Although I often say that a short sale is a long buy there’s a lot of money to be made in doing short sales. If you focus on them, I’m sure you’ll become successful, but you’ll eventually get a seller that owes more than the property is worth and is behind in payments. In this situation, lenders are sometimes willing to accept less than the amount owed.
Your first step is to obtain written authorization from the borrower (seller) to discuss loan information with the lender. Next, contact the “LOSS MITIGATION” department. Negotiating a short sale with the lender is a difficult process because it’s extremely difficult to find a bank officer who has the authority to accept a discount. Be patient and explain to everyone what information you need to proceed. Like getting your phone bill corrected, you can expect the process to involve a lot of waiting on hold and bouncing around to several automated voice mail systems. Once you get in touch with the right person, the negotiating begins. To save yourself time in the future, make sure to get this person’s direct telephone number and other contact information.
From the lender’s perspective, a short sale saves them a lot of money due to the extra costs and employee burdens associated with the foreclosure process. Your job as the investor is to convince the lender that they’ll fare better by accepting your offer now and cutting their losses as quickly as possible.
The lender will need every detail of the deal between you and the borrower. Specifically, the lender wants to know the property worth. The lender will generally hire a local broker or appraiser to evaluate the property. You can also submit your own appraisal or comparable sales. You’ll want to offer as much negative information about the property as possible. Include some relevant information about the neighborhood, with pictures of the closest rundown properties around. You should include a contractor’s bid for repair estimates, which should be the highest bid you can obtain ethically! Remember, pictures speak volumes.
The lender will also ask for financial information on the borrower. The borrower must prove that he’s in dire financial straits and can’t afford the payments. The borrower must show he has no source of income or assets to repay the loan. The borrower should submit a “hardship letter”, which is a sob story about their financial trouble. This may require a little help on your part. Don’t lie! Just paint a picture that doesn’t look good.
Finally, the lender wants to see a written contract between you and the borrower. The lender wants to make sure that the borrower (seller) isn’t walking away with any cash in their pockets. Generally, the contract must be written so that the buyer pays all costs associated with the transaction, so that the “net cash” to the borrower is the exact amount of the short sale amount to the lender. A preliminary HUD-1 settlement statement is often requested, which can be difficult, since many title and escrow companies won’t prepare one in advance of closing. As an alternative, you could prepare your own HUD-1 statement and write “preliminary” across the top of it.
Don’t be surprised if your bid is rejected at first. Lenders aren’t emotionally attached to properties; so they aren’t as likely to give you the “deal of the century”. Many short sales fall through mainly because a Brokers Price Opinion (BPO) comes in too high. You can’t pull the wool over a lender’s eyes. If the property isn’t in need of serious repairs, it’s unlikely that you’ll be able to convince the lender that the property is worth a lot less than the appraised value.