay for 12 months without paying any rent? Typically, these borrowers have trashed credit and don't seem to mind adding a foreclosure or BK.

You're probably best off focusing on the ones that would benefit for the reasons described in the above posts. There are a few borrowers out there like that.....

I agree with the other posts about having the house listed on the MLS for maximum exposure. We'd want to have the best chance of recovering as much of the loan as is possible.

Thank you Andreas, Ron and Brett for the additional information and insight! So, I'm curious how do the companies like "We buy ugly houses" or we pay "cash for your house" or when people say they do direct mailers work? Is this somewhat the same concept? Do they tend to look for someone that's distressed and yet owes less on the home than what it's worth. Would they be looking for someone like the below example:

-Current Home Value- $300,000

-What the individual owes on the mortgage- $250,000

Thank you all for the help! 

@Eric Drum hey Eric, HomeVestors “We Buy Ugly Houses” guy here and your correct our model is based discounted sale and often distressed owner.  Not uncommon for us to come across leads that owe too much for us, or any investor, to assist at a cash price and other investors may imploy  “subject to” in order to make something of the property.  That’s not our business model at all though, we look for discounted sale on a property we can fix and flip, hold for rental or assigning/wholesale to another investor.

@Eric Drum

Hi Eric. I'm also a HomeVestors franchisee. One of the mantras we teach is to "never think for the seller". Both before becoming a franchise and now since becoming a franchise, we have purchased plenty of houses where the seller owed more on their mortgage than we offer. What does the seller do? They come to closing with money. And don't assume they can't. Ask any closing attorney how often sellers come to closing with money and you'll be amazed. They have their own money, retirement funds, families step in to help, etc, etc.

All I do is figure out what I can offer on any deal. That's the only number I worry about. If the seller agrees, we have a deal. If they don't or can't, we part as friends and I'm always available to offer my assistance to them in the sales process whether they sell to me or to someone else. But I have purchased a lot of properties where the seller brings money to closing so don't "assume" that someone upside down on a mortgage can't or won't do that.

And I never follow a property that goes to short-sale, foreclosure, any situation where banks or additional competition buyers are involved. I only want deals where I can speak directly with the seller and that's where I get the best prices by far.

Thanks for asking and good luck to you!

Well said @Karen Rittenhouse I know that I had to actually see it to believe it and very hesitant to write offers when the seller owed more than we were in a position to pay. I have learned to trust in what we can offer and let the seller make the decision as to what they want to do. I cannot believe some of the numbers that I have seen folks come to closing with and they are very happy to do the transaction. We always want to be sure that we are either hand-shacking or giving out hugs at closing for a win/win. If that is not the case for either party then we just won't do the deal. The seller is in control of deciding what they would like to do. I will no longer attempt to assume or try to anticipate what is best for them. 

Absolutely, @Eddie Sorrell . My only concern is my number, my business. I have NO idea what is truly going on in the life of my seller. I talk openly and honestly about what I can do and why. They make their decision based on a lot of things out of my control. 

And I always make an offer - because, why not?

Thanks for responding!

@Karen Rittenhouse @Jeffrey Hotz @Eddie Sorrell  I have a quick question about this topic that originated from @Eric Drum . For an investor that is inexperienced with dealing with short sales, would you suggest they bring in an experienced agent to help facilitate the process? Also, if the investor would still like to pursue the property, would they first agree to terms with the buy and put the property under contract first and then contact an agent or contact an agent first?

Thank you. 

I buy 60 houses a year. I don't use agents. Properties on the MLS typically do not make good wholesale deals because they're too expensive. But you need to do a lot of marketing to find deals on your own.

And short sales involve working with banks which is also costly and time consuming. Probably too difficult for someone with no experience.

When it comes to short sales, banks are the one who decides. There is not really any "Sliding in and giving a lowball offer that the bank just accepts". Banks are in the business to make money. So part of the standard process for a short sale is they expect it to be on the market. Why? Because they want to make sure if they are taking a bath on it, they are taking the one with the smallest downside. Most times even when it is on the market, the bank drags their feet in case something better comes in. In which case they just disapprove what is there and go with the new one.

There is a game to play in short sales, but it takes alot of time, money and losing 9 out of 10 you are under contract with, 7 months after it was supposed to have closed. It also sounded like you were working on assigning a short sale? If that is the case, don't even bother. Most banks require their contract for a short sale and it is already heavily in their favor. Trying to add an assign-ability clause is not likely.

Good Luck!

@Karen Rittenhouse Thanks for the response. So if you receive a response through marketing from a seller in pre-foreclosure that happens to be a candidate for a short sale, do you just point them in the direction of an agent (just to at least help them) if the current amount they owe would not work for you?

@Mike Cumbie thanks. I wouldn’t necessarily be looking to assign the contract. I am trying to figure out the best way to help a seller and the order of how things should go if I was to figure out a price that would work for me. I do understand what you are saying and it appears to be a  hassle and possibly a big consumer of time. 

Many agents won't even work with short sales. You go through the whole dog and pony show, fill out extra paperwork, talk your buyer off a cliff for 6 months while the bank waits. Then when it all falls apart (because the bank said... nevermind) the client only remembers your face. When they are running around town retelling the horror story, who is everyone associating with the failure? Yup you guessed it, the agent. It's not a good way to build a referral business. 

Greeting everyone. I'm in the Los Angeles area and with the explosion of growth and and out of state investors in the area can anyone suggest some ways I can best find deals in a crowded market.

Thanks Lee