The Basics of "Short Sales"
byBill Bronchick

You will likely come across dozens ofproperties in foreclosure with little or no equity, that is, the sellerowes at close to or more than the property is worth. In these situations,lenders are sometimes willing to accept less than the full amount due,commonly referred to as a“short pay�?or“short sale.�?

Negotiatinga short sale with the lender is a difficult process, generally because itis a daunting task finding a bank officer who has the authority to accepta discount. You will have to call around to locate the lender’s“LossMitigation Department.�?More than likely, each lender you deal with willhave a separate name for this department, so be patient when calling. Muchlike getting your phone bill corrected, you can expect the process toinvolve a lot of waiting on hold and being bounced around an intricatemaze of automated voice mail systems. Once you get in touch with the rightperson, then the negotiating begins.

From the lender’s perspective,a short sale saves many of the costs associated with the foreclosureprocess - attorney fee's, the eviction process, delays from borrowerbankruptcy, damage to the property, costs associated with resale, etc. Ina short sale scenario, the lender gets the property back faster, so it isable to cut its losses. Your job as the investor is to convince the lenderthat it will fare better by accepting less money now.

The lenderwill want some information about the property, the borrower and the dealhe has made with you. Specifically, the lender wants to know what theproperty is worth. The lender will generally hire a local real estatebroker or appraiser to evaluate the property (called a broker’s priceopinion or“BPO�?). You can also submit your own appraisal or comparablesales information. In addition you will want to offer as much specificnegative information about the property as possible. Also, include somerelevant information about the neighborhood and the local economy ifthings are bad (copies of newspaper articles with“bad news�?may help). Acontract’s bid for repair estimates should also be submitted, which, ofcourse, should be the highest bid you can obtain!

The lender willalso ask for financial information about the borrower. Sort of a backwardsloan application, the borrower must prove that he is broke and unable toafford the payments. The borrower must show that he has no other source ofincome or assets to repay the loan. This process may involve as much, ifnot more paperwork than an original mortgage application! The borrowershould submit a“hardship letter�?, which is basically a sob story abouthow much financial trouble the borrower is in. This may require a littleliterary creativity, and some help on your part. Don’t lie, just paint apicture that doesn’t look good.

Finally, the lender generallywants to see a written contract between you and the seller. The lenderwants to make sure the seller isn’t walking away with any cash from thedeal. Generally, the contract must be written so that the buyer pays allcosts associated with the transaction, so that the“net cash�?to theseller is the exact amount of the short pay to the lender. A preliminaryHUD-1 settlement statement is often requested, which can be difficult,since many title and escrow companies simple won’t prepare one in advanceof closing. You can prepare your own HUD-1, and simply write“preliminary�?on the top.

Don’t be surprised if your short sale bid is rejected.Lenders aren’t emotionally attached to their properties, so they aren’t aslikely to give you“steal.�?Many short sales fall through if the BPO comesin too high, which is often the case. You can’t pull the wool over alender’s eyes - if the property isn’t is need of serious repair, it isunlikely you can convince the lender the property is worth a whole lotless than the appraised value.