“The Short Sale”
Briefly, a “short sale” is negotiating with a mortgage holder (bank) to accept less than what is owed as payment in full.
A short sale is a strategy to use when there is a distressed homeowner who owes the bank close to or more than what the property is worth.
- Here is how it looks: The homeowner owes $200,000 to their first mortgage holder and the payments are in arrears. Their property is worth $200,000 in retail condition. With the proper negotiating strategies, we get the bank to accept $100,000 to $150,000 as payment in full. Purchasing a $200,000 retail property for 50% – 70% of its value is where we both are paid.
With proper negotiations, we take deals that most investors would pass on and turn them into amazing deals. Most of our happiest homeowners have come from deals that had no equity before we negotiated the Short Sale.
We take the time to build relationships within the banking industry. Building these relationships will ensure our success to help other homeowners like yourself.
Do not let anyone discourage you from working on a Short Sale. Work with us and we will provide the solution for your situation.
You Might Ask… Why Does The Bank Short Sale?
There are many reasons why banks accept a short sales. The main reason is because the payments are late and you, the homeowner, can prove that you can no longer afford the property.
- The property does not have to be in foreclosure for the bank to accept a short sale. Some banks require the foreclosure notice to be served, while others will accept a short sale when a few payments are late.
There is no specific number of payments that must be delinquent for the bank to open a short sale. Often homeowners will call us when they are not yet in default, but cannot make any more payments. In this case, we contact the bank on behalf of the homeowner (after you sign the Authorization To Release Information form) and let them know that you won’t be able to make any more payments and to open negotiations for a short sale before the payments are even late.
Let us look at a few more reasons why banks short sale:
- The mortgage is in arrears or foreclosure.
- The property is in poor condition.
- The homeowners have hardships and can no longer make payments.
- New homes in the area are being chosen over existing homes.
- The area or neighborhood has depreciated.
- The bank’s shareholders are concerned when there are too many defaulted loans on the books.
Banks have reports due at the end of each quarter. They are more inclined to accept short sales at the end of a quarter to “clean up their books.” The absolute best time to get short sales accepted quickly is the last quarter of the year. We have called banks on December 10th and been told the short sale would be accepted if we would close by the end of the month! Banks short sale faster in the last quarter.
- Some banks are required to keep a cash reserve of up to three times the retail value for each REO. REO means real estate owned. Once a property is taken by the bank at the foreclosure sale it is considered an REO. An REO is a liability, not an asset. Too many liabilities will cause any business to go under if not dealt with quickly.
It breaks down like this: The bank has a $200,000 property and is required to keep three times that amount as a cash reserve. This means the bank is sitting on $600,000 in un-lendable money. Imagine if the bank has 2,000 foreclosures across the nation! The homeowners could drag the foreclosure on for two years utilizing the bankruptcy system. Would it be better for the bank to sit on $600,000 for two years or accept a short sale today? The answer is obvious. The short sale is a relief for both parties.
- The area is crime ridden.
- The area is riddled with foreclosures proving a decline in the area.
- Many homeowners do not realize that the banks wholesale money. Banks borrow money from larger banks and lend it to you. These banks must show reports in order to borrow this money.
Think of it like a credit report: Every defaulter loan is like a bank mark on the credit report. The more foreclosures a bank is carrying, the riskier it appears. If you were a larger bank lending to a smaller bank, would you lend your money to the bank with more or fewer defaulted loans? Exactly… fewer! The bank needs to borrow this money as inexpensively as possible so that it can make money lending it to you.
As you can see, a short sale is often a welcome answer to a big problem. When the bank takes the short sale it can write the loss off and clean up the books before any reports are due.
As A Homeowner, Where Do You Begin?
There is a new “streamlined” HAFA (Home Affordable Foreclosure Alternatives) short sale process offered by the Federal Government which you may qualify for. HAFA promises short sale approval within 10 days and gives the seller $3,000 in cash at closing to help with moving expenses. But, because HAFA is a government-sponsored program, it’s a lot more complicated than that. To enter the program you first have to apply for a loan modification under HAMP (Home Affordable Modification Program) and then either fail to qualify for quite making payment after a modification has been approved. You then have to give the bank a deed in lieu of foreclosure (see Deed In Lieu of Foreclosure) that can be used by the bank if a successful short sale isn’t made. This can readily happen if the bank sets the price too high, which they tend to do or in the event other lien holders, such as a second mortgage holder or homeowner association, fails to agree to the short sale. In that event, you will end up losing the house and will not be paid the $3,000.
In most cases the best option is to have us (or another attorney) negotiate the short sale for you. It is important to realize that when submitting a short sale package, we are building a case. The better the case, the better the chance of getting it approved. With proper negotiations, we take deals that most investors would pass on and turn them into amazing deals. Most of our happiest homeowners have come from deals that had no equity.
Think of yourself as an attorney preparing for a court hearing. If the attorney shows up unprepared, the case will be lost.
Do you remember the OJ Simpson trial? Did you think he was guilty? If you think he is guilty, why do you think he walked away from a double murder charge? His attorney built a great case. His case was presented better than the prosecution’s case. Short sales are those same concept, the better the case, the better the deal.
Having done so many over the years, we know exactly what the banks are looking for. Before we submit your short sale package, let us look at an overview of what we are about to do for you:
- We are going to submit a total of three offers. Each offer will have a different focus and will be higher than the previous.
- The first offer will focus on your distress, the distress of the property, and the overall hardship of the situation. This will be our initial offer and our lowest.
- The second offer will focus on the distress of the neighborhood, crime, job losses, natural disasters, or whatever is happening in the area that decrease property value. In this offer, we will raise our initial offer to get closer to the number the bank countered at.
- The third offer is our highest and final offer. In this offer we will focus on the financial loss to the bank by denying our short sale. We will break down, step-by-step, how much the bank will actually lose, how long this will take, and will send a copy to the loss mitigation rep’s boss. This is called the LRR (Lender Recovery Rate).
The Short Sale process is a very complex. Most of the time, you cannot short sale your own home. If you could, everyone would. With this process, you need expert help and that is why we are here. If you choose this option, call me ASAP so we could get you on the road to financial recovery. Let us show you how we can short sale you mortgage, eliminate the bank, it’s is an ideal solution to your situation… everyone wins.
The Short Payoff versus The Short Sale
How is this different than the short sale? It also has to be done in a certain way. If you are an “underwater homeowner” – let’s say your house is worth $200,000 and you owe $210,000. Depending on your financial situation, you might try to negotiate a short payoff with your lender. In this scenario, the lender agrees to release the lien, their interest in the property, allowing it to be sold to a new buyer. The lender agrees to accept less than the amount owed on the property to release the lien, this is called a “short payoff.”
The only catch is the previous lender, the one that took the short payoff, will instruct you to sign a promissory note for the difference OR SOME of the difference agreeing to “pay off” this unsecured line of credit according to the terms of the promissory note.
The promissory note is an un-secured document that is basically, an IOU to the previous bank.
- You must be current on your mortgage payments.
- You must have good credit.
- You must be able to prove you have the ability to pay off the debt in a reasonable amount of time…. basically 3-5 years.
- You keep your good credit and can purchase another home or anything else you want.
- You never fall behind with your payments and never get your name in the paper, which can be embarrassing.
When is the best time for a “Short Sale?”
- You might request a short payoff when your home has lost value dramatically or even just enough to make it impossible to sell. This is the case with most of the underwater homeowners.
- You do not have the ability to pay the large amount to get completely out of the property.
Will all lenders do a “Short Payoff?”
No, not all lenders will; however, you will never know if you never ask. Remember, the advantage of a Short Payoff is that you are able to move out of your property and get on with your life. There SHOULD BE no negative impact on your credit. We help negotiate that in with the promissory note for you.
If for some reason down the line, you lose the ability to pay the promissory note, the credit ramifications to you are significantly smaller.
Call me for free advice at 210-777-0567.