The term “short sale” isn’t actually a niche in the same way as others are. It’s actually a strategy for purchasing properties with no equity in pre-foreclosure. I’m listing it as a separate niche because though you will fall into situations where a short sale is necessary when dealing with pre-foreclosures, and should know how to handle a short sale when the a property requiring a short sale comes along. Many make a living only reaching out for homes with the potential to short sale. For today, I am going to refer to it as a subheading of pre-foreclosures.
Be sure and refer to information found in the Niche I cover here on Pre-foreclosures. Much of the information in this article also applies to short sales.
A short sale is where you negotiate with the lender for an overextended asset, (most often a bank), to settle on acceptance to buy that asset for less than the total amount due. In real estate, a short sale is when a bank or mortgage lender agrees to discount a loan balance due to an economic hardship on the part of the mortgagee.
A short sale may be the only solution for sellers that have little or no equity, owing more than the
value of the property
Extenuating circumstances usually delegate whether or not banks will discount a loan balance. These circumstances are usually related to the current real estate market climate combined with the individual borrower’s financial situation. A short sale typically is executed to prevent a home from going into foreclosure. Often a bank will choose to allow a short sale if they believe that it will result in a smaller financial loss than foreclosing.
A successful short sale negotiation may prevent the homeowner’s need for a foreclosure or bankruptcy. A short sale can satisfy a loan balance in full limiting the additional adverse effects on a person’s credit file should a foreclosure occur.
Note: A short sale does not change a customer’s credit history. Credit is already damaged when payments are not made.
- Why are Short Sales a good niche to consider?
- Potential opportunity to buy property at a discount
- Feeling of being able to help a homeowner losing their house to foreclosure
- Potential for profits from sale of property that is currently upside down on a mortgage.
- Seller avoids having foreclosure on credit report, allows for quicker recovery to credit
- Seller will not need to make mortgage payments while living in the house during short sale negotiations.
- Seller will be eligible, under Fannie Mae guidelines, to buy another home in 2 years instead of 5 years would it have gone to foreclosure. For many sellers, the chance to buy another home in two years is a real motivation to do a short sale. Good credit behavior can supplant bad credit after two years, even though the derogatory will remain.
- Relief from emotional stress for the seller. Collection calls from mortgage company stop coming during the negotiation process.
- What are downsides of this niche?
- Lenders are not always agreeable to lower the price to what the house is worth.
- It can take several months before your offer is accepted by the bank, if at all.
- Overall uncertainty and lack of control for so many of the outcomes such as the BPO, (Brokers Price Opinion), the buyer’s financing, the sellers backing out unexpectedly, the loss mitigation’s requirements, etc.
- Waiting for the bank to accept your offer is frustrating.
- The bank will want to examine the seller’s personal records such as tax returns, bank accounts, assets and liabilities, in addition to asking for a hardship letter from you. (In fact this information may be asked for several times during a negotiation process)
- Accommodating buyers will mean keeping their home in proper condition for weeks or months until an offer is received and putting up with traffic through a seller’s home.
- There is no assurance the bank will accept a short sale offer no matter how much time and money has been spent in negotiations.
- The derogatory credit will still remain on seller’s credit report for 7 years.
- What are good market conditions to consider this niche?
You want to look for the following market conditions in the area (s) you plan to research and invest.
- There is a high number of homes in pre-foreclosure
- Interest rates on loans are high.
- Lenders are flexible to work with those who have been late on their payments, (For example, today the government is paying lenders to accept a short sale).
- Loans and refinances are difficult for anyone with late payment to obtain.
- Average property prices are declining.
- What are bad market conditions where you might want to avoid this niche?
Avoid focusing on this niche if these conditions exist.
- There is a low number of homes in foreclosures
- Low mortgage interest rates – allow for lowering payments on refinance
- Average property prices are increasing.
- STEPS TO HANDLING SHORT SALES:
- Establish Personal Goals
- Research Your Market
- Research and invest in necessary Tools and Training
- Invest in a personal coach/mentor
- Establish Your Real Estate Investing Goals
- Put together qualified Power team
- Market to develop buyers list
- Get financing options in place
- Purchase a pre-foreclosure leads list from reputable list company
- While you can often go to your local county courthouse (or visit them online), paying a firm for this outsourced service is a much better use of your time as an investor
- Do marketing for pre-foreclosure prospects
- Direct Mail
- Bandit Signs
- FSBO ads
- Business Cards
- Pro-actively reach out to property sellers who advertising their property is a short sale
- Ask a realtor to have any new listings meeting your criteria emailed to you daily.
- Contact realtors listing properties who are showing “Short sale” on listing.
- Develop relationships with realtors to bring you all their short sales and other deals they list before they hit the market.
- Interact with Sellers
- Evaluate Property and Profitability
- Get into Contract with seller
- Gather documents required by the bank to consider a short sale
- (See below for complete short sale package checklist)
- Decide who is going to be handling the short sale negotiations
- Buy it!
- Rent or Sell it!
A Complete Short Sale Package Must be Presented to the BANK
- The following forms are usually created and provided to the bank by the investor or short sale negotiator:
- Short Sale Cover Letter – Overview Of Offer
- Detailed Repair Estimate for the property.
- Bid for work to be done for repairs. This should be done by a contractor. Obtaining more than one estimate is helpful.
- Comparable sales for the property. If you don’t have access to pull MLS comps, you can ask your Realtor to pull 3 actives and 3 sold comparable properties to send in with your short sale package.
- Net Sheet or completed HUD. A Net sheet is a little easier to fill out. This will show the bank or lender just how much money they will walk away from the deal with after everything is said and done.
- BPO (optional) Hire a BPO agent to do this.
- Proof Of Buyer Funds Letter (optional)
seller to sign:
- Authorization to Release for seller – This form will allow someone other than the borrower (homeowner) to speak to the bank about the loan.
Contracts to Purchase
- Option To Purchase Agreement
- Memorandum of Option
- Affidavit of Understanding
- Agreement to Select Negotiator
- Statement of financial condition (Most of the time you can use a generic financial statement, but some lenders require that they be written on their specific financial statement form.
- Copy of all Mortgage docouments showing type of loan:
(fixed, ARM, or balloon payment)
- Copy of Previous HUD Settlement Statement (when they bought house, if available)
- Copy of any collection letters, foreclosure filings, etc.
- Most recent mortgage statement or coupon showing balances
- Attorney Letters (if any)
- 60 days – All Current Bank Statements – all pages must be received (If the homeowner does not have a bank account, then provide the bank a letter stating this fact.
- Copy of Homeowners Insurance Policy
- Listing sheet (if house was listed by a Realtor or purchased from a Builder)
- Copy of previous Appraisals if any
- Hardship Letter – this is a letter that is written by the homeowner describing their current situation, and why they fell into economic hardship.
- Two years of income tax returns – all pages (self explanatory)
- Two months of pay stubs (If none – letter of explanation)
- Supporting Hardship Info – HOA liens, medical/disability statements etc.
- Supporting Information about condition of neighborhood, house, area.
This concludes my article on Short Sales. If you are interested in my personal coaching/training services for this and all the Niches I have shared, go here to see if my program fits your needs.
Watch for my next post on Absentee Owners.
To learn more about 12 of the most popular real estate investing niches, please enjoy the articles I have written detailing how to use them and grow your real estate investing business. Enjoy!