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Archive for the ‘Foreclosure’ Category

Q: What makes a bank decide whether to take a discount on a defaulted mortgage or not? And what formula do they use to decide how much to take? Some banks I’ve talked to have just said no to a discount right away, and others seem perfectly happy to negotiate any offer, even if it’s a fraction of the loan amount. What gives?—D.D., Houston

There are a number of factors that go into a lender’s decision about whether (and by how much) to discount a loan gone bad. Some are obvious; some involve the vagaries of the lending market.

The first step in getting a particular lender to consider your short sale offer is to have your own ducks in a row. Before the lender will even discuss an offer with you, you’ll need a signed purchase contract and a letter of permission from the seller allowing the bank to discuss his loan with you) You’ll also need to make sure that you’re talking to the right person at the right bank—sometimes the place that the seller is sending his payments is not the lender at all, but just a loan servicer. And there’s usually only one person within a given institution who’s empowered to take offers to the board, so discussing your offer with anyone else is a dead end. And don’t even bother to call the attorney who’s handling the foreclosure—there’s absolutely nothing he can do for you.

Assuming you’ve done your homework and are talking to the right paper-pusher, there are a number of other factors that could affect how open the lender is to your offer. One is where the loan is in the foreclosure process. If the borrower is just a few months behind—or if the auction is happening in 3 days—the bank might not be terribly motivated to take a major discount. In the first case, they may assume that they can work out a payoff with the owner: in the second, they’ve already invested a great deal of money in legal fees, and may feel that it’s better to take their chances on getting the property back and reselling it on the open market.

Another issue is the condition of the property. Most lenders are hesitant to take back a property that needs major work, or that has building orders, or that could become an “attractive nuisance.” In other words, the nastier the house, the better the chance that the lender will deal.

Of course, the lender’s position as creditor is another big factor: 2nd and 3rd mortgagors are usually much more willing to discount—and discount big—than a 1st mortgagor. Think about it: the seller may have no equity thanks to a 75% 1st mortgage and a 30% 2nd, but the 1st mortgagor has 25% equity if he has to take the property back.

The requirements of the lender’s private mortgage insurance company or of FHA and VA insurance also influence its decision about how much to discount, as does the housing market, difficulty of foreclosure in a particular state, number of bad loans the bank is dealing with, likelihood that the owner will declare bankruptcy, and many, many more variables. So the short answer is, there’s no short answer. Make your best offer, keep following up, and don’t get discouraged!

Over the past two years, it seems like everyone and his brother has jumped onto the short payoff sale bandwagon. The problem with ninety-nine percent of the short sales hype that’s currently being foisted onto an unsuspecting public, by unscrupulous real estate hucksters peddling overpriced courses and boot camp seminars, is that it’s based on misinformation, half-truths, distortions and outright lies. All of this hype has fueled unrealistic expectations on the part of would-be short sale investors, who’ve been led to believe, that every lender in America will approve a short payoff sale at the drop of a hat.

The Definition Of A Short Payoff Sale

A short payoff sale is generally defined by loan loss mitigation professionals, as: “A sale in which a lender allows the property securing a mortgage or deed of trust loan to be sold for less than the existing loan balance, due to factors such as the borrower’s financial circumstances, the property’s physical condition, and local real estate market conditions.”

Short Payoff Sales Are Lenders Last Resort Before Proceeding With Foreclosure

First things first: In spite of what the self-professed short sale pros and experts may espouse, bona fide short payoff sale transactions are very few and far between. In fact, most lenders will only approve a short payoff sale as a last resort, when foreclosure isn’t economically feasible because the borrower is insolvent, and:

1. The property was purchased or refinanced at the top of a seller’s market at an over-inflated price, and has had a substantial drop in value.
2. The property was refinanced at one hundred and twenty-five percent of its value that was based on an over-inflated property appraisal report.
3. The property is located in an area where property values have dropped due to a dramatic change in local economic conditions.
4. The property’s value has decreased to an amount that’s below the loan balance due to local and national economic conditions that are beyond the borrower’s control.
5. The property’s as is condition has deteriorated to the point where it’s not financially feasible for the lender, to put it in a marketable resale condition.
6. The proposed purchase price is more than the lender would be able to sell the property for after foreclosing on the loan.
7. Any sales commission the lender must pay is less than what they would have to pay to sell the property after foreclosing on the loan.

Most Lenders Have A Stringent Hardship Test That Borrowers Must Pass

Contrary to what the short sale seminar promoters would lead you to believe, most lenders have a stringent hardship test that borrowers must pass in order to have the short payoff of their loan approved. In most cases, the borrower must be experiencing one or more of the following financial hardships:

1. The borrower or an immediate member of the borrower’s family has experienced a catastrophic illness that has wreaked havoc on their personal finances.
2. The borrower’s spouse has died or divorced and they have insufficient income to pay the loan payment.
3. The borrower’s employer has transferred them out of the area and they’re unable to sell or rent the property.
4. The borrower has been called away to active duty military service for an extended period and lacks the monthly income to pay their loan.
5. The borrower has suffered a disabling injury that precludes them from ever working again.
6. The borrower is unemployed and has no realistic expectations of finding employment in the foreseeable future, due to local economic conditions that are beyond their control.
7. The borrower has become financially insolvent, and there’s no realistic expectation that their financial condition will improve within the foreseeable future.
8. The borrower has been incarcerated and no longer has the income to pay the loan payment.

Factors That Influence A Lender’s Willingness To Approve Short Payoff Sales

The following factors generally influence a lender’s willingness to approve a short payoff sale:

1. The number of nonperforming loans that the lender has in their portfolio.
2. The lender’s overall financial condition.
3. The financial condition of the third party investor who owns the loan.
4. The loss mitigation policy of the third party investor who owns the loan.
5. The loss mitigation authority of the lender servicing the loan.
6. The loss mitigation policy and procedures of the government agency insuring or the loan.

Six Factors Lenders Consider During The Short Payoff Sale Approval Process

When deciding whether or not to approve a short payoff sale, lenders consider the six factors:

Factor #1: The borrower’s overall financial condition.
Factor #2: The property’s as is value.
Factor #3: The cost to put the property into resale condition.
Factor #4: The property’s as repaired value.
Factor #5: The cost of securing and maintaining the property while it’s being marketed for resale.
Factor #6: The cost of marketing and selling the property.

Final Short Sale Approval Must Come From The Investor Owning The Loan

Lastly, in almost all cases, the lender or loss mitigation company that’s servicing a loan in default isn’t authorized to approve a short payoff sale. That’s because final approval for a short payoff sale usually must come from the investor who actually owns the loan. And oftentimes, it can take thirty days, or longer for an investor like Fannie Mae or Freddie Mac to approve a short payoff sale.

Everywhere you turn, there is another seminar, another guru, or another boot camp all teaching the same thing. Can so many people be right? How many different ways can there be to do the same thing? Folks, believe it or not, there are not one hundred different ways to do short sales, there is only one. What you have is people trying to put a spin on it to seem original. My partner and I were the first to bring this topic to the forefront. It is very exciting for us to see how this incredible topic has exploded in the last few years. I am going to review the short sale concept and show you just how easy it actually is. My students and I have done hundreds of short sales. If you will do what we do, you can expect the same incredible success.

A short sale is simple: Through simple negotiations you get the bank to accept less than what is owed as payment in full on a property. For example, you find a homeowner with a property worth $100,000 that has a $100,000 mortgage balance. You work with the bank to negotiate a discount on the payoff. The bank agrees to accept $50,000 as payment in full and you have just completed your first short sale.

Is it really that simple? You bet! The key to successful short sales is to understand the mindset of the people involved and make the deal appealing to each person. There are basically three parties involved in a successful short sale: the homeowner who is interested in getting out of foreclosure, the bank who wants to get a bad debt off its books, and the rehabber who wants a great property to fix-up and sell retail. In each situation, we strive for a win/win outcome.

Let us start with the homeowners. Their motivation is obvious. They are behind in payments or already in foreclosure. Creditors, banks, attorneys, mortgage broker’s and more everyday, are calling them. They just want to sleep at night and get out from under the stress of this situation. Their downfall: they have no equity. They have called every investor in town and have been turned down by everyone because they have no equity. They call you and you say, “No equity? No problem!” You explain the short sale concept, get the property under contract, and get busy.

“Why would the bank accept less?” you ask, “The bank can just take the property back at the sheriff’s sale and then retail it.” Well, let me ask you this: do banks want to lend money or own homes? Correct, lend money. Is a foreclosure an asset or a liability? Right again, a liability. Folks, banks are in the business of wholesaling money. They borrow money from bigger banks and then lend it to you. They have to show their credit report, just like you do, to get a low interest rate on the money they are trying to borrow. If you were going to lend millions of dollars to a bank, would you lend your money to the banks with the low default rates or the banks with the high default rates? Right again, you would lend to the banks with the smallest number of defaulted or foreclosable loans. The banks motivation to accept a short sale is to clean up its books so that it can borrow more money, at a cheaper rate, and then lend it to you for more.

Were does the rehabber come into play? You have to have someone to sell your properties to once you negotiate a successful short sale. Rehabbers are the perfect outlet. Rehabbers like to purchase fixer-uppers at 65% of the retail value. In the case of the $100,000 property, a rehabber wants to buy it for no more than $65,000. In order for this to happen, you must get the bank to say yes to your offer.

So, how do you get the bank to say yes? You build a great case. Think of it like an attorney defending a case. The better case you build, the better your chances are to win. I send as much information as I can to the bank to show the bank why it should accept my low offer now instead of waiting out the foreclosure and bankruptcy process and getting the house later.

How do you build a good case? Send: a sales contract, signed by the homeowners, for the amount you want to offer the bank; an “authorization to release information” form; low comps; bad pictures; a detailed list of repairs; a hardship letter written by the homeowners – backed up with proof such as late notices, shut off notices, bank statements, job layoff papers, medical bills, tax returns, or whatever you can find; a crime report; a list of sex offenders in the area; articles from the newspaper that negatively reflect the area – job layoffs, crime, natural disasters, foreclosures up, bankruptcies up, and whatever you can find that is detrimental to the neighborhood; net sheet; and a cover letter from you stating why you couldn’t possibly pay full price for the property.

Submit that information to the Loss Mitigation department of the bank and you are in business. The rep will negotiate with you and once you settle on a price, wholesale the property to the rehabber. You become the middleman and make the difference between what you negotiated with the bank and the price the rehabber is willing to pay. Folks, short sales are that easy. There are millions of dollars being left on the table. Get busy and put some of it in your pocket. Good luck!

To be successful in real estate I always preach to the masses that you have to be significantly better and significantly different than the next person. That ‘next person’ is called your competition.

I don’t want to send out hints of paranoid thoughts that you shouldn’t network with other investors. In fact nothing could be farther from the truth. However, other investors including myself still guard some of their secrets on finding truly great deals in order to consistently profit in creative real estate in their local market.

Let me give you an example of exactly what I’m talking about. I travel and speak at various real estate clubs and organizations of which one promoter of a very large club in fact didn’t want me to speak about one particular subject.

The one particular subject is ‘Probate Real Estate Investing’ that is simply the most overlooked and misunder- stood areas for creative real estate. I was very puzzled by that comment from the promoter which was said half jokingly and half seriously.

When I inquired why he wouldn’t recommend speaking on such a key secret that only very few successful real estate investors know about, well his response was quite under- standable, ‘Scott, that is the bread and butter of my personal real estate business here and I don’t want to create any competition for myself.’

In one way I can sympathize almost with the real estate investor, but on the flipside I’m committed for EVERYONE that wants to be successful in creative real estate must know about PROBATE!!

Let me get specific though with one no-brainer technique that if you key into Probate will make it VERY profitable for you. This has to ‘Short Sales’ within the Probate process!

First off you must know that Probate exists for the benefit of creditors and NOT for the heirs. When someone passes away with a $5,000 Visa bill, the creditor has a right to claim their balance due through each state’s regular Probate process.

One of the creditors involved that makes this work for the real estate investor is obviously the mortgage company/lender. So, let me ask you how the lender feels sometimes about the status of their loan when someone passes away and there isn’t much money in the estate to keep the mortgage current. Let me answer that question for you and state they can be VERY, VERY motivated.

So now we’ve got a creditor who has a non-performing loan and because of many reasons they are willing to ‘wheel and deal’. That is where the arena of short-sales comes into play that when you’re ‘luckily’(right!), at the right place at the right time can mean a deal with chunks of equity to be had. These are the types of deals that put you into true financial security.

Now, unless you’re totally new into real estate or have been hiding under a rock then you already know that negotiating short-sales is an absolutely must-have technique. This simply is getting the bank to accept a significantly lower loan payoff than is currently on the books.

Sometimes there are many steps that need to be followed in order to effectively negotiate a short-sale of an existing mortgage. One of those key steps in negotiating a short-sale with a lender is the amount of information about the seller that needs to be produced.

Most of the time you’ll be needing to gather the following information from the seller:

* Current employment pay stubs

* Financial statement of assets

* Written proof of financial hardship

* Hardship letter of seller explaining personal situation

* Any additional bills or such verying financial hardship

* Etc, Etc…..

Have you put this together yet? If not then let me spell this out for you. Everything I’ve listed above and more required by the lender is basically not needed when it comes to the seller having been deceased!

In the short-sale process you’re seeking to really make the seller in the most unfavorable financial light as possible. The reason being is so that the bank will be first of all motivated to begin with and now when you couple that with the seller having passed away means they are much more attentive to your real estate investor special offer.

You will be able to find properties in the Probate process that there simply isn’t any or enough money in the estate to keep the mortgage current. In other words, its going straight to foreclosure and in a hurry.

The Probate short-sale recipe for success then boils down to this: property heading to foreclosure and mortgage that is currently in default or soon heading to. All the cards are out on the table so to speak when presenting your offer in this light. Its now the lender’s turn to accept or counter and helps put you in a much stronger negotiating position.

Of course there is a clear/conveyable title issue that has to be worked out, but this is a small hurdle to overcome within the Probate process. In fact its really the type of ‘problems’ you’ll be glad to work through for that deal that has a huge chunk of equity in it. Now, it will be up to you deciding if you should wholesale it for some quick cash or buy/hold for long-term equity appreciation. As you can see those truly are the types of difficult choices in your real estate business you need to be making.

To your success and good hunting as luck has absolutely NOTHING to do with it!

While the number of new mortgages boomed between 2000 and 2003, foreclosure rates also hit record highs. Conditions have improved somewhat since mid-2003: over the last two years the foreclosure rate has flattened. The delinquency rate has also improved slightly with the number of delinquent loans hovering near 4.4%, down from highs of almost 4.8% a couple of years ago.

Yet more homes are being foreclosed upon than ever before. Why? While the foreclosure rate has remained fairly static, the rate of home ownership in the United States has continued to increase. Stephen Blank of the Urban Land Institute, quoted in the St. Louis Daily Record, cautioned that, The level of home ownership is reaching unhealthy levels cited at 70% of the population, and moving towards 80% which foretells of a looming increase in foreclosures. In effect, the percentage rate has remained flat, but the total number of homes in foreclosure has risen due to increased home ownership. More homes are owned – and more homes are being foreclosed upon.

Experts predict the trend will continue. Home ownership is at record levels and interest rates have remained at historically low levels for a number of years. In addition, over 150 different types of mortgage loans now exist, allowing purchases by consumers who would not have previously been able to qualify for a home loan. Buyers enjoy zero-down mortgages, no-documentation loans, 106% loans to allow for no-cash closings, and even 40-year mortgages.

Looser lending standards contribute to high foreclosure rates because owners with no equity in their homes find it easier to simply walk away from their mortgages. And if interest rates rise, many of the ever-increasing number of homeowners with ARMs may be unable to obtain suitable replacement financing or to meet the new, larger monthly payments required when the initial ARM term expires.

Studies show that a loan’s default risk is directly tied to the size of the down payment: the lower the down payment, the greater the likelihood of default. Even in cases where down payments were made, low interest rates have encouraged growth of home equity loan advances and cash-out refinancing, allowing homeowners to take out cash generated from down payments and from appreciation.

The Census Bureau estimates that in 2004 approximately $569 billion in home equity was extracted through refinancing, taking out second mortgages, or simply pulling out cash during a move. The less equity that remains in a home the higher the likelihood of default, and with cash-out extractions continuing to rise, more and more homeowners are at risk.

Liberal lending standards have also led some consumers to borrow more than they can afford: the Census Bureau recently released statistics showing that the average household spends almost a third of their income on housing costs, up from about 20% in 2000. As a result, financial difficulties like the loss of a job, unexpected medical costs, or other emergencies quickly put a homeowner’s mortgage in jeopardy. Rising consumer debt burden means almost any disruption in financial circumstances like lost income, illness, or divorce can seriously impact a homeowner’s ability to make payments.

What’s the result? When interest rates rise, foreclosure rates will rise. And if the real estate market flattens or dips, homeowners with ARMS or interest-only may find themselves upside-down on their mortgages… with foreclosure their only real alternative.

If you wanted to learn how to prepare a deed, perform a title search, draft a strong option contract, or understand how to fix a bad title, where would you go? It’s hard to answer, because, frankly, this information is tightly controlled by title companies and lawyers. Go into any bookstore and try to find this sort of highly protected information. You won’t find it. Believe it or not, it’s tough to find even in most law libraries.

Title companies and lawyers consider this hidden knowledge a major profit center, and they’re not about to share it with you just because you’re a nice person. For one, lawyers don’t have time. They are in one of the most high pressured, time-driven industries. Spending hours explaining a process to you isn’t nearly as profitable as punching a few computer buttons – and out comes a boilerplate document that they’ll sell for $250. Title companies won’t tell you either, because it just doesn’t make sense for them to give away trade secrets that earn them many hundreds of dollars per customer!

Title companies and lawyers are good people just like any other group of business people. In fact, they are a part of every investor’s team. Always have been, always will. I need lawyers and you need them – they are invaluable to society. What I’m suggesting is that serious investors begin to take a new form of control over their deals by having a strong understanding of the more technical side of investing. Sound boring? Let me tell you why it’s not.

Serious investors know that most outrageously underpriced deals are distressed deals. There is some sort of tangled up mess involved. Either the property is trashed, or the finances are trashed, often both: back taxes, judgments, liens, questionable contracts, etc. Most deals, especially those private, sleeper deals, have problems that need to be understood. If you, the aggressive investor, are able to intelligently understand the paperwork, title search, and closing procedures, you can craft deals that the conventional folks may not understand. Colossal deals. High equity. Cash flow.

Let me give you a true example, a few years ago I found a foreclosure deal that was excellent. The terms were pay the owner’s back mortgage payments to reinstate the mortgage and give the owner $55 to deed me the house (it was trashed and nasty). Knowing the fundamentals of title searching I immediately performed a title search. I wasn’t happy about what I found. A $5000 lien along with the defaulted mortgage. I did some further legal research and discovered this type of lien was not to be feared. It was a particular type of lien that almost never is pursued. Plus, I know the lien’s statute of limitations. With this and other knowledge I decided to take title anyway. Voila, a few years later, the lien is gone!

Now friend, you must never, ever do this unless you know what you’re doing. Underline that twice in your brain. This is not an arena for dabblers. But, the more you learn about the legal facets of these distress deals, the more money you’ll save in professional fees, and the more money you’ll make by maneuvering these rough but highly profitable waters. Also, remember, the bigger the stakes in terms of total dollars involved, the more legal counsel you need.

Okay, back to why this information is hard to find. There isn’t a huge market for this type of specialized knowledge. This is for elite investors only. Not one-time real estate buyers. This information makes absolutely no sense at all for the occasional homeowner or buyer!

If you start hanging around real estate investment associations and clubs you will eventually meet some elite investors. These are the guys who really know their stuff about the inside world of distress property. And let me tell you, these guys are tight lipped. They might throw you a few crumbs now and then, but the real secrets of judgments, defaulted mortgages, title searching is off limits to the uninitiated. They too want to keep this information to themselves.

You will likely come across dozens of properties in foreclosure with little or no equity, that is, the seller owes 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.”

Negotiating a short sale with the lender is a difficult process, generally because it is a daunting task finding a bank officer who has the authority to accept a discount. You will have to call around to locate the lender’s “Loss Mitigation Department.” More than likely, each lender you deal with will have a separate name for this department, so be patient when calling. Much like getting your phone bill corrected, you can expect the process to involve a lot of waiting on hold and being bounced around an intricate maze of automated voice mail systems. Once you get in touch with the right person, then the negotiating begins.

From the lender’s perspective, a short sale saves many of the costs associated with the foreclosure process – attorney fee’s, the eviction process, delays from borrower bankruptcy, damage to the property, costs associated with resale, etc. In a short sale scenario, the lender gets the property back faster, so it is able to cut its losses. Your job as the investor is to convince the lender that it will fare better by accepting less money now.

The lender will want some information about the property, the borrower and the deal he has made with you. Specifically, the lender wants to know what the property is worth. The lender will generally hire a local real estate broker or appraiser to evaluate the property (called a broker’s price opinion or “BPO”). You can also submit your own appraisal or comparable sales information. In addition you will want to offer as much specific negative information about the property as possible. Also, include some relevant information about the neighborhood and the local economy if things are bad (copies of newspaper articles with “bad news” may help). A contract’s bid for repair estimates should also be submitted, which, of course, should be the highest bid you can obtain!

The lender will also ask for financial information about the borrower. Sort of a backwards loan application, the borrower must prove that he is broke and unable to afford the payments. The borrower must show that he has no other source of income or assets to repay the loan. This process may involve as much, if not more paperwork than an original mortgage application! The borrower should submit a “hardship letter”, which is basically a sob story about how much financial trouble the borrower is in. This may require a little literary creativity, and some help on your part. Don’t lie, just paint a picture that doesn’t look good.

Finally, the lender generally wants to see a written contract between you and the seller. The lender wants to make sure the seller isn’t walking away with any cash from the deal. Generally, the contract must be written so that the buyer pays all costs associated with the transaction, so that the “net cash” to the seller is the exact amount of the short pay to the lender. A preliminary HUD-1 settlement statement is often requested, which can be difficult, since many title and escrow companies simple won’t prepare one in advance of 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 as likely to give you “steal.” Many short sales fall through if the BPO comes in too high, which is often the case. You can’t pull the wool over a lender’s eyes – if the property isn’t is need of serious repair, it is unlikely you can convince the lender the property is worth a whole lot less than the appraised value.

So you wanna buy pre-foreclosures? or at the courthouse steps? So many people ask us about this. Here’s our ’30 second seminar’ on it. If you’re going to buy Pre-foreclosures–after the seller is behind on her payments, but before the lender’s auction date-then there are some pros and cons to consider.

Pros:
1) you’ve got a good possibility of buying the house subject-to the loan from a very motivated seller who just wants out.

2) you don’t need to do any marketing, just read the foreclosure notices (more on this later), pull some comps and do drive-bys.

3) There are several *thousand* foreclosures published each month, in the greater Atlanta area-plenty to choose from.

Cons:
1) You’ve only got about 3 weeks (to beat the courthouse auction) to contact homeowners and get signed contracts, title work, funding, etc.

2) Most pre-foreclosure homeowners are in denial about their situation and/or mad at the world due to all their stress and debt collection calls they get. So, they’re usually not very open or friendly to you and your offer.

3) Most really good deals are redeemed (caught up) by the homeowner, and the foreclosure cancelled, just before the courthouse auction.

Say you decide to jump in and “Play the Pre-Foreclosure Game”. Consider doing a lot of bold, cut through the clutter mailings to the pre-foreclosures you’re considering, to get their attention and have them call you. Remember, their mailbox and answering machine is filled with debt collection stuff. You need to stand out, and hit them often. You might want to mail a different neon postcard or lumpy mail (trash can, stick of dynamite, handcuffs, etc.) *every few days*, until they’ve grown to like you or are curious enough to call you.

If you choose to skip pre-foreclosure and actually buy foreclosures at the courthouse steps-then you’re dealing with the foreclosing attorney and the lender, not the homeowner. The biggest things to keep in mind is you’re expected to pay all cash by the end of the auction day; you’ll have to run your own title exam in advance; and you’ll probably have to guess what condition of home interior is since homeowner may not have let you inside. Another option is to buy the note/mortgage for cash at a deep discount, direct from the lender, prior to the courthouse auction. You don’t have to deal with the homeowner that way, but you do have to have access to funds, and you will still have to do your own foreclosure after you buy the mortgage.

As I wrote in my article, Can the Government Solve the Foreclosure Problem, the state and federal governments are considering using taxpayer money to bail out people in foreclosure. Is this a good or bad idea?

At first blush, it appears awfully unfair, in that the government would take your money and give it to someone who made an irresponsible financial decision and would thus profit from it. On the other hand, one could argue that the government’s lack of regulation on loans, in part, led to the problem.

From a purely capitalist, free-market position, I’d say, “Absolutely not – let the market correct itself and allow economic darwinism take its course”. From a sympathetic standpoint, what’s $300 million in the scheme of things, since most of it would go to HUD counseling agencies to help poor people refi and keep their homes?

Despite the animosity from people who object to paying for this “robin hood” program, it would help everyone, since less foreclosures helps keep your neighborhood home values up. However, the harsh reality is that $300 million wouldn’t change anything, and like most government programs, it would be nothing more than lip service and bureaucracy.

Nobody wants to see low income families on the street, but it is a bad precedent for the government to have too many programs to bail consumers out of bad financial decisions. True, some of the lenders are to blame, but they are already being punished in their pocketbooks. Many lenders who originated and sold these loans are now having to buy them back from the investors they sold them to.

As a final note, most states do not have extensive regulation of the mortgage broker profession. I am not much for excessive government anything, but having a sufficient fund to reimburse the victims of the worst predatory lending would be a good idea. Real estate brokers, attorneys, and other professionals pay into a fund managed by the state for the protection of clients that are scammed, and so should mortgage brokers. In my own state of Colorado, mortgage brokers have to carry a small bond, which is almost a joke. California, on the other hand, requires a mortgage broker to first be licensed as a real estate broker, which I think is a good idea.

Many of the properties that you come across will have two mortgages with two separate banks. If you are just getting started, I strongly recommend that you target properties with single mortgages. Negotiating one mortgage is always easier because a second mortgage means that you are now responsible for negotiating two short sales instead of one. However, if finding homeowners who only have a single mortgage is not a realistic option, you must be prepared to successfully discount two properties.

The first thing you will need to know is that in the event of a foreclosure, the bank who holds the 1st mortgage is considered the primary lien holder and will always receive the proceeds from the sale. If there is a second or third mortgage on the property these banks are considered secondary lien holders and will not receive anything from the sale.

With that being said, your negotiating power is much greater when attempting a short sale on a second mortgage. If the secondary lien holder is made aware of an upcoming foreclosure and you make it clear to them that the primary lien holder has already accepted a short sale the ball is now in their court to decide whether they are willing to accept a discounted payoff to salvage something from the mortgage instead of possibly receiving nothing. The reason I say “possibly receiving nothing” is because it is also possible that once the secondary lien holder realizes that the primary lien holder has accepted a short sale they may attempt to go behind your back and negotiate their own deal with the primary and cut you out of the transaction. To help avoid any unethical business practices do not reveal who the other mortgage company is, just provide the necessary proof that a short sale has been accepted by the primary lien holder and begin your negotiating from that point.

The second thing you need to do is compile a list of all of the reasons why the lender may consider your discounted offer. You will want to particularly make a note of any repairs, decrease in property value, other foreclosures in the area, crime and vandalism, and slow or no market activity. At this time you can also prepare a hardship letter for the homeowner to help justify the short sale.

Next make copies of the homeowners W-2, tax returns, bank statements, and pay stubs. There is a chance that the lender will not ask for these documents since they are the secondary lien holder. However, they may ask for a copy of your acceptance letter that you received from the 1st lien holder along with a sales agreement and net sheet. If you have an acceptance letter from the 1st lien holder you can fax it to the 2nd lien holder as proof but be sure to white out the name of the lender, the discount amount, and any other information throughout the document that may disclose who the 1st mortgage holder is and how much was accepted. Although the 2nd lien holder will request and often demand to know the exact payoff, do your best to keep this information confidential. Let the lien holder know that you respect the homeowner and the 1st lien holder and it would be unethical to disclose personal information. The lender often will understand and appreciate your business ethics and not push the issue. Other times they will be very firm on their requests and it will be your job to be creative enough to give them what they want and still not put yourself in a compromising position by sharing the wrong information.

If you have not received your acceptance letter from the 1st lien holder, prepare an alternate letter stating that you have verbally received acceptance of the short sale along with the estimated date that the deal will be closed. Sometimes a letter like this will be sufficient but if it doesn’t you may be forced to come up with an actual acceptance letter.

Even if you have an acceptance letter it is still a good idea to send a personalized offer letter along with you proposal.

Lastly, you will now need to prepare your sales contract and net sheet. You will write up the contract the same way you did for the first mortgage the only difference is that the total percentage of your discount will be significantly higher. With the first mortgage you will want to discount the mortgage 30-50%. However, with the second mortgage you will only want to offer a small percentage of what is owed. For example, if the second mortgage has a total balance of $35,000 you will only want to offer $1,000. As a rule I start my offer around 3% of the total balance and work my way up from there if necessary. A large percentage of my deals with second mortgages are accepted on the first offer. If the bank rejects my offer I counter by increasing my original offer by 1-2%.

Example:
$40,000 (second mortgage balance) X 3% = $1,200 initial offer
$40,000 (second mortgage balance) X 5% = $2,000 counteroffer offer

It is possible that both the 1st and 2nd mortgage can have similar balances. If this is the case the same strategy will apply. The only difference will be the amount that each lien holder receives from the short sale.

At first it may be hard to grasp the concept that the 2nd lien holder would accept such a small amount to release their mortgage. The reason they are typically open to making a deal is because being in a secondary lien holder position is always risky. Since a foreclosure basically assures that they will get nothing, the lender is usually motivated to try and salvage something out of their investment and will strongly consider accepting a short sale.