Short Sales - A Guide For Foreclosure Investors - Part 2 However you do it just remember you must have cash to close the deal
within the times limit imposed by the lender. You will seldom have time to get
mortgage money by conventional means.
Keep in mind that after you pay off the discounted loan and pay the
buyer’s closing costs you will have the fix up and selling expenses. Calculate
what you can pay to satisfy the loan considering any repairs, costs and closing
costs. The payoff figure will probably fall somewhere from 40% to 60% of the
amount currently owning. Start low and negotiate up, if necessary.
From the result of the above calculation subtract what you estimate all
costs will be to purchase and resell the property. These costs will include rehab,
legal, closing, taxes, interest, some cash to seller and anything else that you
must pay.
Home value $120,000
Loan Balance 111,000
Payoff Offer 60.000
After paying the lender $60,000 your equity would be $60,000 (if home
sold for full market value). From that $60,000 equity you must deduct all costs to
arrive at your estimated profit potential.
Be careful about making your first offer extremely low. You don’t want to
lose your credibility as a person who is serious about arranging a payoff.
Now that you have an idea about how this opportunity works let’s go
through the three ways that lenders will agree to discounted loan payoffs:
1. THE DISCOUNT
You find a homeowner facing foreclosure who has little or no equity in
their home. You explain you may be able to buy the home if you can convince
the lender to give you a break on the amount due on the loan.
You must be upfront and tell the homeowner exactly what is going on and
have he/she/them sign a sales agreement.
If the homeowner knows (or think they know) the amount due on the loan
you can use 50% of that number as your purchase price as you fill out the
purchase contract. That number can be adjusted with an amendment to the
agreement after you talk to the mitigation rep and find out the true payoff figure.
At this point you just want to get the homeowner committed to the deal.
Get everyone who is on title to sign the purchase contract before you
contact the mitigation department.
These homeowners are under a lot of stress and you don’t want to depend
upon a verbal agreement and then have them back out just as the deal is ready
to go into escrow.
The homeowners must be told that they will get nothing at the close! They
have to understand that the deal will be void if you can’t strike an acceptable deal
with the lender. (Unless it would be practical to buy the home from the
homeowner on a “subject to” deal.)
To protect yourself, the purchase agreement you prepare for the
homeowners’ signatures must contain a clause like “This agreement is
contingent upon the lender accepting a discounted loan payoff acceptable to the
buyer.”
Now you – the investor - call the lender’s loss-mitigation department,
get the OK from the mitigation representative that the lender will consider a
discounted payoff offer and then you immediately fax or send by overnight
delivery an “Authorization To Disclose Financial Information” form to the official
you’ve just talked with.
The representative will not talk to you about the particular borrower’s
situation until you send the Authorization signed by the borrowers. Some lenders
require that the Authorization signatures be notarized. Ask the mitigation rep if
this is necessary. After the Authorization has been received the representative is
free to discuss with you the current state of the loan. You can learn the payoff
balance of the loan. That will be your starting point.
Authorization to Release Information
Authorization dated this ________ day of _______________, 20__________
Borrower(s): _____________________________________________________
Loan No.: ______________________________________
Property: _______________________________________
TO: __________________________________________________________
I/We the undersigned hereby authorize you to release information regarding the above-
referenced loan to ________________________________________________________
and/or their agents/assigns. This form may be duplicated in blank and or sent via
facsimile transmission. This authorization is a continuation authorization for said persons
to receive information about my loan, including duplicates of any notices sent to me
regarding my loan.
Borrower
SSN: __________________________
_
Borrower
SSN: __________________________
_
* * *
As soon as possible after the mitigation rep has received the Authorization
call and ask for the amount of money it will take to payoff the loan.
Then explain that you are trying to help Mr. & Mrs. Homeowner out of a
tight spot by buying their home, but you can’t do it with the dollar amount of the
loan balance. Point out that the home is in terrible condition and needs extensive
repair work…
- or a fertilizer plant has moved in near by and home values have plummeted…
- or there has been a jump in the neighborhood crime rate that is effecting
values…
- or the home next door is now a burned out shell and the borrower can’t find
a
buyer…
.
- Or whatever the conditions are that should be brought to the lender’s attention.
It is not helpful to reveal that you are a real estate investor. The lender is
not interested in helping anyone make a profit on the home. Just explain that
you are ready to buy, but that the homeowners need the lender’s help in selling
the home and that you will fax or overnight deliver to them your offer. Ask what
information you should send to the rep in your loan payoff offer.
Now that you know how much is owing on the full amount of the loan
balance you are able to complete your a sales agreement with the homeowners.
The purchase price will be the amount that you are offering the lender to payoff
the loan. If the amount of the loan is $110,000, your purchase price might be
$60,000.
Lenders will not accept a sales contract that shows the home seller is
receiving money. Why should they? If the lender is taking a loss on the loan
why should the borrower get any cash?
Lenders will not accept a sales contract that shows the contract can be
assigned. If you are planning on flipping the property you will have to arrange a
double close, so that the mitigation division is not aware of your plan. There’s
nothing unethical about doing the double close. The lender will only require that
the contract not be assignable. As soon as your escrow with the lender closes
they are paid off and your obligation to them is terminated.
Just be aware that the mitigation people do not want to see anyone
obviously making money on any of their discounted deals.
(Never put a For Sale sign in front of the property until after escrow closes. The
lender often will have someone inspect the property. They could learn that you
have the home for sale at full value. That would kill the discount deal.)
Most often you will want to give some cash to the seller. You must do this
under the table, so to speak. They can’t receive any money out of escrow.
You can have a verbal agreement with them to pay for services rendered.
The service could be something like hauling away all the trash found on the
property. This would be a confidential agreement between you and the seller.
How much to give them?
That’s up to you and the amount of profit in the deal. Any where from
$500 to $2,000 might be reasonable?
If the deal is successfully completed, at closing you must deposit $60,000
into the escrow, plus the customary buyer’s costs of closing. The $60,000 is the
gross amount the lender will receive. The lender will net something less after
paying the seller’s closing costs.
THE PACKAGE
You must present your payoff offer to the lender in an organized manner.
Prepare a package to send to the lender that will stress the urgent need of a
discounted loan payoff to facilitate the sale of the home. The first item in the
package should be a letter of intent. This letter states the “all inclusive” amount
you are offering to payoff the loan.
In the letter you list everything you are including in the package.
Remember, you asked the loan mitigation representative what information that
you should send to them. The sample letter below lists what some lenders
require.
* * *
Pacifica Atlantic Financial
Ms.June Chin, Loss Mitigation
1234 Peach Tree Circle
Atlanta, GA 7000
Concerning: Loan #9432B7759
Dear Ms. Chin:
As I explained in our brief phone conversation of Jan. 26th,
I have contracted to buy the home of Ramon and Linda Gomez.
You hold their mortgage note and a notice of foreclosure
has been recorded against their home at 6167 W. East Ave.
,
in Bad Water, AZ 85000.
My offer is $60,000 cash as payment in full, inclusive of
all fees, taxes, etc. I am prepared to close in 30 days or
less. My offer is contingent upon Pacifica Atlantic
Financial agreeing to the discounted pay off and that PAF
waives any possible deficiency judgment against the
borrowers.
Mr. And Mrs. Gomez owe far more than the property is worth
in its present condition. Their attorney is advising them
to file bankruptcy, but they’ve agreed to allow me to ask
you for a loan discount, so that I can buy the home. That
would allow them to begin repairing their financial
situation and save them from a foreclosure.
The property needs extensive work to bring it up to
neighborhood standards. If you will examine the included
comparable sales for the area you will see that considering
the cost of needed repairs Mr. and Mrs. Gomez owe
considerably more than the property is now worth.
The following documents are included in this mailing:
1. A copy of the Purchase Contract/Sales Agreement.
2. HUD-1 (or net sheet)
3. Letter from homeowner.
4. Photographs of the property.
5. Contractor’s estimate of repairs.
6. Comparable sales.
7. Proof of funds letter.
8. Escrow details.
You are well aware that time is of the essence in this
matter. It is my sincere desire that you find my offer
acceptable. Your expedited response will allow us to close
the sale and pay you the agreed upon amount as soon as
possible.
Sincerely,
(Your Signature)
That is a sample letter. There is no required format for this letter of intent
or cover letter. Just be sure it is clear and easy to understand.
* *
*
“My offer is $60,000 cash as payment in full, inclusive of all fees, taxes,
etc.” In effect, when the lender accepts this offer they are stepping into the
shoes of the seller as far as closing costs are concerned. At the closing the
lender will have to pay any costs customarily paid by the seller.
“Inclusive of all fees” means that any costs the lender must pay to close
will come out of the $60,000 you will be depositing into escrow. You are not
agreeing to payoff the loan and additionally pay for the lender’s closing costs.
There may be deals where you would pay those costs if required, but
many lenders don’t expect you to do that. Just make it clear in the letter of intent
and in the sales agreement with the homeowner that the dollar amount to payoff
the loan is “all inclusive”.
You, of course, will be responsible for any closing costs customarily paid
by the buyer. This document and accompanying materials are designed to provide authoritative information in regard to the subject matter covered in it. It is for illustration purposes only and presented with the understanding that the author and publisher are not engaged in rendering legal, accounting or other professional opinions. If legal advice or other expert assistance is required, the services of a competent professional should be sought. |
