As an investor and a coach I am getting more and more questions concerning short sales with banks. I get as many questions as a realtor by regular clients as well.
There's a lot of confusion out there regarding the bank's decision to take a discount or not and then - if they do - how much will they take?
The market in most areas has simply sunk below what is due on many home owners' loans. As a result, there are a number of variables that go into a lender's decision about whether to discount a loan and then, of course, how much discount they'll take. Now, I know most of us think - heck, why won't they take simply what the home is worth and be happy with that rather than having to foreclose on the property to eventually get to that point anyway?
Whether you are an investor or a home owner, please understand that there is some basic preparation you can and should do before the lender will even discuss a short sale with you.
• A signed purchase agreement
• A letter of permission from the seller allowing the bank to discuss the loan with you as investor or realtor.
• 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. On top of that, if it is the bank, the person answering the phone for your payment typically has no decision authority. There's typically one person within a given bank or lending entity who has the authority to take offers, so discussing your offer with anyone else is could prove to be a total waste of time.
• The attorney handling the foreclosure - if in fact it made it that far - has nothing to do with this short sale typically so don't waste your time there.
• On that note above, where is the loan 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. They may assume, for example, that they can work out a payoff with the owner and if not, they may have 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. I know to most that doesn't make sense due to the market being in what I call a trailing downtrend, but that's reality.
• What condition is the property in? Most lenders are hesitant to take back a property that needs major work or that has code violations. I always tell clients, the uglier it is, the better the chance that the lender will entertain your offer
• The lender's position as creditor is very important. Are they in 1st, 2nd or 3rd. The latter two are usually much more willing to discount-and discount much more than a 1st mortgagor would. Think about it: the seller may have no equity thanks to a 80% 1st mortgage and a 15% 2nd, but the 1st mortgagor has 20% equity if he or she has to take the property back.
• The requirements of the lender's private mortgage insurance company or of FHA and VA insurance can also influence its decision.
• How is the housing market at the point in time you're dealing with this deal?
• Rules and regulations by state - make sure you speak with a competent attorney in this area.
• Number of bad loans the bank is dealing with already.
• What is the likelihood that the owner will declare bankruptcy
Now, what if you get through all this and do all this investigatory work and the bank still says NO.
Please go into this deal or client relationship realizing that you're only going to get about 60%-75% of your short sales accepted. Don't take any of this personally. It's simply a numbers game and if you know that going in you won't be frustrated when 6 or 7 out of 10 go through and the others fall apart.
The bank may say no for several reasons: high BPO, an inexperienced loss mitigation rep, or possibly a foreclosure sale date that is just days away. One of the most common reasons the bank will say no is because the BPO came in too high and the bank feels the property is worth more than it actually is.
Before we go further, let's define what BPO is? It means "Broker's Price Opinion." When a short sale package is submitted, the bank will send a real estate agent or Broker to the property to judge its value. When I was an active agent, I would get these requests. Many times the BPO is simply a drive by. To insure a low BPO - an accurate BPO, I strongly urge you to meet the agent at the property with your own comparables and a complete short sale package. In addition to comps for the agent, give copies of pictures, list of repairs documented by a contractor on their letter head, and walk the agent through the house room-by-room. Usually, agents and appraisers are asked to value properties at the high end of the scale. Most homeowners trying to purchase a home need top value in order to qualify for the loan. Therefore, it is unusual to ask for low numbers. This is why I like to meet the agent at the property; without doing that it's very tough to expect them to see the true picture.
If the bank said no because of the BPO, your first step is to challenge it and request a second opinion. My suggested script for you with the loss mitigation department would sound like this: "My friend (or "I am", or "An appraiser said...")is an agent that works specifically in this neighborhood. I think your BPO might be sending you in the wrong direction. It would be a shame for your bank to take the property at auction, only to lose money. Why don't we do the right thing and schedule a second BPO. I'm sure if you choose someone who actually works this neighborhood, that person will agree with me that the property is only worth what I'm finding out to be it's true value. Your bank is not in the business of losing money, is it? I didn't think so. When is the best time to schedule another BPO, today or tomorrow at 5:00?"
Your bottom line goal here is to insert doubt in the mind of the loss mitigator and the fear that they may be wrong in their company's eyes if they don't reconsider. Once you schedule a second BPO, run through the above steps again.
If, after a second BPO, you still can't get the bank to see it your way, what should you do? PASS and take pleasure in saying NEXT. I tell investors in our training program (www.R-E-A-N.com) the same thing I tell realtors I train: put enough deals in the funnel and you won't be attached to any of them.
Chris Prefontaine is a Internationally recognized real estate coach & trainer. Whether you're a seasoned investor, or new to the industry be sure to check all state guidelines and laws before you invest. For more information about becoming an expert investor or having your own personal coach, visit http://www.R-E-A-N.com Chris will give you a 30 minute personal coaching call.
