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Short Sales

Short Sales

Short sales are the process of buying a property below the current mortgage balance pay off. A lender must be negotiated with to allow the lower payoff. It is the process of purchasing a property below the price of what the pay off balance of the mortgage would be. The investor must negotiate not only with the homeowner on the purchase of the property, but also with the lender for a reduced pay off. (i.e., the mortgage balance is $100,000, but the investor gets the property under contract for purchase with the homeowner for $65,000 and negotiates with the lender for a complete payoff of the $100,000 mortgage for $65,000.)

Individual service providers are individuals involved with the purchase and sale of real estate property who may have access or insight into properties in pre-foreclosure. Such service providers may include, but are not limited to, local contractors, property appraisers, property inspectors, city code officials, etc. You can check with the local deed of records office or the clerk of courts to determine if there is a specific process for the publication or notification of a pre-foreclosure. The series of dates at the bottom of a notice to sell listing gives the dates the notice of the trustee will appear in the publication that the trustee for the lender is using to publicize the trustee sale. This will reflect the process, how often and when the notice will be published.With the increase in foreclosures, lenders are reporting to the IRS the full amount of the mortgage versus just the unpaid balance or unpaid amount collected at the sale. Tom and Betty could be facing a 1099 of $100,000 which would lead to an IRS liability of $33,000 depending on their tax bracket.

Morale – This is probably the hardest hit area for the property owners. The experience of foreclosure, the letters they receive from lenders, and the calls they receive from collection departments and loss mitigation reps can be incredibly stressful, humiliating and degrading.

Future Ownership – A foreclosure on a borrower’s credit can be devastating, however, worse yet, are the judgments and liens that can result from the foreclosure process. It is difficult to have to work to repay debt related to a home or property you no longer live in or own. Not every state statute allows a deficiency judgment, however, an IRS tax lien for the amount not paid on the mortgage can be filed in any state.

The advantage of working with investors in the pre-foreclosure stage is that many times we can negotiate with the lender to waive their rights to a deficiency judgment. Another advantage is that oftentimes the lender does not follow through on the filing of the 1099. This can be a KEY.

Advantage of Over-Leveraged Properties

  • Hidden diamonds in the rough
  • Few investors are wanting them
  • Negotiating SS can be lengthy
  • Owners know they have no options
  • Owners are more motivated
  • Lien holders know they are on the losing end

Documenting the Problem

  • Hardship letter
  • Need to prove to the bank that there is no chance of the borrower catching up or meeting obligation
  • Letter should flow like a timetable
  • Proof should be included for each statement

Documenting the problem is the hardship letter. Investors may need to assist the borrower to write this letter. The hardship letter should contain complete details as to what lead up to the default as well as indication that the problem will continue or is unsolvable at the time. This will give the loss mitigation reps documentation to justify the short sale in the loan file. The hardship letter should flow like a timetable story. Proof should be included for each item mentioned in the hardship letter. The proof should be referenced as an appendix item in the file. The appendix should be at the back of the file submitted.

DOCUMENT THE PROPERTY

  • Gather your own rehab estimates
  • Do your own research on the property title or deed – don’t include it as part of your short sale package
  • Take pictures of the properties
  • Have your own BPO or CMA

Documenting the property is the final documentation portion in the initial package sent in. Document the title. Gather copies of any mortgages, liens or judgments or any other financial situations that would affect the home. We DO NOT INCLUDE them in the short sale package to the lender we are negotiating with, but we will need them to negotiate with those lenders or creditors as well. Unlike purchasing a foreclosure at a sheriff or trustee sale, in a short sale, all encumbered title issues come with the property unless cleared.

Consequences of Foreclosure to Lenders

The lender has a score that is monitored by the FDIC. It is similar to a borrower’s credit score. The lender determines a borrower’s credit worthiness according to their credit score. The lender faces similar scrutiny by the FDIC. The FDIC monitors and accredits lenders according to their CAMELS ratings. CAMELS ratings are explained in detail later in this training. How to use CAMELS ratings in negotiating your pre-foreclosures with lenders is also explored later. For now, we can suffice to say that lenders are concerned with the amount of foreclosures that are on their books. Their CAMELS ratings can be drastically affected on every level by a foreclosed loan.

A variety of marketing can be experimented with. You can determine what the best response is to your marketing. Trying several different forms of marketing will reveal what works best in your market.

The following are several different forms of pre-foreclosure marketing. Please feel free to try all or to initiate some marketing strategies of your own. It is important to point out that as we review the RESPA guidelines, Regulation Z, and Truth In Lending, that we never interpret law. We can, however, ask pertinent questions that can lead to leverage in our short sale package.

Lender’s FDIC CAMELS Ratings

The lender’s decision on your short sale package is going to be based on how the lender is going to take the least amount of loss to the bottom line of their financial statements. The lender will also be looking at what decision on this file is going to create the least amount of negative hits on their CAMELS ratings when this file is audited by the FDIC, as well as how it will affect the liability of the loan loss reserves funds.

CAMEL RATINGS are what the FDIC uses to “score” a bank. Ratings can be scored from one to five. One is the highest, while a three is a bank in crisis; when a bank starts receiving 5 ratings, they are close to being shut down. Banks are scored in six areas. A foreclosed loan hits all six areas. Foreclosed loans are usually targeted to be reviewed in a bank audit.

  • C – Capital Adequacy
  • A – Asset Quality
  • M – Management Practices
  • E – Earning Performance
  • L – Liquidity Position
  • S – Sensitivity to Market Risk

How Foreclosure Affects Banks

Foreclosures are not just negative on the borrower’s financial history. Foreclosures hurt lenders as well. Banks must make provisions for loans that end up in default. This is done through a loan-valuation process. This process consists of factors including allowances for loan losses, recognition of loan losses and provisions for the loan losses. The provisions must come out of current revenues which affect the amount of profit a bank can make. Provisions set aside are basically in a “loss” set aside – or unusable funds for the bank. Provisions are set aside for “future” losses.

Reporting on the banks results in the formulation of the loan loss reserves and the amount of funds which must be set aside. The bank's financial reporting comes from the bank auditing. Banks and lending institutions are required to have external audits to retain their ability to fund residential loans. Audits are overseen by regulators and done periodically with onsite evaluations.

Areas of Review

Takeaway

Big picture takeaway points

  1. Short Sales, unlike their name, are anything but short, but they can yield a huge return if you are patient.
  2. Short sale is a better option for a homeowner than the property going into foreclosure.
  3. With a short sale you are the go between with the homeowner and the lender to get the property at a lower price.

Reflection

Self-reflection questions to think more about the content

  1. Am I familiar with short sales? Read up on what the process is for a short sale, some hear the name and think it's an effortless process to acquire a property. It can be very beneficial but does take some time.
  2. Do I know someone that has done a short sale? Look at shadowing a pro on the process to better understand what the bank will be asking for.
  3. Is my power team in place? Have your power team set so they can give you accurate figures on what the rehab and resale value will be on the property.

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