What the hell is a "short sale" or "short payoff"? In this blog I will refer to the process as a short sale because that is what most real estate investors and professionals that do them refer to them as, even though some banks call them a short payoff. In short (get it, short?) it is the process of negotiating with a bank that has a loan in default or behind on payments to accept less money than what is owed. Is this really possible? Will a bank really accept less than what is owed? The answer is a big YES, YES, YES, and you would too if you were the bank. Here is how it works and why.
Here is why a bank or mortgage lender will some of the time accept a short sale with little to no resistance.
#1. The asset (mortgage, note, equity loan) is considered non-performing. Basically when a homeowner isn't paying, the bank or subsequent stock holder or investor who owns the loan isn't getting paid so they are making nothing on the money lent out. No interest, dividends or whatever you want to call them. This is a big no no. No money coming in = unhappy investor = big bank problem, solution, short sale.
#2. It costs a lot of money to foreclose on a loan. Not only is the bank not making money on their non liquid asset, they have to pay expensive attorneys to file papers and in essence begin a lawsuit against their homeowner. They also will pay the attorney to go to the auction to buy it back for the bank and then they will pay to evict the "squatter" which is what the homeowner will become after an auction or sale. This can amount to tens of thousands of dollars and a short sale can prevent this.
#3. If the bank has too many loans foreclosed on they can lose their right to lend money. It also shakes up the investors who buy stock in the company or the pools of investors who buy mortgage loans (e.g. enormous sub prime mess that is the mortgage industry right now 2008). Also, if the bank posts too many losses it can eventually lead to financial collapse and bankruptcy. Short sales are all too attractive at this point for the bank.
The following is a brief summary of how a short sale goes down. If you are really interested in doing short sales you can get the basics from this blog and then jump into the fire. The only way to really learn is by doing in this case. There are some really good resources for learning short sales but at this point I have no solid recommendation.
#1. Find a short sale candidate. In my previous blog "How to Find Motivated Home Sellers" I mentioned many ways people find motivated home sellers. Some work better than others and with short sales you basically need to find homeowners who have little or no equity, no alternative to foreclosure and are willing to take a chance. Make no mistake; a short sale should almost always be attempted when the homeowner has no other choice. It is a great alternative to foreclosure and bankruptcy.
#2. Get an authorization to release information. Wow, it sounds like a really complicated thing right? Not quite, this is just a piece of paper that states that the homeowner(s) are allowing you or your company to access information on the loan. You will need this to contact the bank and get the ball rolling. A word document with their name, address, loan #, social security #, date and signature is sufficient. Some banks have their own they want used so get one from them and copy it and use it for your other deals.
#3. Get a mortgage statement from the homeowner with the account # and balance owed. The balance will be an approximate because the bank will no doubt have added attorney's fees and late fees not on the statement. The homeowner many times owes thousands more than they think.
#4. Call the bank. This can be a hard part; you may sit on hold for as much as an hour. It takes immense amounts of patience and it can be very hard to not tell the person who finally answers the phone just how you feel about their hold policy, you must resist. When they do answer, ask to speak with the loss mitigation department or whoever can give you their requirements for a short sale package. Have them fax or mail these requirements to you or the homeowner as soon as possible.
#5. Gather the documents needed. A short sale package will usually be very specific in what it wants and self explanatory. Follow their requirements to the tee, do not add anything that you may think they want because they don't. It is extremely important to give them what they want and that's it. Get it together and fax it to them now.
#6. Follow up. Once the package is together and faxed to the bank's loss mitigation department follow up with a phone call to see what kind of processing time to expect. It could be weeks before it is even assigned to a loss mitigation negotiator, ask and they will tell you.
#7. Order a BPO or appraisal. Once your package is in the right hands, call and request a Broker Price Opinion or appraisal. This is done to give the bank an idea of the value. When they come out, meet them there and give them some bad comps. Any good investor knows how to pull comparables. Find the bad ones and hand them to the appraiser or broker, this can do wonders. Remember to kiss a little ass, this can also do wonders. Tell them what you are doing, they understand, show them a picture of your kids, level with them. They know what a short sale is and they know you need to make a buck.
#8. Negotiate. Once the BPO is received by the bank, call and check the status. They may or may not tell you what it is, but asking definitely won't hurt. Once they have all these things they are ready to say no to your short sale offer, and they will. What ever you have offered them will surely be rejected (unless you made a high offer and you will know this if they accept off the bat) but that's when you start negotiating. Negotiating is on you. It can be a science or you can just lay it all out and be as honest as possible and hope for the best. You will be surprised what you will get by just asking.
#9. Win or Lose. Either they accept it or not. If they do, buy the house at a great discount or flip your contract to another investor. If they don't, move on to the next. Don't waste time, short sales are a dime a dozen in this market and the homeowner needs to know ASAP so they can make arrangements.
Short sales can be tough, but very rewarding if you are successful. If you want to do one, give it a shot, you never know what can happen. Good Luck!
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