How to Discount and Get a Short Sale Approved When There is Only a 1st Mortgage
There are so many misconceptions about how to negotiate 1st mortgages versus 2nd mortgages when dealing with a real estate short sale! First off, one of the most important details to be aware of in today’s market is that the 1st mortgage is typically the lien holder that is foreclosing on the seller, and seeking to repossess the property. And so when you first start working with the seller, make sure to ask them if the 1st mortgage lender has contacted them regarding the foreclosure process or if they’ve received any letters from the court. Make sure to let them know that depending on how many months behind they are that it will govern the chances for success of the short sale. For example, we’ve had sellers that have come to us 5 days before the lender was set to foreclose and take title to their home. In those situations, it is quite likely that the lender will not postpone the foreclosure, and so make sure the seller understands that. Outside of these rare situations, a lender will typically postpone a foreclosure to allow for review of an offer, but it is always important information to keep in mind when dealing with a 1st mortgage lender.
When discounting a 1st mortgage, you will need to pay close attention to and know the foreclosing lender’s investor guidelines. (For a description of how to find out what “foreclosing lenders investor guidelines” are go to www.RealEstateBusinessMentors.com). For example, the investor on a loan may be FHA, in which case the lowest offer they’ll accept must net them a minimum of 84% of the appraised value, or else the buyer will have to come up on their offer. Upon gathering the short sale paperwork and loan information from the seller, ask them if they know if they have an FHA or Fannie Mae backed loan. If they don’t know, then you can always ask a representative at the lender once you have authorization on file. One of the benefits of knowing the investor’s guidelines is that you can set proper expectations for everyone involved in the transaction, especially the buyer, so that they’ll be able to see clearly why the lender is asking for the offer that they are.
In addition to these points, and just as in any typical short sale, make sure to present any and all evidence you have that relates to the property’s value (comparables, log of showings, listing history, etc). Some properties that we’ve worked on have been located in rough neighborhoods. If that’s the case with yours, make sure the negotiator knows about it. And when submitting your short sale package and filling out your HUD1 Settlement Statement or “Net” Sheet, make sure to keep a close eye on the property taxes or any water or sewer taxes that may be delinquent so you can provide accurate numbers for the lender, since those balances are paid before the 1st mortgage (also if you are working on a condo keep in mind that in some states the condo association fees are paid ahead of the mortgage). When adding taxes to the HUD1 it is essential to make sure you estimate and add an extra 4 months or so worth of property taxes (if they are not included in the mortgage payment); water and sewer usage and condo association dues (if you are working on a condo). This is a huge mistake that many real estate agents, title agents, investors and attorneys make due to the fact that they do not take into consideration the length of time a short sale can take! There’s nothing worse than spending 6 months on a short sale, only to find out that someone is going to have to pay out of pocket for taxes that weren’t accounted for!
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I recently looked into investing in foreclosed homes but did not succeed. Would like to get your thoughts on investing in them.