Short Sales - A Guide For Foreclosure Investors - Part 4 Loss Mitigation
The Steps:
1. Find a no equity home in foreclosure.
2. Explain deal to owner and sign sales contract.
3. Contact mitigation rep and send Authorization.
4. Ask rep for loan payoff figure and where to send discount offer.
5. Get preliminary title report.
6. Negotiate discounts with other lien holders (if necessary).
7. Amend signed sales contract with your purchase offer.
8. Put together package for mitigation rep’s consideration.
9. Receive affirmative response from rep in writing.
10.Start escrow, deposit funds, close.
Now you understand how a loan might be “discounted”. That was the #1
method that lenders might offer to distressed homeowners. Methods #2 and #3
are similar, but different.
2. THE SHORT SALE
You contact the lender and ask if they will discount the loan. They say no, but
that they will consider a “Short Sale”.
With a short sale the mitigation representative may say that they can only
deal directly with the borrower/homeowner. In that case ask for the phone
number the homeowner must call to get the ball rolling.
When negotiating a short sale instead of you putting together a package to
send to the lender, the lender will send a package to the homeowner. In some
cases you can explain on the phone that you are helping the homeowner and
they will allow you to request that the package be sent to the homeowner.
The short sale package will have a number of pages and is something like the
package of documents a borrower must complete when applying for a loan. You
can help the homeowner fill out the information needed in each form.
The information requested is designed to prove to the lender that the
homeowner is truly facing a financial crisis and must be allowed to pay off the
loan at a discount if they are to have any chance of selling the home.
Just follow the directions in the short sale package. Include anything from the
“discount” method that you feel will help move the mitigation rep toward
accepting your offer.
The lender may ask for a listing agreement from a real estate broker. They
want to see that the homeowner has really made an attempt to sell. If the
homeowner has not tried to sell by listing with an agent see if you can find one
who will cooperate with you. The lender is usually willing to pay the real estate
broker’s commission out of the money he receives. Have the agent list the
property in the MLS as “sale pending”. You have a signed purchase agreement
with the seller, so that’s a true statement.
The price listed in the MLS will be too high to attract any other buyer. The
agent will add the mortgage balance to the agent’s commission and closing
costs. With a no equity property that price will be completely unreasonable and
more motivation for the lender to agree to a deal.
When the short sale package is returned be sure and list yourself as contact
person. Then anyone the lender hires to inspect the property will have to ask
you to show it to them. That will give you a chance to explain to them how
hopeless the financial situation of the homeowner is and getting a short sale
done with the lender quickly is their only hope.
Yes, your job is to manipulate and do what you can to get the deal accepted.
Just do it from the heart and honestly. There’s nothing wrong with stressing the
negative to help save the homeowner from a foreclosure entry on their credit
report.
3. AFTER FORECLOSURE PURCHASE
Some lenders will only allow you to pay off the loan at a discount after they
have foreclosed on the property.
With these lenders you negotiate your purchase agreement before they
acquire the property at the foreclosure sale, but the purchase does not take place
until after the sale.
In this situation you contact a homeowner who is facing foreclosure. You
explain that you can only buy the property of the lender will discount the
mortgage loan.
You contact the lender and they explain they will strike a discount deal
with you, but it can only take effect after the sale.
At that point you terminate your relationship with the homeowner. Explain
that the lender will not offer the homeowner a discounted payoff, so you are not
able to buy the home.
You then submit your offer package (without anything concerning the
homeowner) to the lender and negotiate a deal.
Don’t confuse this method with a purchase from the lender’s Real Estate
Owned (REO) department. With an REO you are buying a home from the
lender’s inventory of homes acquired in foreclosure sales from the previous
weeks or months.
In this “before & after foreclosure sale” purchase you are making your deal
before the actual foreclosure sale and closing the deal after the sale.
The authors must admit we have never been involved in an “after
foreclosure” home purchase. This is a situation where the mitigation rep should
be willing to give you plenty of guidance. We would guess that the purchase
agreement would contain a clause stating that the agreement would be null and
void if there was a buyer at the sale who entered a bid higher than the lender’s
credit bid.
(A credit bid is the amount owed to the lender and in most cases is used as the
opening bid in a foreclosure sale. If someone bids over that amount the lender
would be getting paid for the full balance of the loan, plus the amount of the over
bid. There would be no reason to allow you to make discounted payoff.)
REDEMPTION PERIOD
In some states the law gives a homeowner a certain number of months
after a foreclosure to pay off the loan and reclaim their home. That is called the
Redemption Period. It may be possible to arrange a discounted loan payoff
during this redemption period.
A discount would probably only be possible if the bank had been the only
bidder at the foreclosure sale. They would then own the home and might be
interested in taking a discount on the original loan amount so they could get rid of
the home.
If a private bidder has purchased the home at the foreclosure sale there
would be no chance for a discount deal.
To redeem the homeowner would have to come up with the amount the
private bidder paid, plus costs. The private bidder would have over bid the
lender’s credit bid, so the full value of the loan would have been paid for the
property.
KEEP TRYING
If you try for any of the discounted payoff opportunities and are refused.
Keep trying. Talk to the loss mitigation rep and see if there might be some other
way to make an offer that would be accepted. If it is in the lender’s best interest
not to own the property there probably will be some kind of deal that would be of
interest.
Remember, things change. What you are reading here is a pattern that is
working well at the time these words are being written. As the word spreads
among investors it is possible that lenders may change the requirements for
discounted payoffs.
Chances are that during times when there are a lot of foreclosures lenders
will not want to own houses and there will be some variation available of what
you are learning here.
VA Loans
When considering a workout solution for VA loans, borrowers should be aware
they might lose their VA eligibility if a compromise sale, Deed-in-lieu, or
Foreclosure is completed. The exception is when VA executes a release of
liability, or the deficiency is paid in full.
Contact the local VA, as they may be aware of community or government
assistance programs willing to help borrowers in financial difficulty. You as the
investor may guide the homeowner through one of these programs and then buy
the property.
FHA
FHA actively encourages lenders to mitigate solutions with the purpose of
keeping borrowers in their homes and the cost of foreclosures at a minimum.
FHA provides lenders with a monetary incentive when a lender works out a
solution with a borrower.
To present your case, contact the lender and ask for the "Loss Mitigation
Department."
Now, suppose the loan servicer is uncooperative when it comes to making a
deal. Don't give up hope. Instead, ask them if Fannie Mae or Freddie Mac
guarantees the loan?
If they say yes, hang up the phone and call the appropriate agency. Both Fannie
Mae and Freddie Mac have programs that can help people who are having
difficulties with their loan payments. Typical loan modifications offered by these
agencies include a reduction in the interest rate (and therefore in the monthly
payment), or an extension of the loan term. Any of these can create an attractive
buying opportunity for an investor.
The following phone numbers were current at the time this was written:
Fannie Mae: (800) 732-6643
Freddie Mac: (800) 373-3343
Second Mortgages
Second mortgages are liens recorded behind the first mortgage. All workout
options used as examples here apply to secondary liens also. If you are
delinquent on a second mortgage and unable to reach an acceptable solution,
this lender may foreclose. If so, this lender is then responsible for keeping the
first mortgage current. If the foreclosure process is completed and there is a
deficiency balance remaining on the second, the lender may not collect it in
states that allow non-judicial foreclosure.
However, the second mortgage can become an unsecured loan, and therefore
collectable, under the following combination of circumstances:
1. The first mortgage is delinquent.
2. The holder of the first forecloses.
3. There is not enough money after the auction to cure the second.
The holder of the "second" then has access to the normal court process for
collecting the deficiency as unsecured debt: lawsuit, judgment, and wage
garnishment.
In the case of a short sale, a second note holder may consider a settlement or
recasting of the loan because he knows his risk of loss is high.
Title I home improvement loans have different restrictions depending on the type
of first mortgage:
If the first is an FHA loan, the Title I loan must be treated differently when a pre-
foreclosure sale occurs. They may accept $2,000 to settle, or they may want to
reaffirm as an unsecured note.
If the first mortgage is a conventional or VA loan, Title I may require as much as
50% of the balance owing up front and carry back an unsecured loan on the
remaining 50%.
BE CAREFUL
As you begin to deal with a distressed homeowner you must consider
protecting yourself. You don’t want to spend the time and effort setting up a
profitable discount deal and then have the homeowner find a way to go around
you or just disappear.
Have them sign a sales agreement as soon as they agree to let you try and work
out a deal. You can guess at a purchase price and amend the agreement later, if
necessary.
An even better method would be to have them sign a sales agreement
and a deed. Then you would have complete control. If for some reason the deal
fell through just tear up the deed. As long as you don’t record the deed until
escrow closes you have no worries.
JUNIOR LIENS
With financially distressed homeowners it is not unusual to find that there
are other liens on the property. That’s why it is very important that you examine
a preliminary title report before you send the mitigation rep your offer package.
Many lien holders will settle for some quick cash and release their liens.
Usually they have not been receiving payments, so they know there’s a problem.
Contact these lien holders, explain the homeowner is a financial disaster
and will never be able pay another nickel. In fact, the homeowner is considering
bankruptcy. Offer to give them some quick cash if they will sign a satisfaction of
lien within three days (or whatever).
How much to pay? 5% to 10% of the balance due is a good offer,
depending on the size of the loan. Start very low and move up only slightly.
Every deal is different and the amount of your potential profit will vary. Do
what seems sensible.
TAXES
Whenever anyone is forgiven a portion of a loan the amount forgiven is
considered by the IRS as taxable income.
Example:
The balance owing on the loan is $100,000
The lender accepts a discounted payoff of $60,000
The lender has forgiven $40,000 of the amount originally borrowed by the
homeowner. $40,000 is considered taxable income to the homeowner.
The lender is required by IRS regulation to send to the homeowner a form
1099 listing the amount forgiven. A copy is also sent to the IRS. The homeowner
must give the 1099 to whoever prepares his tax return for that year.
Be sure and explain this to the homeowner when you are putting the deal
together. It maybe that they have so little income the forgiven loan amount won’t
have much effect on their tax status.
FHA – VA – PMI
Lenders who make mortgage loans conforming to FHA requirements have
those loans insured up to 82% to 87% of the property’s appraised value. VA
loans insure the lender up to 91% of appraisal. That means that the lender will
be reimbursed by the government for any loss that falls within those guidelines.
The government’s intent with these insured loans is to make mortgage
loans easy to get and allow more voters the chance to own a home.
You can often buy the home for the amount of the insurance pay off.
Example:
Home appraises at $120,000
The insurance pay off is (lender will receive) $100,800 (84%
)
If buying that home at $100,800 would be a profitable deal, then make
your offer. Often these homes need extensive fix-up. Make a careful estimate of
how much that may cost before you try for a deal.
Private Mortgage Insurance (PMI) payoffs to the lender have some room
for negotiation. Those loans can present a better opportunity. Ask the loss
mitigation rep for guidance with these opportunities. 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. |
