Making big $$$ in pre-foreclosure properties is just simply one of the most profitable ways to consistently make money in real estate today. The popularity in recent years of investors taking over payments of mortgages on “pretty houses” has grown exponentially as well as other services and individuals keying into those opportunities. Now more than ever we have more pre-foreclosures services right at the fingertips of investors to take advantage of. If a company or individual has not already set up shop at your local tax assessor’s office selling pre-foreclosure information, then it’s probably not far away. The fact of the matter is that information in real estate, and especially pre-foreclosures, is the key that makes it so profitable for more real estate investors each day. Accessing that pre-foreclosure information correctly and then implementing your marketing plan to reach those pre-foreclosure leads in simplicity is one technique that many investors literally live off of daily…..and quite well I might add!

Before we go much further it’s almost an insult in one paragraph to describe why taking over properties “Subject-To” existing financing is so profitable. Just on the front end it is worth mentioning that structured correctly you as an investor can make yourself almost “bulletproof” from a liability prospective. With mortgages in recent years there are just some absolutely fabulous interest rates that are obscenely low from a “traditional” investor financing perspective. I mean who can’t make properties cash-flow with 6-8% interest rates? After locating the deals, then it’s mostly a matter of then evaluating how much cash (if any) it will take to:

* Pay off owner’s equity making it worth their while – note that sometimes no money is required and a matter of offering debt relief.

* Repairs needed if any to get property in A-1 shape for owner financing specials on tenant/buyer prospects.

Catch Up the Mortgage Payments to Be Current

The great aspect of taking over properties “Subject-To” existing financing is that the three items listed above does NOT mean you must have a large cash reserve to make these deals profitable for you. The standard rule in real estate of “using other people’s money” is so applicable here. That money may come from your future tenant/buyers, partners, or yes even your cash reserves for the time being. Even if you have to float the deal with your own cash reserves, if the deal is negotiated correctly then all your money can be recouped once the right tenant/buyer is realized for the property. There are simply a number of ways to get your pre-foreclosure leads by either developing your own personal leads or simply just buying the information that is readily available in your area. My emphasis here lies in this one question I want to ask you:

“Once you get a pre-foreclosure lead, how are you going to turn that into big money?”

If you had to hesitate even a moment or you just don’t have a clue what to do with that lead once you get it, then hopefully by the end of reading this you will be more equipped. This is not only to have a game-plan of where you are going with your real estate business, but to develop the vehicle of how to get your message effectively to your target marketing turning the “potential” into “profitable”!

Moving on, now let’s say you have an address and name on a property in foreclosure, so what now? What is your plan to talk to that seller or rather how are you going to get that phone ringing off the hook getting them to talk to you? Well, that is the question to answer and this is exactly what this article is entirely about. Call it what you want: Attack Plan, Method of Operation, Game-Plan, Standard Operating Procedure, Plan of Operation, etc. The end result is the same as you must know how to get that seller talking to you as soon as possible because time is of the essence in dealing in pre-foreclosures.

From this point on let’s just call it your “game-plan” but let’s define this one technique that will work for you: Direct Mail! I don’t know how to emphasize it more because direct mail in pre-foreclosure is an absolute lethal weapon to have. Sure there are many ways to get into direct contact with the seller and some are more effective than others and I’ve tried many:

Going Directly to Properties and Knocking on the Door to Talk to Sellers

Accessing the seller’s phone numbers by reverse CD directories of property address….at this point in pre-foreclosure a seller may have changed phone number or implemented other features to block calls because they are probably getting bombarded by creditors to pay up.

Leaving Flyers on Doors, Cars, or Mailbox

Playing detective a bit here finding out their work place or work phone number to contact them directly there.

Do you know what has been my experience contacting individuals in pre-foreclosure with the above listed approaches? You’re harassing them! You can lead a horse to water, but you simply can’t make it drink. What I mean is that until the individual in foreclosure is receptive to deal with their problem then you will have a hard time progressing on that property turning it into a profitable deal. Sure, I’ve been able to finally track down an individual to make a deal happen but it can all too often be just exhaustive and time-consuming.

Direct mail is my most preferable approach to getting those pre-foreclosure leads calling me! I assimilate my pre-foreclosure information personally and do buy from other sources also. When I get that information all I’m really concerned about is the name and address of owner. Sure you’ll get all sorts of information about the property being in foreclosure like outstanding mortgage balance, payments behind, lender on mortgage, etc. I just don’t need all that information because until that seller is contacting me, then they are not in the motivated category making it worth my while.

My approach is to use direct mail to get the individual in foreclosure talking to me. The foreclosure information if you’re buying it from a foreclosure source is obviously available to others. So yes there is some competition out there and to distinguish yourself from others and getting the individual to contact you will need some creativity. That creativity for me comes in the content and frequency of my marketing message.

All things are relative to the time of the pre-foreclosure information once you receive it but here is my game-plan that pays dividends for me month after month. My basic approach is mailing to the individual in pre-foreclosure with a total of two letters and two postcards. The seller will receive an alternating letter/postcard each week until all are mailed. The vast majority of leads I will hear absolutely nothing back from, but it just takes one deal to make it all worthwhile.

My message is alternating and “incremental” in style. I’ll list here the body/text of the letters and postcards to give you an idea. Make no doubt that you can tweak your message in many different ways but here are just some examples for you to think about:

———————————————————————

Letter #1 (Week #1)

Do you need to sell your house and F-A-S-T! I buy houses that others simply won’t consider because of one reason: I Get Personally Involved. Others just don’t take the time to listen how to meet your needs because everyone’s situation is unique from the next person.

I am an investor and do expect to make a profit so if you need all cash and retail value for your house, then simply do not call me. However, if you have some flexibility and need a resolution quickly so you can quit putting your entire life on hold then give me a call. No obligation, fees, commissions. I just want to buy your house!

Postcard #2 (Week #2)

If you are looking for someone to possibly buy your house, then don’t call me! However, if you want to already consider your house sold, then start packing your bags so you can get on with your life.

There is a variety of ways I can buy your house and it doesn’t have to be a complicated process. In fact I can close in little as 48 hours or as long as……..you name when! Give me a call and I’ll explain in plain English how the solution to your problems is a phone call away.

Letter #2 (Week #3)

Life can bring on many circumstances to deal with and unfortunately some of those are not pleasant to work through. Selling your house can be the exact type stress you need relief from and that is what I specialize in. I buy houses no matter what the situation so people can simply make a difficult decision easy, and just move on in life.

If no obligations, fees, or commissions has an appeal to you then give me a call. I would be happy to meet with you face-to-face and discuss the opportunities available to you so I can buy your house. I hope to hear from you soon.

Postcard #2 (Week #4)

Well, I can certainly understand if you do not want to sell that property for now. There may come a time down the line that you may decide to do something with it. I would only ask that you keep this card and that way you can give me a call when you’re ready

Thanks for taking the time to listen to my offer to purchase just in case you know where to reach me if you decide to sell. Don’t hesitate to give me a call if you have any questions and I do hope to hear back from you soon.

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You can see by the above listed examples that my message is incremental and differing in nature. It’s just rare for the pre-foreclosure seller to call you on that first letter or postcard. You just have to put yourself in the “shoes” of the seller and know that if they are in pre-foreclosure then they are probably getting a LOT of mail from creditors. The possibility of the pre-foreclosure seller throwing some or all of your direct mail away is a given! Just know that now and expect it. However, all it takes is one phone call and one deal to see your next big payday dealing in pre-foreclosures.

A Couple of Points in Wrapping Up Here:

On all your letters, stamp on the outside in red ink, “I Want To Buy This House!”. You can buy stamps like this at Office Depot or Staples costing you about $25. You write in the script you want and mail it to them with the custom stamp coming back to you in a couple of weeks. Before that potential foreclosure seller throws away your letter, they will at least read that red stamped message on the outside. I can’t tell you how many people have commented to me on that one technique was the reason they took the time to open my letter and thus call me.

Best success in direct mailing to pre-foreclosures is that you simply must mail to them more than once. I don’t have the time or patience to mark on my calendar or day planner when to write the next letter or postcard and that is where my custom direct mail software comes in. It knows the date I enter a contact and automatically calculates when the next scheduled mailing of letters and postcards due. I just have to remember to print my letter/postcards at least once a week and just keep pumping the leads into my database.

Although some of your initial offers will be accepted, you must also be prepared if the lender rejects your offer. Just because your first offer is denied does not mean that the deal is dead. This is now the perfect opportunity to learn precisely what you have to do in order to close the short sale.

The first thing you will want to do before making another offer is find out from the lender exactly why the first offer was rejected. Here are several key factors that may result in your offer being rejected.

* They will not net the required amount needed to justify accepting your short sale offer. Simply speaking, your offer was too low!

* The lender is adamant that they can do better waiting for a better offer or foreclosing on the property.

* They do not agree with the terms of your contract or net sheet.

* The loan is government insured and therefore they are protected against a foreclosure.

* The investors of the loan are asking for more money to close out the loan.

* You tick the loss mitigations rep off so bad that the last thing they want to do is help you.

* The hardship was not proven enough to persuade the lender to accept a short sale.

* The lender would like to explore alternative payment options with the homeowner instead of doing a short sale.

* Your offer was much lower than what the BPO assessed the house for. This is another example of your offer being too low.

These are just some of the reasons you may get from the lender for your short sale being rejected but the main thing to remember is that you must at least probe and find the exact reason why. I can confidently say that the main reason your short sale offer will be rejected will be because the offer is too low. Remember, the lender’s number one priority when doing a short sale is how much money they will net. The best way to find out how much the lender needs to net is to just ask! Once you identify the right loss mitigations rep you can simply ask:

“How much do you need to net if we agreed to a reasonable short sale offer?” Will the lender tell you how much? That is to be determined after you ask the question. The point is that you will never find out unless you throw it out there. Even if you don’t find out initially, the next best time to ask is prior to the counteroffer. You want to start and maintain a constructive dialogue with the loss mitigations rep where you are constantly probing for information that will determine what your best offer will be.

When I do short sales, I mainly develop my initial offer based on how much equity or profit I want to make with each deal. However, from time to time when I’m preparing a counteroffer I use a formula to help me come up with the most accurate guess on what I think the lender is willing to accept. If used correctly, this formula alone will more than pay for the price of this course 1000 fold.

Here it is…

Step 1: I take the estimated or actual BPO amount or the value of the house, based on the comps then multiply that number by 85%.

Example:

$175,000 (Estimated BPO value) X 85% = $148.750

Step 2: I then take the number I got and multiply it by 92%

Example:
$148,750 X 92% = $136,850

If this were an actual deal, I would use this final number or something close to give me my counteroffer amount. Although I have reason to believe that the lenders use a similar formula when they determine the amount they are willing to accept on a short sale, I cannot say that this is exactly it.

I do know that this formula does two things.

It gives me a calculated number to use for my initial offer or counteroffer.

It allows me to breakdown to the lender how I came up with my offer.

Be resilient yet realistic when making your counteroffers. Understand that it may not stop with the first counteroffer. You may have to counteroffer a 3rd or 4th time just to get the amount down to where the lender feels comfortable to accept. At times it may only be hundreds of dollars that you are negotiating. If you are game for a strategic a methodical approach to negotiating your offers you can always use my 3 step approach to getting your offer accepted.

Step 1: The first offer will be used to get the number that you and the lender are negotiating down to tens of thousands.

Step 2: The first counteroffer will be used to either close the deal or get the number that you and the lender are negotiating within thousands.

Step 3: The second counteroffer will be used to either close the deal or get the number that you and the lender are negotiating within hundreds. Usually at this point, the lender is the most flexible and the loss is obviously not as great.

Another thing to consider when determining your counteroffer is if in fact it even makes sense to offer one. Sometimes the lender is non-negotiable and will only accept what they will accept. Period! If this is the case does it make sense to continue trying to persuade someone who is not willing to work with you? You have to make that decision on a case by case basis. The most important thing to remember when making your counteroffer is that the deal has to make sense for you. I’ve seen investors get their short sale accepted but fail to agree to an amount that is highly profitable.

Like I mentioned, I cannot determine the value of your time and effort. That is something that you must decide, but I can say that short sales are big money deals and if you are making offers that do not put a lot of money in your pocket you are probably leaving it on the table for someone else to enjoy.

It is virtually impossible to complete a successful short sale without dealing with the loss mitigation department at the bank. So, how does one deal with loss mitigation successfully? Hopefully I can shed some light on that today.

For those of you who are new to investing, you might be wondering what a short sale is. Good question. A short sale is getting the bank to accept less that what is owed as payment in full. For example: You find a homeowner in distress who owes $100,000 on a property that is worth $100,000. What do you do? Most investors walk away unless they know how to short sale. Using my “short sale secrets”, you get the bank to accept $55,000 as payment in full. You now have equity in a deal that had none, the homeowners are ecstatic as they can move on with their lives, and the bank has a defaulted loan off its books. Short sales are win/win for everyone.

Once you have your homeowner under control and your short sale package together, you are ready to deal with loss mitigation. When making the initial phone call to the bank, ask for the loss mitigation department. Some customer service reps may say that the bank does not have a loss mitigation department. Keep trying. Ask if the bank has a work-out department, foreclosure department, short sale department, loan modification department, or reinstatement department. The reason I ask for different departments is many times a new person is working the customer service phone and may have no clue what you actually want. By using a term they are familiar with, you will eventually get to the right person.

You have loss mitigation on the phone; it’s time to get to work. This person will make or break your deal so be very nice. Your initial conversation should go something like this: “Hi, my name is your name here and I am calling on behalf of Bob and Sally Smith (your distressed homeowners). I have an “authorization to release information” form I’d like to fax to you. What is your fax number? (Stay on the phone while the rep retrieves the form from the fax machine) Great, I’ll send it right over. – the rep gets the authorization and returns – As you know Bob an Sally are in foreclosure. I recently met them and they seem like sweet folks.

When I found out about Bob and Sally’s dilemma, I said I’d try to help. They would like to sell their property and move on with their lives. I own several rentals in the area and am willing to purchase Bob and Sally’s property. However, we have a big problem. I called a real estate agent friend of mine and ask her to run comps for me. Based on her comps and based on what I know about the area, Bob and Sally owe much more than their property is worth. As I said, I’m willing to help them out of foreclosure as well as helping you get a defaulted loan off your books, but I can’t possibly pay the mortgage balance. Will you entertain some sort of short payoff or something along those lines? Great! What do you need from me?”

As you can see in my conversation, I do not come across as a professional investor out to make a killing on the banks loss. Many investors chose to present themselves that way. I have much more success as a friend trying to help poor Bob and Sally. Use whichever approach makes you feel most comfortable. However, don’t lie to get the deal. I did recently just meet Bob and Sally, I do have rentals, I do have a real estate agent friend, and I am willing to purchase Bob and Sally’s property. In your conversations with loss mitigation, be certain to refer to your distressed homeowners by name as often as possible. This makes them seem more real to the rep. I am trying to get a banker to make an emotional decision as well as a business one.

Once you build rapport with the loss mitigation rep, send your short sale package. I call my reps at least once a day to follow-up. Always ask the rep how the day is going, how the weather is where they are, how the kids are, and so on. You want the rep to look forward to your calls, not dread them. Find out who makes the actual decision, how long it typically takes, how long the rep can give you to close once your deal is accepted, etc. With a helpful attitude from you, your loss mitigation rep will push your deal through quickly.

Once your deal is accepted, get it in writing immediately. Find your buyer or arrange financing and get the deal closed. You don’t want anything to happen between the acceptance and the closing to make you lose your deal. Once the deal is closed, send the rep flowers or a gift basket and write a letter to the reps boss. The rep will remember you and the next time you call about a short sale, the rep will be more than willing to help you again. Loss mitigation: Friend or foe? I say friend!

Now that you have a general understanding of a short sale and you are fully operational it’s time to secure your first deal. Assuming you have either done some form of advertising, made direct contact through a foreclosure listing, or by word of mouth, you are now ready to get started. If your phone does not ring immediately don’t panic. Sometimes homeowners will hold on to your number until they feel like there is nothing that they can do on their own. When it finally does ring you will respond along these lines: “Good Morning, Real Estate, how can I help you?” or “Good Afternoon, John speaking!” Avoid greetings such as, “Good Morning, Thank you for calling ABC Real Estate Company!”

Some people that call are a bit skeptical and by mentioning your company name they become more concerned with whom you are rather than how you can help them. The proper response to anyone that asks for more information or references would be, “I’m a private investor that specializes in obtaining properties pre-foreclosure. If your property qualifies then I may be able to take your property off your hands and help you avoid any further damage to your credit.” You want to eliminate the perception that you are a huge company with lots of offices and employees.

Besides, someone that has a potential foreclosure hanging over their head most likely will feel more comfortable speaking with an individual rather than a corporation. You are someone with a possible solution to their problem, get straight to the point and do not waste anytime attempting to justify your service offering. If it is not right for that individual then move on to the next. Don’t get me wrong; don’t be rude or obnoxious because you will have some people that won’t go any further until they feel comfortable with who’s on the other line.

What I’m saying is if you feel that someone is being difficult although they are the one with the problem, then you have to decide whether or not it is worth your time. I have had people call me that gave me a hard time at first but after I met with them face to face and explained how I can help, they immediately warmed up.

Once the ice is broken then it’s time to take down some personal information. Try not to sound like you are reading from a script but rather hold a conversation and get your questions answered in that manner. (Go to the back of the book and review the property profile sheet). Use this form every time you get a prospect on the phone. Make sure that you fill the form out completely, this will give you all of the information you need to start your initial qualification. If the homeowner is facing a possible foreclosure they will often let you know that they are behind on their payments or have received calls or letters from their lenders. You let the person know that you may be able to work with their lender to delay or even prevent the foreclosure. Ask to set up appointment to see the property ASAP.

I usually ask to come and take a look at the property the same day. If you don’t, they may speak with another investor. If you can’t meet with them the same day ask them to please not speak with anyone else until you can sit down face to face with them. Often, homeowners will agree to your request and be very open minded when you meet with them.

Anyone who has ever profited from doing a short sale has also without a doubt had one or two rejected at some point. Guess what? It is just the nature of the beast…As with all types of sales you’re playing a numbers game.

There are very few investors who truly know how to successfully negotiate a Short Sale. We find that most investors have the perception that all that is necessary is to submit an offer and wait for the bank to give you an answer. If all goes well the offer will be accepted but in many cases it’s not that simple. That’s why a strategic plan is necessary. A strategic plan means making the deal go your way by persuading the lender to agree with your offer.

There are several steps that will ensure your success when negotiating with lenders:

First of all, you must be able to determine if you indeed have a short sale opportunity on your hands. Many investors are under the misconception that every homeowner facing foreclosure is a good short sale candidate. This could not be any further from the truth. One of the most common mistakes made by investors is attempting to fit a square peg into a round hole. Not all deals are good short sale opportunities. You must know the difference between a good and a bad deal. Period! You’ll have to analyze the deal and develop an excellent plan of attack if you want to truly master the art of the Short Sale.

Second, you must not take no for an answer. No can never be the final chapter to your negotiation. If the lender says no you must ask yourself why. There must be a reason. Why did they say no? Is there anyone else I can speak with? Was my offer to low? How does the lender determine their bottom dollar? What else can I do? What was the BPO amount? These are just a few of the questions that need to be addressed each time you are met with some resistance from the lender.

We’d like to share an awesome deal that one of our students closed recently. His name is Thomas Stockman.

Thomas got a call off of one of his signs from a gentleman that had two properties in foreclosure. The two properties were on the same street and were bought as rental homes within the last year. Consequently, they were also financed by the same mortgage company. One property had a mortgage balance of approximately $150,000 and was in need of several thousand dollars worth of repairs. The other had a mortgage balance of $156,000 and was currently being rented for $1,100 per month. Both properties had very little equity but the neighborhood had been very active over the last 9 months. After qualifying the two potential deals he decided to attempt short sales.

He contacted the bank and began the process. His offer on the first house was $89,900 and $95,800 on the second house. The bank rejected both and asked for higher offers. After several conversations and some additional documentation to justify his offer, Thomas was able to get both properties for a total of $60,000 below market value. Thomas rehabbed the first property for $3,500 and put it on the market for sale. Since the second property was already occupied by a tenant he decided to keep it. His mortgage is roughly $400 per month (interest only loan/taxes paid at year end) he makes $700 in monthly positive cash flow. Not bad for a beginner (wink).

This would have never happened if Thomas accepted NO from the bank. If he would have not known what pressure points to touch and how to counter without increasing the offer amount we would not be talking about these deals.

This type of outcome is customary when you are equipped with the necessary tools and know how to turn a “No” into a “Yes” just by slightly adjusting your approach. Thomas got two great properties with lots of equity and a constant cash flow, the homeowner avoided two foreclosures, and the bank was satisfied.

Remember, the next time you are putting together a short sale offer, be prepared and take control of the deal. Never take NO for an answer. Be proactive not reactive. Don’t just submit offers without having a game plan. Do yourself a favor and take advantage of the opportunity to make lots of money in an industry where great deals are hard to come by. We hope that you have learned something and are on your way to much success.

Ok, so you’ve received the short sale requirements from the lender and you’ve made friends with the loss mitigation’s rep that’s assigned to your potential deal. Next, you are now ready for the lender to order a BPO on the property. Notice that I emphasize “you”, this is because I don’t want you to miss out on a key opportunity to influence the overall outcome of your short sale.

Although many investors are aware of the benefits of influencing the BPO, few know exactly how it’s done. The BPO is the single most influential component that the lender considers when deciding how much they are willing to accept as a reasonable short sale offer. If your offer is not in the ballpark of the BPO it will most likely be rejected. Many investors give up at this point and assume that the lender is not willing to accept a short sale. It’s not that the lender is not willing to accept a short sale, it’s that the short sale offer does not come close to the amount of the BPO. It’s just that simple. There is a big difference between a lender not accepting a short sale and a lender not accepting the offer.

What Exactly Is a BPO?

BPO stands for Broker’s Price Opinion. All this means is that a real estate agent or broker will assess the property and give their professional opinion of it’s value to the lender. The closer that number is to your offer the better. You want the BPO to be as low as possible. Listed below is a snap shot of a BPO requirement.

1.) Run comps and take pictures of the surrounding neighborhood, subdivision, or area.
2.) Inspect the overall condition of the home and estimate the cost of repair. Take pictures.
3.) Formulate their “opinion” of the property’s value based on the information that was gathered.
4.) Submit a detailed report of their research to the lender.

Here Are 5 Necessary Steps to Influence the Broker’s Price Opinion (BPO)

Step 1:
Before your package is submitted ask your loss mitigation’s rep to order the BPO. Let them know that there is not a lockbox on the door and you have the only key. Give them the best number to reach you and have the agent doing the BPO call to set up an appointment. You must be present for the BPO.

Note: There are two types of BPO’s:

1.) Full BPO – The agent does a full inspection of the home.

2.) Drive-By BPO – The agent only takes pictures of the outside and other homes in area.

Always request a full BPO. If a drive-by BPO is done, you will not have any one-on-one time with the agent, therefore eliminating any possibility of influencing the outcome.

Step 2:
Compile comps, estimated costs of repair, and any other relevant information that will justify a discount. If possible, visit the property prior to the BPO or at the least a half hour before the agent arrives. Make two lists for repair costs. One with all of the obvious repairs such as wall damage, carpet, paint, etc. The first list will be mostly cosmetic repairs. Make a second list of all repairs that the agent will not see with their naked eye (i.e.: roof and water damage, faulty plumbing or electrical fixtures, pests, mold, etc. This list will contain more serious problems. Be sure to have an itemized breakdown of the costs involved. Bring this information with you to the BPO appointment. Be prepared to explain in detail how you came up with your estimates.

Step 3:
Make sure if the house is occupied that the homeowner is not present during the BPO. You do not want the agent asking the homeowner any questions about the property or offering any unwanted information. All communication must be between you and the agent. Follow this rule each time and you will maintain leverage during your negotiation.

Step 4:
On the day of the appointment shadow the agent as he/she does their assessment. Bring a camera and take pictures of every room in the house. The agent will only take a limited amount of pictures and may miss something important. As you are walking throughout the house, point out the most important repairs only. Take notes and make them aware of other homes in the area that are comparable to your offer. Share with the agent the information about the house that you’ve compiled. Doing these things will help establish you as a well-prepared professional and help you earn respect with the agent.

Step 5:
Before the BPO is complete, ask the agent if they have a ballpark estimate in their head. They will most likely tell you that the numbers will be determined once they complete their report. At this time, ask when they will be finished and if you can give them a call at a specific time to get their final numbers. Note: The agent works for the lender and more than likely they will inform you that their report is proprietary to the lender. You have to feel that person out and see if they may be willing to share that information with you. It doesn’t hurt to ask more than once if necessary.

Let the agent know that you are very familiar with the neighborhood and tell them what you think the property is worth. The agent doing the BPO knows only what they have researched and what they discover once they actually see the property. You will be surprised as to how much your opinion matters. I like to call it YPO (Your Price Opinion). If the agent views you as someone who is educated about the property and the activity in the neighborhood, your opinion will be valued and taken into consideration when they make their report to the lender. Hopefully, I’ve helped shed some light on this most important area of short sale negotiations and that you are able to apply what you’ve read to your next deal.

When investors find out I specialize in short sales, they always have so many questions. Here are the answers to some of the most common. Hopefully, these answers will give you a better understanding of a short sale and how to do one.

Why Do The Banks Short Sale?

* The mortgage is in arrears or foreclosure.

* The property is in poor condition.

* The homeowner has hardships and cannot afford the payments.

* New homes in the area are being chosen over existing homes.

* The area or neighborhood has depreciated in value.

* The bank’s shareholders are concerned when there are too many defaulting
loans on the books.

* Some banks are required to prove a loss each month… let’s help them out.

* Some banks are required to have an amount equal to or up to six times the
retail value of each REO “on hand” – ouch, that hurts.

* An REO is a liability, not asset. Too many liabilities will cause any
business to go under if not dealt with quickly.

Can I Short Sale A Nice Property?

Absolutely! As you can see, banks short sale for many reasons other than the poor condition of the property.

What Steps Do I Take To Complete A Successful Short Sale?

A. Find a property owner in distress.
B. Put a deal together with the homeowner.
C. Have the homeowner sign an authorization to release form.
D. Fill out a sales contract for the amount you want to offer the bank and have the homeowner sign it.
E. Call the Loss Mitigation department at the bank.
F. Fax them your offer along with the following:

1. Your cover letter explaining why you can’t offer full price.

2. The sales contract.

3. Justifying comps of the area.

4. Pictures, if you have them.

5. A net sheet or closing statement (a sheet that shows the bank exactly
how much they will net after closing costs, taxes, etc. are paid).

6. A hardship letter from the homeowner that mentions the dreaded word….
bankruptcy.

7. Estimated list and cost of repairs, using retail repair prices that the
normal homeowner would pay for these items.

What Happens To The Homeowner’s Credit?

When you negotiate a successful short sale, keep in mind that the agreed upon price is payment in full. However, the homeowners may still owe the difference between the mortgage balance and the discounted amount via a “deficiency judgment.” If granted, this judgment will affect the homeowners and their credit report just as any other judgment. You must get the bank to agree to accept “payment in full without pursuit of any deficiency judgment.”

In addition, you need to explain to the homeowners that the discounted amount (the difference between the mortgage balance and the short sale) may be declared as income on their income tax return by means of a “1099.” The homeowners can speak with their accountant for advice. Since the homeowners have been in such duress and probably haven’t made much income, a 1099 may not adversely affect them.

I hope this sheds some light on short sales. As you know, nine out of ten deals have no equity. To be successful in this business, trends call for you to be a short sale expert.

With the press full of more bad news about defaulting homeowners and a rise in foreclosures, the question most people ask me is: “Jeff, how do people get into that state in the first place?”

Being a real estate expert who has seen foreclosures close up I can tell you that a foreclosure is never the result of a single incident. It’s never, for instance, a case of a little bad luck, the loss of a job, a car accident or some ill health. These are deplorable situations to occur, to be sure, but on their own they are never enough to take a homeowner who has purchased his dream property, down.

What usually happens is that homeowners who end up facing the dreaded prospect of a foreclosure have consistently boxed themselves in, closing their prospects and notching up debt through the consistent use of credit to finance debts. This is a case of “robbing Peter to pay Paul” and the scenario, all too familiar goes a little like this:

The homeowner boxed into a financial corner, rather than thinking of how he can reduce outgoings and perhaps downsize his lifestyle until his financial condition improves, he chooses to take out a second and maybe even a third mortgage and release equity stored up in the house.

Now there’s nothing wrong in doing anything like this. Equity stored up in a property could be released which means that it can, if used properly, save a house owner in trouble. The problem is that house owners forced to release the equity in their homes very rarely manage to use this facility properly. Feeling a certain sense of desperation, they leave it too late to shop around for credit, fail to look at the fine print and feel incapable of negotiating with the lender. As a result they get locked down into second mortgages which hit them with hefty interest rates after a brief honeymoon period which usually lasts between six months and a year.

The increased payments the homeowner then has to make put him back into the same situation he was in before he took out the loan. He then gets into a greater panic and is forced to take out another loan from an ever shrinking number of choices which leaves him in the worst possible financial bargaining state. Next is a story that’s pretty much foreclosed and inevitable.

The tragedy is that a little careful planning here could possibly have averted the worst as the fine print would have revealed it early enough for the homeowner to either avoid getting the loan or making an adjustment in order to meet the higher cost. So, the lesson is when it comes to credit, the fine print is all important.

They say there’s never a cloud without a silver lining and it certainly would seem so where foreclosures are concerned. The fact that so many foreclosures are now hitting the market is a clear indication that a market correction mechanism is in operation in the world of property speculation and real estate and it is part of the market’s self-correcting ability to stabilise every time it overheats.

Let’s look at this process a little more closely so we understand it: Left unchecked here’s what can happen to the real estate market. Properties begin to increase in price and value. The growing value of those who have already bought a property allows them to sell on so they can then invest in a bigger, more expensive one.

Those who are already in expensive properties take out second and third mortgages, releasing the equity in their property and enjoying some of the finer things in life. So far, so good. But, left unchecked the increase in house prices begins to force a lock out and a lock down. Those looking to get their foot on the first rung of the property ladder are beginning to get locked out as house prices on starter homes also experience an increase.

With no new buyers coming into the market those who are in the middle ground and need to sell on so they can move up begin to experience a lock down as sales begin to drop and buyers become sparse in a market that has suddenly got not just too expensive for them but also one lacking in movement.

This, in turn affects the entire real estate economy which relies on new home buyers for its buoyancy. You begin now to see why foreclosures can be considered a good thing. By ‘hitting’ those who have bad credit foreclosures break the impasse of the lock down and the barrier of the lock out and release, in the real estate market, a fresh spate of properties which are affordable and can enable buyers to come in at a level they could not before.

This also mobilises the market as new buyers, generally, spend more than those upgrading or staying put, and it stimulates the economy which stimulates growth and jobs and begins to finance credit and homes and the whole cycle starts again.

Am I oversimplifying a little? Definitely yes and I am not for a moment making light of the personal tragedy for the aspiring home owner which is a foreclosure, but you can see how from a market mechanics point of view foreclosures are a necessary self-correcting mechanism which allows the real estate market to be truly self-sustaining.

Understanding the different options a seller may be considering is important when negotiating with sellers. Below are the most common options that sellers may address with you if the sellers are either in default or anticipating being in default.

1. Reinstatement of Loan (Cure): This option is paying the lender everything that is owed in one lump sum to include missed payments, any late fees associated with these payments, foreclosure fees, legal fees and the principal owed during the delinquency. A cure may involve the seller curing or deeding it to the investor “subject to” the exisiting loans, who will cure. There is a risk to the homeowner that the lender may accelerate the loan because of the due-on-sale, and the homeowner no longer owns the property and has no recourse of the investor doesn’t pay the loans.

2. Repayment Plan: This is a written agreement between the lender and the seller. These plans require higher payments than the regular monthly mortgage amount for a period of time until the loan is brought up-to-date.

3. Loan Modification: A loan modification involves changing one or more terms of a mortgage. Modifications can be considered to reduce the interest rate of the mortgage, change the mortgage product (from an adjustable rate to a fixed rate, for example), extend the term of the mortgage or capitalize delinquent payments (add delinquent payments to the mortgage balance-only available in extreme hardship situations). Modifications are NOT easily granted and there must be strong, justifiable reasons for the request.

4. Forbearance Agreement: The lender will allow you a period of time (3-6 months typically) of either low payments or no payments at all. Unless the loan term is extended (which happens rarely), the later payments generally will have to be higher than the original monthly mortgage payments until the loan is up-to-date.

5. Special Forbearance (FHA Loans only): Allows eligible borrowers to postpone monthly mortgage payments for a minimum of four months. While there is no limit on the maximum number of months, at no time may the agreement allow the delinquency to exceed the equivalent of 12 monthly PITI installments.

6. Deed-in-Lieu: A Deed in Lieu is an option in which a borrower voluntarily deeds collateral property in exchange for a release from all obligations under the mortgage. A DIL may not be accepted from borrowers who can financially make their payments. If a borrower qualifies for a DIL program they may be eligible for cash back from the lender as in the “Cash for Keys” program.

7. Cash Sale: The borrower sells the property, pays off his loan, and, depending on the equity, may net some cash out of the deal. The challenge, of course, is being able to sell it quickly enough, which most often requires a substantial drop in the price.

8. Short Sale: The borrower makes an agreement with the investor to sell it for less than is actually owed, subject to approval of the lien holders. This generally results in no cash to the homeowner, but will be better for the better for his credit than a completed foreclosure.

9. Refinance: The borrower may be able to refinance and get a new loan, but generally this is difficult because the borrower has little equity and poor credit. The new loan likely will have higher payments than the old loan.

10. Do Nothing: The worst choice for the seller, whose credit will be ruined, but he can stay in the house for several months for nothing, save up some cash, and move when the lender or the high bidder from the auction eventually evicts the homeowner.

Explain each of these choices, and be honest with the homeowner. In many cases, he will trust you for your candid explanations. You may lose a deal or two by offering the homeowner choices that are actually BETTER than your offer, but that’s ok – always take the high road and you will have a long and properous business in real estate investing.