Short Sales

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This is some information that was given to me and I thought I would pass it along.

How to Write a Contract for a Short Sale

Purchasing a distressed property for a discount directly from a lender - not the homeowner - is considered a short sale.
Often, there is little or no equity in properties that are in the foreclosure process because the homeowners owe Close to - If not more than - the value of the loans. In these cases, lenders will sometimes accept discountson mortgages to avoid potential foreclosures and bankruptcies
Banks and lending institutions don't like bad loans on their books. These organizations are not in the business of selling real estate. It may cost them considerably more time and money to sell these properties at the conclusion of the foreclosure process.
Therefore, if opportunities emerge in which lenders can sell distressed properties without registering big losses, they will do it.
For example, consider that a homeowner with a $200,000 mortgage is late on his or her loan payments and is facing foreclosure. With the consent of the homeowner, you offer his or her lender $180,000 as full payment for the loan, which is accepted. That means you instantly save $20,000 on a real estate investment.
This is a short sale.

Getting started
Negotiating a short sale with a lender can be complicated But with careful research and patience, it is possible for you to earn big profits with short sale deals.
The first step in this process is to identify potential investment opportunities. Be sure to work with an educated real estate professional that has completed the short sale process and can help guide you through the approval process.
To be most successful, we recommend your contract to be very "clean'. In other words, no contingencies and remove unrealistic dates that the lender cannot honor. A lender will accept a contract with a financing contingency, but be prepared to supply a pre-approval letter with specific information regarding your current financial situation. The lender will not accept a contract requiring the seller to provide financing assistance, such as points, pre-paids and or closing costs to be paid by the seller Also, the lender will not allow the seller to pay for home warranties or any inspections to the property. The lender is willing to allow the sale, providing the seller does not provide any financial assistance to the buyer.

Calling lenders
It's important to be very patient. When a lender allows a short sale, they are losing money. They will not cash in on mortgage insurance and will be losing a great deal of money The Loss Mitigation Dept is very busy, most departments have one lender representative that service 4-fj statss. It may take weeks to get an answer, but if the listing agent is educated in working with a short safe, it should not take more than two weeks before a BPO would be completed Final approval will take an additional 3-1 weeks, taking the complete process about 6 weeks. Once the final approval is given, the Lender will expect the property to close within 3-5 days.

Broker's Price Opinion (BPO)
Lenders generally hire local real estate brokers or appraisers to evaluate properties in the foreclosure process prior to selling them at public auction. These are referred to as a Broker's Price Opinion (BPO). Essentially, 3 Realtor® - based on the condition of the home and current market conditions - provides the lender with an estimate for the value of the property. The BPO is the key piece of information that a lender will rely on to make a decision regarding a short sale.
The lower the estimate, the better it is for you. Typically, ihe lender will order three BPOs. Your offer must be within the guidelines of these three BPOs. If your offer is lower, the bank will require your offer to be raised to fit within the BPOs high low range. This is why it is very important to work with an educated real estate professional in the short sale process. Lenders want to get rid of distressed properties as soon as possible, but they aren't going to self them for ridiculously low prices Many short sates, in (act, fall through if the BPOs come in too high. When properties are in good condition, it is hard to convince lenders that they are worth much less than the appraised values.

Hardship letter
Most lenders will request a hardship letter that details the reasons a homeowner has not made his or her mortgage payments. This is a bit strange because the borrower who is in default must prove that he or she is broke and unable to afford the payments.
This is a fairly extensive request, which may require the homeowner to submit pay stubs, tax records and other personal financial records, along with the letter. It is essential that you submit everything that is requested.
Otherwise, your offer will not be accepted.
Creating an effective and compelling hardship letter requires creativity. Without lying, the letter should paint a very bleak picture of She situation. If neither you nor the homeowner possesses decent writing skills, it may be in your collective best interests to seek the assistance of a professional - it's worth it.

HUD-1 settlement statement
A lender will generally require a written contract thai has been accepted by the homeowner. A preliminaryHUD-1 seltlemenl statement will reassure the lender that the homeowner isn't receiving any cash from the
The HUD-1 form requires you to itemize all charges imposed upon you and the homeowner for the real estatetransaction. Essentially, it is a complete list of the incoming and outgoing funds.The contract should be written so that the buyer pays all costs associated with the deal. And, that Ihe "net cash" to the homeowner is the precise amount of the short pay to Ihe lender.
It is important to use a title company who is familiar with the short sale process.

Reminders when writing a Short Sale Contract
1. No seller concession!, including a Home Warranty, points, pre-paids and/or closing costs
2. Seller must accept the terms before the contract is presented to the Lender (third party) for approval. Once the Seller accepts the terms, His property will be officially pending. Earnest money will be collected and the buyer is expected to complete due diligence. The contract will need to be approved with a contingency of final approval of theLender (third party)
3. the contract must contain a contingency that the contract Is contingent upon a third party approval. (This usually takes 3-6 weeks)
4. Be sure to allow enough time for theLender (third party) to perform due diligence before closing. A good rule of thumb is six weeks.
5. Ask the Listing Agent for a recommendation for a Title Company. A title company who Is proficient in short sales Is a must!
6. Inspections are fine and encouraged. However, the Lender (third party) will not pay for any repairs to the property. If the buyer request repairs, the negotiations will need to be outside the contract
7. Ask the Listing Agent If you need help writing an offer. The Listing Agent can meet directly with you and you client to prepare the offer. Ask if you need help!

Originally posted by "Ohio Realtor":
This is some information that was given to me and I thought I would pass it along.
How to Write a Contract for a Short Sale

Based on your information, almost everything that's been done on MY purchase of a short sale has been done incorrectly or incompletely.
And, I was to sign papers for a time extension yesterday--Friday--but still don't have them. My agent said she's done short sales, but her other words imply she doesn't have any idea what I'm talking about.
The seller agent isn't in a hurry to get the addendum (time extension) written, so as of now I apparently don't have any standing, and since I have no idea what the Brokers Price Opinion is, I don't want to make another offer. AFAIK there have been no other offers.
How do I find out what the Brokers Price opinion is? Does my agent ask the sellers agent? Is it in writing, so I know I'm not getting snowed?
How can I rescue this purchase?

I went through my agent on this offer of short sale, but what about others: should I approach the listing agent myself?

The BPO is confidential to the lender. They just want to make sure that they are not letting a property that is worth 400K go for 200K. If that is the case they will forclose and market the property close to FMV if as is almost always the case the BPOs all come back in a close range and the property is worth about what they lent on it you are flying clear.

By the way I closed one in January as the listing agent. Apraised at 180,000, loan was 162,000(90% on a refi). Payoff was 165,000 (lastes and legal fees). The lender accepted 105,000 and thanked me for doing a good job because we closed over trhe highest BPO.

If I would have thought that they would have taken 105 I would have bought it myself as the transaction was a purchase lease back until the county comes by and knocks it down. Road widening from 2 lanes to 5 and this house sits 15 feet off the road.

On a short you should always use your own agent. Get an agent who knows what they are though. I don't think anyone is trying to snow you as asset managers are busy now. The last one I listed had one asset manager for the state of Ohio and in January she had just over 50 closings the last week of the month.

Thanks. That helps, but I still don't know my standing, if any.
Seller pruchased in 2002 for 68,500.
At that time, that was the going price for the nenighborhood, I suppose, some higher, some lower. Over the boom of the last 3 years with prices doubling plus a bit, they've gone up to todays sales prices of $165-185, average days on market, 61.

Seller listed this at $167K, then 70 days later relisted at $152K
This house is a wreck, inside and out. Needs work on probably all systems except maybe roof. Needs3 bedrooms of floors, some in living room, kitchen and baths need work.
They have either had no offers, or none accepted, and none since I made my offer of 90K on the 73 day.
Then I find out the (supposed) mortgage amount is $158000. This is the worst house in the best neighborhood typr thing, and I would like it.

Am I right in thinking your suggestion at this point is to do no more, just wait them out, even though the date on MY offer has expired?
They let it die without a counter, and the only thing I have is seller agent verbal promise to my agent to get the time extension addendum to her so I can sign it.

Another question: How do the agents--listing and purchase agents--get paid if the offer is less than mortgage owed?

ofgift, your situation sounds identical to the situation I've been staring at for the last couple of months.

I'm watching now to see the advice you get.

Sadly, the owner I'm dealing with is in denial about his own financial bomb that is about to explode, and will not move on the house for another 6 months, which is too far away for me right now.

So, let me add some additional thoughts to what Ohio Realtor wrote. I'll give the caveat that I've not done this myself. However, this is a hot topic at our REIA, and we've had a lot of discussion on it recently, and had a day long seminar on the details of pulling it off. The presenters are all involved in various aspects of doing these transactions, including one person who does this for a living.

There are some other reasons a lender will do this. One is that a bad loan changes from an asset to a liability on the banks books. The more bad loans they have, the higher reserves they have to have in order to make new loans.

Many (most? a few? don't know) of these deals are done without ever having a realtor involved. The investor finds these deals with various forms of marketing. The "we buy houses" signs and car magnets. Ads to the same effect. Sending letters and postcards to people who have been notified they're in default. Knocking on doors.

Here in CO, this notice is called a "notice of election and demand" or NED. You can find them at the courthouse, or from various services. In my county, the county's decided to get their cut of the foreclosure game, and has their own service that will send you notifications and info, for a subscription fee.

Once you get a homeowner who's willing to let you work with them, you get a purchase contract with them. You also get the info on their lender(s) and get a limited power of attorney or similar document from the homeowner that gives you the ability to talk to the lender(s) on their behalf. You want to find out what they owe to anyone, including any judgements or other liens on the house. This is also your chance to have a careful look at the house, and get the first assessment of the repairs needed.

Now, when doing these contracts and forms, you must, must be knowledgable about your local laws. These vary a lot, and are very restrictive in some places. There are new laws here now that dictate a bunch of specific clauses that must be in the contracts and time limits when the homeowner can back out. Fonts and font sizes are dictated. Penalties for doing it wrong include prison time!

Documents need to be notarized. So, you'll either need to get the seller somewhere to get them notarized, or get a notary out to the house. This new law was caused largely by a single investor who was getting signatures and copies of drivers licenses and then getting them notarized after the fact.

Once you have the agreement to disclose, you contact the lender(s). You need to get in touch with the person who has the ability to make a decision about the property in question. You will likely have to provide the document that allows them to talk to you about the loan. They may have their own form. Finding the right person may be difficult.

Once you find the right person, you tell them, "I have a short sale package I need to provide to you, where do I send it?" That includes the contract, the hardship letter, justification for price, the HUD-1, and other stuff (hey, I already said I've not actually done this, yet.) Like Ohio Realtor says, it takes a long time to get a response. The hardship letter needs to show why the owner is not going to be able to pay any time soon. "I don't wanna" isn't going to fly with the lender. You need to show the lender what the value really is. The lender has most likely never seen the property. So, you need to provide pictures, estimates for repairs, pictures of the crack house next door, or any other relevant info the will justify the low price you're offering.

Don't expect the lender to help you with the process. They're a busy bunch these days. If you come off as a newbie who needs help, you're not going to get very far.

You need to be sure you work with anyone who has a loan, lien, or judgement against the property. So, a title seach may be needed to try to turn up these things. Otherwise, you can end up clearing the first mortgage, but have the property subject to other claims. Even worse, you could clear a second mortgage and end up with a property subject to its first. Verify everything the homeowner tells you.

Be sure the seller is aware the short sale removes the lien, mortgage or deed of trust from the property but does not eliminate their obligation. Even if the lender agrees to the short sales as "full and final payment", the seller may have a judgement recorded against them, or may receive a 1099 for the forgiven debt. Cover yourself by having a signed, notarized document where the seller acknowledges this. In a transaction like ofgift is discussing where realtors are involved, I would assume they would take care of some of these details. But, I would verify that so the seller doesn't come after you later for having cheated them out of their house and created a big tax bill. Full disclosure is essential.

Realize that most people are going to wait until the last minute to try to pull this off. In CO, its 45-60 days between when the NED is filed and the sale. The owner's are much more likely to want to talk a week before the sale than the day they get the notice. So, don't give up if they don't want to talk early in the process.

If you're going to turn around a flip this to another investor, you'll need a title company that will do the double close. Unless, that is, the lender will accept an assignment of contract. Not likely, from what I understand. Join your REIA or find other investors who can point you to a title company that will accomodate you.

Originally posted by "Wheatie":
So, let me add some additional thoughts to what Ohio Realtor wrote. I'll give the caveat that I've not done this myself. However, this is a hot topic at our REIA, and we've had a lot of discussion on it recently, and had a day long seminar on the details of pulling it off.

:crying: WOW! That's a LOT! They should have called it a LONG sale, lol.
Now I am relatively sure my agent has (had) NO idea of what a short sale is. I had no idea of what all one entails.
It's now Monday noon, and I still haven't heard aobout papers to sign.
I guess I'll chop wood for a while.

Chopping wood is good.
My agent called just now. She still hasn't heard from the seller agent, so SHE wrote the the time extension addendum. I'll sign it in a few hours.
She said she has a check list of the steps in a short salw, that the sellelr agent said ALL the paperwork has gone to the lender. So, with this additional time, maybe by the end of the month I'll have a new (old) house.
Think I'll go chop more wood :mrgreen:
Maybe we can get that price DOWN farther!

Any idea how a short sale works in Canada? I am talking to a distressed seller. He is on a 90 day payment plan and his property is close to foreclosure. His home is a bit of a wreck and he tried listing the property 3 times. Do I need an agent to help me make this work?

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