The numbers are rolling in, and the outlook for homeowners is bleak: According to a recent RealtyTrac report, the first three months of 2006 saw a 72 percent increase in foreclosures nationwide. Economists blame a variety of factors, including rising gas prices, interest rates, insurance rates, and property taxes. This increase in foreclosures is not a surprise and is being driven in large part by the increase in creative financing packages offered by lenders in recent years.
In recent years, the foreclosure rate has remained at historically low levels because rising home values have made it relatively easy for financially strapped homeowners to sell. But as appreciation rates stabilize and with billions of dollars in adjustable-rate mortgages subject to rate increases this year, the demand for assistance from foreclosure specialists will only increase.
One of the most effective foreclosure strategies is known as a short sale, which is when a lender agrees to pay less than the amount owed to avoid foreclosure or, if a foreclosure has already occurred, to get rid of the property and avoid loss. greater. . For example, suppose a homeowner is facing foreclosure on a home valued at $250,000 with a mortgage of $238,000. If the owner were to try to sell through a traditional real estate agent, he would have to raise cash at closing to complete the deal. Instead, using a short sale strategy, he goes to the lender with an offer of $190,000, and the lender accepts that as payment in full on the loan.
In this situation, everyone wins. The owner has avoided foreclosure and has been relieved of a huge burden. The lender has avoided the cost of foreclosure, the damage of having a bad loan on his books, and the hassle of having to repossess and then sell the property. And he has purchased a property with an automatic net worth of $60,000.
While it is possible to conduct a short sale after foreclosure when the bank actually owns the property, it is best to use this strategy when the owner has received a notice of default but before the actual foreclosure. Lenders will rarely, if ever, negotiate a short sale until notice of default has been filed. But at that point, the lender may be highly motivated to give you a nice discount to take a problem out of your hands.
Properties that are over-leveraged (with mortgages that exceed market value) and properties with multiple mortgages are prime candidates for short sales. Remember, second and third mortgages are usually removed at a foreclosure auction. These lenders would rather have something than nothing and will usually be willing to negotiate with you. Of course, cosmetically damaged properties are also ripe for a short sale because lenders don’t want to get into the repair business.
How to make a short sale
The first step in the short sale process is to come to an agreement with the homeowner and get the property under contract, perhaps using an Option Memorandum that can be filed if necessary. This means that you now have an interest in the property and the owner cannot easily back out of the deal after spending hours working on it.
Then contact the lender and ask for the dirty shorts gold exercise package. The information on the package will tell you exactly what you need to do. The lender will likely request a substantial amount of information about the homeowner, including a letter explaining why you have missed your mortgage payments, bank statements, pay stubs, a copy of the real estate purchase agreement , etc. Gather this information and return it to the lender as quickly as possible. Remember, the foreclosure clock is ticking.
The next step in the process is the broker’s price opinion, or BPO. This is an alternative to a full appraisal and is typically done by a local licensed real estate professional. The BPO is the secret to a successful short sale, and you want it to be as low as possible. Remember that real estate agents are conditioned to seek the highest possible appraisal, but you need them to see the situation from your perspective. The lower the BPO, the better your chances of getting the discount you want.
After the BPO is delivered, the lender will either reject or accept your short sale offer. If you are turned down, you can renegotiate and even apply for a second BPO. If accepted, congratulations – you’ve resolved a problem for the owner. and the lender, and made money for you in the process.
