With more and more sellers unloading their homes for less than what they owe on their mortgages, now is a good time for investors to start negotiating “short sales” with lenders. You can find good deals with short sales as long as you are aware of the extra time and work required to make it happen.
Your chances of success improve if your communication with the foreclosing lender is organized and complete. Your first contact with the lender’s “loss mitigation department” is crucial in making a good impression.
The first thing you need to get from the owner in default is what’s called a “release” or “authorization to release information,” which is a letter signed by the owner that allows the mortgage lender to talk with you about the mortgage. Laws prevent lenders from releasing mortgage information without the borrower’s written consent.
Next, contact the lender and ask for the department that handles short sales. They may call this loss mitigation, asset management or REO management. When you talk with the lender, you’ll want to find out three things:
• If the lender will agree to a short sale;
• What additional information they’ll need to complete the process;
• The “payoff quote schedule,” which is what the lender thinks they are owed.
Loss mitigators sometimes receive bonuses based on how many defaulted loans they can clear up, so they’re more likely to pay attention to your sale if you can show them you’re taking care of as many details and objections as possible.
The lender, on the other hand, will be considering many factors in deciding whether to approve a short sale, including:
• Whether the seller is deserving of a break, due to financial hardship caused by unforeseen circumstances such as layoffs, divorce or illness;
• Whether it would be cheaper to simply repossess the house, make any necessary repairs and sell it through a real estate agent or broker;
• How many other properties the mortgage lender currently has in default.
Additionally, the lender may require what’s called a “hardship letter,” which explains the seller’s financial difficulties in writing. The lender may also require owner payroll stubs, copies of medical bills, checking account statements, financial statements, two years of tax returns, a signed purchase contract and other appropriate evidence from the seller. The lender will also look at the seller’s credit reports to verify the seller’s financial predicament. This will all take extra time.
RealtyTrac members have a distinct advantage over other investors because they have access to valuable information that non-subscribers lack. This vital information will give you an advantage over other investors — and will give you an edge when you prepare to negotiate with the lender on price and terms.
For example, RealtyTrac members have an enormous arsenal of information at their finger tips, including the foreclosing loan balance, the name and address of the lender or lenders (if there’s a second mortgage), the name of the defaulting owner, the estimated market value of the property and information on possible liens on the property.
Moreover, RealtyTrac subscribers also have access to comparable sales data, which allows investors to gauge whether a particular property has enough equity. And buyers can also view aerial photographs of the property, analyze the square footage, calculate the lot size, determine the number of bedrooms and baths and evaluate what stage of the foreclosure process the home is in — all this — with a few clicks of your mouse. All the information provided on RealtyTrac will put you in a better position to negotiate with the lender.
While buying a home on a short sale can be time consuming, your hard work can pay off in a home that’s worth considerably more than you paid for it. For more detailed information, read Make Money in Short Sale Foreclosures, by Chantal Howell Carey and Bill Cary (Wiley, New Jersey), 2006, $29.95, 267 pages.