UTAH REAL ESTATE INVESTOR

I have a simple strategy that I use when I want to get a short sale sold. Here is the process:

1. List the Property
2. Get an Investor Offer on the Property
3. Collect current Financials & other Short Sale Documents
4. Submit entire short sale packet to lender(s)
5. Order BPO/Appraisal and lender’s BPO/Appraisal
6. Start a “Dutch Auction” list price weekly reduction
7. Negotiate lowest acceptable net price to lender
8. Compare Highest & Best offer with lender’s approved price/value
9. Close transaction

Here is a short summary of the reasoning behind each step:

1. List the Property
The lender wants to know that we are doing everything we can to facilitate a sale. If the lender knows that it is listed and marketed on the MLS then we have the best chance of finding a qualified end buyer. They also know that the offers from a listed property represent “market value” and are more willing to negotiate a good settlement value.

2. Get an Investor Offer on the Property
Investors will always offer a low price on any property in order to get the best deal available. At this stage of the game it doesn’t matter, we just need a legitimate offer that we can submit to the lender to get the short sale process started (we are always honest and never fabricate an offer). We also want that offer to be low so that we can find the lowest acceptable value that the lender will approve.

3. Collect current Financials & other Short Sale Documents
The financial information needs to be current so it is collected when we have an offer. I have a network of investors so I know I’ll have an offer within a couple days of listing the property so I begin to collect this information immediately. The short sale documents include all the financial information to “prove” to the lender that the seller can no longer afford to keep the property and that they need to sell it. These documents also show what happened to the seller because they could afford the property when they bought it and now they can’t they afford it. All information needs to be truthful and honest.

4. Submit entire short sale packet to lender(s)
All the information is submitted in one packet to the lender. This keeps information from becoming lost and allows the process to move forward more quickly. Since most lenders are backed up with other short sales and foreclosures, the first several calls to the lender will just be checking on information and making sure that all information then lender needs has been submitted. Any missing information can quickly be resubmitted.

5. Order BPO/Appraisal and lender’s BPO/Appraisal
While almost no one does this, we order our own BPO on each property. We want to have an independent opinion of value and price. The 1st mortgage lender will almost always order their own BPO (an appraisal if the loan is over FHA limits) to establish value. With our own BPO in hand we will meet the BPO agent and show them the property and give them a copy of the BPO as a second opinion. We will point out those things which are important to the value of the property but that may not be obvious to someone not already familiar with the property. Our main objective is to get an idea of where that agent feels the value of the property will be (although they never tell us their value). We also use our BPO to send to any junior lein-holders so they are also aware of value (which makes negotiations with them go more smoothly).

6. Start a “Dutch Auction” list price weekly reduction
To get the best price available we need to have competing offers. Once the BPO has been completed by the lender we start to lower the price each week until we start to get offers on the property. If we don’t see any offers during the week we lower the price. (I like to lower the price on Thursday so that anyone looking for homes to view over the weekend will see the price change and come to see the home.)

7. Negotiate lowest acceptable net price to lender
Once all of the paperwork has been received by the lender the case/file is assigned to a negotiator who then orders the BPO/appraisal. (Note: We hold any subsequent offers until the negotiation is concluded to establish the best possible pay-off/settlement the lender will allow for the seller.) Once the BPO has been received by the lender we begin the actual negotiations. We know that the lender’s BPO value represents the price that the lender believes they can sell the property for (should they take the property back through foreclosure). We know that the lender’s bottom line is below that number because the foreclosure process is very expensive (attorney’s fees, property insurance, loan interest to Fed, selling costs, commissions, concessions, and dropping property values…not to mention the problems the lenders are having with too much bad debt on their books). Those costs generally add up to 15-20% of the property value (they can be significantly higher in upper-end homes). The lender will negotiate a value that is as high as possible but at least higher than their bottom line through the foreclosure process. Once they agree to a net value it is logged into their system.

8. Compare Highest & Best offer with lender’s approved price/value
Once we have determined the lender’s bottom line we will compare that value with our highest & best offer on the property. If the H&B offer is significantly higher than the lender’s approved bottom line then the investor will buy the property and resell it to the buyer with the H&B offer. However, if the H&B offer is not significantly higher then the lender’s bottom line then the H&B offer is submitted to the lender for approval and that buyer will close a single transaction. (Significantly higher means about 12-15% of the property value. The investor will have costs associated with 2 closings: 1% 1st closing costs, 3% money costs, 1% 2nd closing costs, 3% commission to 2nd buyer’s agent and the investor’s profit. So if the investor finds their own buyer they can reduce the sales price by 3% and still be profitable.)

9. Close transaction
Finally we close the transaction, either with or without the investor. The seller should be done with this settlement and no further negative reporting from the lender (our agreement with the lender states something to the effect of “satisfaction in full to seller”). Because the lender is writing off the “bad debt” lost in the negotiations, the seller may see a 1099 tax form which shows the lender’s loss as income for the seller. If the property was the seller’s principle residence then that “income” may be excluded from their taxes (some restrictions apply so consult your tax advisor).

Conclusion
At the end of the day this process is not 100% successful. However, it is a process that gives the seller the best chance of getting an approved short sale from their lender that is sellable in today’s market.

I have worked with many agents who are now working short sales. The process of working with the lender is no longer so mysterious and in most cases is fairly straight forward, albeit usually quite time consuming. But there is one problem that seems to plague the majority of the real estate agents currently working in this arena…the game plan!

The average agent, once they get their short sale listing, does a market analysis and determines a range for current market value. In their efforts to get the best deal for their clients and have the best chance for a short sale approval, these agents list the property at the top of the range for market value. If they can get an offer, they reason, it should be approved because it is close to market value. If they get an offer and that buyer is willing to wait 60-90 days (wondering if they will get to buy the house) and the lender’s BPO/appraisal comes back appropriately and the lender’s investor approves the deal and the supporting documentation has been properly submitted and recorded (and nothing lost or deleted) and the market hasn’t changed during the process (values haven’t dropped any more) then the deal is done.

This process works occasionally, enough so that most agents feel they are successful short sale negotiators. However, this seems to be a precarious game to be playing with your clients financial future. It seems to me that a better game plan could be employed to create more probability that your short sale will be approved.

The process I use is a little more calculated to bring a successful closing for my clients. Our first offer is ALWAYS from an investor. An investor offer is significantly lower than market value. This offer is submitted to the lender with all the supporting short sale documentation (all at the same time). An independent BPO is ordered by us for our own notes and is used when there is a junior lien-holder (usually a 2nd mortgage). We are always present when the lender’s agent does their BPO and we make sure to share our BPO with them (in case it can be of benefit to them to have a second opinion). We know the lender has a lot of costs should they choose to foreclose which usually costs about 15-20% of the value of the property. We show the lender that a short sale will net them more than a foreclosure (and it will save them all of the work, hassle, bad debt, etc.).

Since we started the negotiations at a low offer we can increase the price (net to lender) and still have a value below current market value that we can sell quickly in any market. Once the BPO has been completed by the lender we begin to lower the value (much like a Dutch Auction) until we start to get competing offers. These offers a generally better than the investor’s offer and still better than the lender’s bottom line. This means that if the investor backs out of the deal we have back-up offers on the property or if the investor consummates their purchase they have end buyers interested in purchase the “flip” with virtually no holding costs. The real triumph is that the seller gets an approved short sale price that can be sold under current market conditions and usually will create competing offers too.

Why don’t most real estate agents fail to use this method. I don’t have that answer but I suspect that there are two major reasons. 1) The agents are not trained to think like investors and do not honestly believe that the lender will accept such low offers, even if you show them that it is in the lender’s best interest to do so. And 2) the agents don’t have time or don’t have the skills to truly negotiate with the lenders; so going for the easy negotiation is their only option.

What is the harm with going for a market value offer? Nothing if the sale is consummated. The problems occur when the buyer backs out of the deal (which occurs most of the time). If an offer is submitted today at market value then a couple of problems may occur. 1) The buyer usually doesn’t stick around for the approval in 90 days. 2) The lender believes that they can get another market value offer or better and their expectation is set too high; they won’t consider lower offers. 3) In a market that is losing value, a market value offer 90 days from now is less than a market value today; a buyer who sticks around still won’t be able to get the appraisal value high enough to complete the purchase (or they buy a property that is upside down from day 1 and who will do that in today’s market?). This is a bad scenario for everyone.

My advice is to start with an investor offer. The chances for being successful are better if you start your negotiations lower and you can still sell for market value when the sale is approved in 60-90 days.

The economy has hurt a lot of people and many families have been forced our of their homes through the foreclosure process. With all the economic problems already weighing you down, what do you do when your mortgage company sends you a tax form 1099-C showing their loss as your gain? Does that mean you have to pay taxes on that money the mortgage company lost when you already have no money (which is why you lost your home in the first place)?

Not necessarily! There may be help through the Mortgage Forgiveness Debt Relief Act of 2007 (enacted Dec. 20, 2006). According to this act, up to $1,000,000 of forgiven debt on your principle residence may be excluded from your taxes (up to $2,000,000 if filing jointly). This debt forgiveness does not apply to second homes, investment property, business property, credit cards or car loans. Also, the debt on the principle residence must have been used to purchase, build or substantially improve the property (so if the loan was to get cash to pay for a new car, kid’s college, investments, etc., then this debt is not exempt under this act).

For most Americans this is extremely good news! Because of our country’s economic struggles, this debt relief act has been extended through 2012. To take advantage of this legislation you will need to fill out IRS form 982 and submit it with your other tax documents.