Is it possible to turn a foreclosure into a short sale?

10 Replies

I've been direct mail marketing to homeowners facing foreclosure, namely, those with the auction date already scheduled. I mail to anyone in my desired areas who is 30+ days out from auction, and follow up weekly until the week before auction. I've had a high call back percentage, with about 2-4 of 20 on an average list calling. The problem I keep running into is that there is just too much owed on the properties. There is not enough equity in any of these to make a deal happen (at least not the ones I've heard from).

My question is this: If a homeowner wants to sell to me versus letting their home go to auction, what are the chances that a bank will approve a short sale? So far, I haven't even suggested the idea to anyone, because I just don't know if it can work. I know the chances are slim, as by the time the sale is scheduled the bank has likely already paid the lawyer and does not stand to gain by allowing a short sale as opposed to letting the property go at auction, but I can't help but feel there's opportunity here.

Any ideas?

On a related note, has anyone had any success marketing to foreclosure leads (auction already scheduled)?

Yes, depending on borrower and account factors they may be approved for a short sale. There are ways to get sale dates postponed too. Yes, short sales can be great deals at times and they may move smoothly or not.

Disclaimer: Not an expert on this topic by any means.

My understanding is a short sale is the bank accepting less than is owed on the note to release their lien. Seller still owns property.

In foreclosure the bank has taken possession and is selling the property.

So, I’m not sure how you go backwards and short sell with owner that was foreclosed on.

Will be interested to see if this is incorrect.

@Kenneth Cowan I think it works a little differently than that. I don't think the bank necessarily takes possession as a result of a foreclosure. When a property is foreclosed, at least in my county in Ohio, it goes to Sheriff's auction, and the bank has the opportunity to bid on it just like anybody else, with the only real difference being that they have something like "store credit" for the amount of the lien they hold on the property (i.e.: say the house was foreclosed with a loan balance of $50k, the bank could bid up to $50k at auction without actually having to pay anything, since they are already owed $50k for the property.) If another bidder outbids the bank, the proceeds left over after the bank is paid off will go to the homeowner.

In a short sale, the bank agrees to forgive their lien on a property for a lesser amount than what is owed. I don't think they would release their lien and just let the homeowner keep the property no strings attached, though I have heard of strange situations like that. Under a short sale, a bank would agree to the lesser amount due to some circumstance such as the owner's inability to make payments. If it can be shown that the home couldn't reasonably be sold for an amount that would satisfy the lien (it's underwater), then the bank could allow the short sale to ease matters on both their books and the borrower.

Same disclaimer as you though..... I'm definitely not an expert on the matter.

@Josiah Stacy just to clarify, on a short sale my understanding is the bank doesn’t take ownership, seller sells to buyer for less than owed on note, bank consents and forgives the deficiency, seller is liable for the tax burden of that forgiveness. Didn’t mean to give idea that seller retains property. 

Will be interested to hear about the FC question though. 

@Josiah Stacy

Short sales usually are a lot of paperwork and take months (at least here in SoCal) and based on your timeline of less than 30 days, it seems very difficult unless you can get the auction date pushed back. Perhaps there is a quicker way like 'subject to'. I think @Account Closed can provide a better answer because he's helped lots of homeowners in pre-foreclosure and offers them at least 7 different solutions to their dilemma so he's dealt with this situation many times in the past.

@Kenneth Cowan , the question is about a property still in the foreclosure process, not after the auction.

@Josiah Stacy Yes, it is possible if the bank is willing And you have an experienced short sale agent. I did this as an agent many times. The agent will have to be quick, and have their act together. The property will be required to be listed in the MLS for usually a minimum of 5 days or so. I've taken them on up to 2 weeks before the auction. But I'd need a fair offer from a qualified buyer before a lender may agree to postpone the auction and if they didn't agree, we could go into court to get a postponement since our Foreclosures are judicial, if we presented a good case. Your local procedures will vary

Thanks @Wayne Brooks  makes sense.  I get now that this is all happening before the auction. interesting play. 

@Wayne Brooks Thanks for that information. What would typically constitute a fair offer in the bank/courts eyes? Would I just need a BPO that justifies an offer lower than the judgment amount?

@Josiah Stacy Well, a BPO provided by you may or may seem suspect.  Here we were a little lucky, the primary judges liked to use the property appraiser value as a reference which was a bit lower than market value. 

Originally posted by @Josiah Stacy :

@Wayne Brooks Thanks for that information. What would typically constitute a fair offer in the bank/courts eyes? Would I just need a BPO that justifies an offer lower than the judgment amount?

 If the bank were willing to entertain your short sale offer they would order their own BPO.   

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