If you are facing the possibility of foreclosure you may be considered for the following:

• Special Forbearance  Your lender may be able to arrange a repayment plan based on your financial situation and may even provide for a temporary reduction or suspension of your payments.  You may qualify for this if you have recently experienced a reduction in income or an increase in living expenses.  You must furnish information to your lender to show that you would be able to meet the requirements of the new payment plan.
• Mortgage Modification  You may be able to refinance the debt and/or extend the term of your mortgage loan.  This may help you catch up by reducing the monthly payments to a more affordable level.  You may qualify if you have recovered from a financial problem and can afford the new payment amount.
• Partial Claim (FHA Loans)  Your lender may be able to work with you to obtain a one-time payment from the FHA-insurance fund to bring your mortgage current.  If you are between 4-12 months delinquent but can afford the regular monthly mortgage payment you may get a loan (a lien on your property with 0 payments, 0% interest) to bring your mortgage current.  This lien must be paid off when you refinance or sell your home.
• Pre-Foreclosure Sale (Short sale)  This will allow you to avoid foreclosure by selling your property for an amount less than is necessary to pay off your mortgage loan.
• Deed-in-Lieu-of Foreclosure  As a last resort, you may be able to voluntarily “give back” your property to the lender.  This won’t save your house, but it is not as damaging to your credit rating as a foreclosure.  In order to qualify for this option you must be delinquent on your mortgage, not qualify or be successful with any other work out option and only have one (1) mortgage on your home.

For more information on Foreclosure Prevention visit www.hud.gov or www.CommunityActionUC.org. To find a FREE HUD-approved housing counselor to explore your options call 1-800-569-4287 (TDD 1-800-877-8339).

Most homeowners who contact me are looking for ways to keep their homes. This means they are looking for option #1, how can I become current with my mortgage even though I am currently (or will soon be) behind in my payments? The average homeowner has a few options available in this case.
1. Refinance the home…if the home owner’s credit has been to badly damaged they may be able to refinance their home. Consider an FHA loan which allows a much lower credit score but still has competitive loan rates (some loan limits may apply).
2. Loan modification…contact your lender and ask them about options for loan modification. This is only realistic if your payment is about 1/3 of your total monthly income. If the payment is greater than 1/3 then a loan modification is simply delaying the inevitable (future foreclosure). Be careful when modifying your loan. If the lender simply adds all your back-payments and fees into the mortgage then your mortgage payment will go up and you won’t have done yourself any favors. You need a reduction in monthly payment either through a lower interest rate or reduced principle balance owed (or both).
3. Loan rescission…if the loan is for your personal residence and the loan is less than 3 years old, you may qualify for an extended right of rescission. Through this legal process you can force the lender to modify your loan to much more favorable terms that will be affordable to you. Since this process can take up to 1 year, you may also qualify for free housing during that year (at the lender’s expense).

If you already know that keeping the house isn’t going to be a possibility there are several more options for selling the home, even in today’s market, with terms that are acceptable to your lenders.
1. Short sale…selling you home to a buyer for less than you owe the lender. Most lenders are very willing to consider a short sale because they actually will make more money than if they foreclose. You should only proceed with a short sale with someone who is knowledgeable and experienced with the short sale process. Most mistakes in the short sale process are made in the early stages of the process and once these mistakes are made they usually can’t be undone and you could end up with a foreclosure anyway.
2. Seller financing…a simple way of saying that someone else with take over your responsibility to make the payments to the lender. This is a great way to sell a home but you need to make sure that the buyer is able and willing to make those payments on your behalf. If they don’t make the payments it is your credit on the line.
3. Assumptive short sale…a combination of options #1 & #2, this process will usually settle the 2nd mortgage for a discount (usually under $3,000) and may modify or simply reinstate the 1st mortgage after which the buyer will service the 1st mortgage on your behalf.
4. Mortgage rescission…cancelling the mortgage and enforcing the rescission through legal options will force the lender to take the property back with no further negative credit reporting. Because the mortgage is cancelled there can be no foreclosure, no deficiency judgement and no 1099 tax reporting.

While this list certainly isn’t exhaustive, it represents the top 7 options that most homeowner are utilizing in today’s market. For a more extensive list you can read my short consumer report by visiting me at my website at http://khayyamjones.com.

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.

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.

How much do you offer on a short sale purchase? How much of a discount is the lender actually willing to take? And what offer will the seller accept in the first place?

There are a few numbers that you need to be aware of when purchasing a short sale. The first and most important number is current market value! When considering what the current market value is today we do not take into consideration what the property sold for last or what the current owner owes on the property. We need to look at the value from the bank’s perspective…if the property is listed as an REO (bank owned) property, what price would most likely cause it to sell in 60 days? The answer to that question in current market value.

Why does this method work to determine value? Because the bank has to answer one simple question, “if we take the property back through foreclosure, how much can we realistically sell the property for?” The bank will determine this value with a BPO (Broker Price Opinion).

When we consider the market comparables we only look at property that has sold within the past 60 days; anything longer than this is old data. We also need to take into consideration the other active listings (the competition) in the area and how that will affect the sales price so that the property could sell in 60 days. If the property has been on the market for more than 30 days without an offer then the list price is too high for the current market.

Once you can figure out current market value your ready to begin to calculate an offer price. Once again we must look at the property from the perspective of the lender, “how much can we realistically expect to NET if we take this property back at foreclosure?” The lender will incur quite a few expenses through the foreclosure process (such as legal fees, holding costs, insurance fees, repair expenses, closing costs, realtor fees, etc.). The lenders are doing so many foreclosures now that they know these expenses very well for every area of the country. If you know what these expenses are you can figure out the lender’s bottom line. Your offer just has to be higher than their bottom line and they will accept your offer!

Experience has shown that the foreclosure costs for the lender are between 15-20% of market value. With this in mind let me share a quick example:

I have a property that was purchased for $300,000 about 18 months ago. Today the CMA (Comparative Market Analysis or Realtor Price) value of the home is about $250,000. Considering the market factors a current market value of $220,000 is more realistic. So the investor offer price on this property would start be between $176,000-187,000.

Now just because the lenders will accept this lower value doesn’t mean they won’t kick and scream about wanting more money. There is more to a short sale than just price. However, if done correctly most lenders will accept these lower values because they actually net more money through the short sale than they will net if they go through the entire foreclosure process. And since the lender will get less than they are owed they will require that the owner receive nothing, so any offer to the seller should be acceptable as long as the investor can perform.

The following items are important and need to be included in your hardship letter:
• Date
• Loan Number
• Reason for Default
• Supporting evidence and documentation
- Event details
- Date of events
• Documents supporting end of hardship (if applicable)
• Your proposed outcome (what you would like to happen)

The following is a list of valid reasons for hardship that would be accepted by most lenders:
• Death of borrower
• Death of spouse or family member
• Illness• Medical Bills
• Short-term or permanent disability
• Unemployment
• Decrease in working hours
• Decline in earning for self employment
• Elimination of overtime or second job
• Mandatory pay reduction
• Increase of expenses due to short-term unemployment
• Involuntary job relocation
• Failure of business
• Divorce
• Marital Separation
• Incarceration
• Military Duty
• Damage to Property

When writing your hardship letter make sure that you honestly represent the facts as you may be asked for supporting documentation to verify your claims. Include all of the things you have done to be responsible for your loan obligations. For example:
• Created family budget
• Seeking credit counseling
• Reduced bills & recurring expenses
• Secured new employment
• Secured additional employment
• Used savings
• Borrowed or closed retirement accounts
• Increased education (more employable)
• Sold large assets
- 2nd car
- Jewlery
• Stocks, bonds, mutual funds
• Cancelled luxury subscriptions
- Magazines
- Cable TV, Internet
• Exhausted other means to pay debt

(Click here to see examples of some hardship letters)