Common Short Sale Questions
There are several short sale questions that I get asked by both homeowners and investors. Here are some of the most common short sale questions. The answers to these questions are based on what typically happens. Please understand that every case is different so there are always exceptions to the rules.
Question: Can a homeowner do a short sale if they’re not delinquent?
Answer: No. For a short sale to be successful, the homeowner needs to prove financial hardship and show they cannot make payments anymore. So without being delinquent, there is no way for the bank to know the homeowner has a hardship. As long as the homeowner is making payments, the banks are content where they are at.
Question: What if there is a 2nd, or 3rd mortgage on the property?
Answer: This is one of the most common short sale questions I get and where you will make most of your profit. If there is a 2nd mortgage on the property and the 1st initiates foreclosure, most likely the 2nd will be wiped out. You can negotiate with the 2nd to get a huge discount. The process is basically the same. There will be a loan number for the 2nd and 3rd mortgages. The negotiation on a 2nd will be a little different than on a 1st. Many times you can tell the 2nd the situation and what you want to offer them. It’s that simple. Or you can tell them the auction is close and the homeowner is getting ready to file bankruptcy. I am offering you x amount of dollars to release the lien. They may ask for a letter, a written offer, proof of sale, or whatever. See a lot of times they are not aware of what’s going on because the 1st does not have to notify the 2nd about the foreclosure. You will do the exact same thing if there is a 3rd, and so on. It’s not uncommon to get 90-95% discounts on 2nd’s and even more on 3rd mortgages. Remember, they won’t get anything anyway if they let it go to auction and they don’t bid. They are usually more than willing to accept your offer within reason. You can always go up if there is enough room for profit.
Question: What if there is an attorney involved?
Answer: If there is an attorney involved, it’s best if you go right to the lender. The attorney is the middleman. If the lender says go to the attorney, then go to the attorney. Once in a while you may have a homeowner ask you if they can show the paperwork they just signed to their attorney. Don’t worry, it’s all legal, however attorneys will always scrutinize your deals because they usually don’t understand what you’re doing. If this ever happens, then you need to ask the homeowner if their attorney can make them a better offer. I’ve seen a lot of deals fall through because of attorneys advising their clients to not go through with it. I still never understood how a foreclosure is better than a short sale.
Question: What do I do in the event of Bankruptcy?
Answer: There is really not a whole lot you can do as an investor if a property is in bankruptcy. If you and the seller try to do anything during a bankruptcy it’s considered a fraudulent conveyance because you are deeding off assets you are not allowed to. Therefore, the deed is no good. If you want the property, the only way is to stop the bankruptcy or release the property from bankruptcy. To do this, you’ve got to talk to the bankruptcy attorney and tell them you would like to buy this house. You would tell them to discharge this asset from the bankruptcy. You will need to get an abandonment of asset letter from the attorney, which will show the property is no longer in bankruptcy, therefore giving you clear title. Then you can proceed. You cannot give legal advice to people in bankruptcy, so be careful. This is a case where you would want to talk to the bankruptcy attorney.
Question: How much do you give a homeowner for their equity?
Answer: It’s illegal to give the homeowner any money. You can’t tell the lender you are giving nothing to the homeowner and then give them something. The best way to make this legal is for you to buy the sellers personal belongings. You can do this with a Bill of Sale. On this bill of sale, you can list everything that you are buying from the seller. Like a weed eater, lawnmower, refrigerator, stove, microwave, machinery, tools, furniture, anything that you might want. The lender is not aware of this document, however, it’s evidence that you are not giving the seller any proceeds from the sale. Plus you will need it at the end of the year for tax purposes.
Question: How do you structure a simultaneous or double closing?
Answer: I won’t go into great detail about simultaneous or double closings because each state has different laws or requirements and they’re always changing. Some states use attorneys others use title companies. Today lenders require “wet funds” or funds from your own pocket to do a double or back to back closing. And since most people don’t have a ton of cash laying around they are in need of a funding partner. This is where transactional funding comes into play.
Basically there will be two separate transactions. An A-B transaction and B-C transaction. (A) would be the bank or homeowner. (B) would be the investor. © would be your end buyer. So you first would close with the bank (A-B) with the money you use from a transactional funding partner. Then immediately after, you would close with your end buyer (B-C). Now in some cases your end buyers lender may have title seasoning requirements so you need to make sure the loan officer knows what you are doing. That’s why it’s ideal if you can find an all cash buyer.
Remember, we offer transactional funding. You can click on the FUNDING link at the top of the page if you’d like us to partner with you on your deals.
Question: Should I give money to someone handling my short sale.
Answer: No. There were a lot of “short sale specialists” that started taking advantage of homeowners giving them false hope of stopping foreclosure. It was becoming a big problem so new laws were put into effect that prevented “short sale specialists” from collecting money upfront to do a short sale. You should NEVER pay anyone to do your short sale. There are plenty of investors out there that will do a short sale for free with the goal of making the profit on the back end when the property sells.
Question: How does a short sale effect my credit?
Answer: Anytime you are late on payments, your credit is affected. The longer you go without making payments, your credit is affected even more. So regardless if you do a short sale or a foreclosure, your credit will be affected. The major difference happens in repairing your credit because of what shows up on your credit report. While both are negative to your credit, your credit with a short sale can be repaired very quickly (1 – 2 years). A foreclosure on your credit will stay there for a very long time affecting your credit for (6 – 7 years). A bankruptcy is even longer. About 10 years if you file chapter 7.
Question: What happens to the homeowner after the short sale?
Answer: A few things can happen depending on how the short sale was handled and what liens were shorted. There are 2 possible outcomes. A deficiency judgment or a 1099. If the short sale was negotiated and a release of lien was agreed upon, the lender can go after the homeowner for loss. If a satisfaction was agreed upon, the homeowner will receive a 1099. A 1099 in most cases can be counteracted with a good accountant. A release of lien is easier to get over a satisfaction which means investors usually have to pay a little more to get a satisfaction. This is why it’s important to be knowledgeable about this process and to find a good short sale negotiator that can make sure a satisfaction is the ONLY option.
I hope these short sale questions and answers have helped some of you get a better understanding of short sales. Please feel free to ask any other short sale questions below here and I’ll answer them.
I am looking for someone knowledgeable and able to help out with the short sale of my home. I have a second person (co-signer) who has now become impatient with waiting any longer for the sale of the house. The home has been on the market FSBO for 4 months and the market has been slow in this area. I am losing the home due to a long term relationship that has ended and haven’t been able to afford the home on my own. A little about the house, it was recently tax assessed by the city in August for $170,600 and the lender (ABN-AMRO) is telling me with all the legal fees right now I owe $166,300. The home started on the market for sale at $174,900, and now I was just asking to walk away owing and receiving nothing. Plenty of interest, but still no luck getting anyone to commit. Homes in this area had been selling 6 months ago immediately for asking price. I just don’t understand. I had been in contact with a woman that I had inquired about a short sale with, but I believe she lost interest, because she’s not returning my calls. There has yet to be a set date for auction, however, I have received court papers for notice of default and the 45 days is almost up. Due to my income/ current credit I’ve tried and can’t refinance, so I believe have no other options. If you believe you can help, please respond to this posting. Also, what is the time frame of the short sale process from start to move out. Thank you for your time and consideration…
It sounds like you’ve done a good job so far in terms of doing your research and looking at other options (refinancing) before selling. That’s unfortunate the other woman will not return your calls, and it’s a clear sign that she may not be worth the trouble to call anymore. You can probably assume she isn’t interested, didn’t have the resources to buy the property, or found a better deal. Whatever the case is, once someone stops taking or returning your calls, it’s best just to walk away.
Also, you may get a number of responses to your post here for help. Most homeowners who are in foreclosure are, unfortunately, prey for unscrupulous foreclosure scams. Just make sure to examine the options and decide on a path that works out in your best interests. Hopefully a buyer will present himself or herself very shortly and you won’t have to worry about the foreclosure anymore.
If you’re in doubt as to where in the process you currently are, just call your lender and their attorneys and ask them. They can usually tell you if there is a sale or other pending action on the property. Of course, occasionally, the lender and the attorneys will be more confused than you are, which may give you even a little bit of extra time. But no sense in counting on that to happen, since it is not all that common.
Regardless, good luck.
The mess:
I have 2 homes. My “buddy” the builder convinced me to go forward with this “slam dunk” project (house #2). Since he’s built over 100 homes, I concluded he must know something about what sells. One home was our primary residence in GA. The 2nd was a spec. (also in GA). The spec has been an 800K disaster. We moved into it hoping to bring life into this place. the market is saturated with homes in this price range. Not much is moving. Have tried to sell both. (The spec for nearly 2 1/2 yrs.with 4 realtors). I’ve tried price. The condition is new. I’ve tried a plate full of enticements. No traffic. Nothing! I’m trying to get a short sale-nothing yet. I’m contemplating the what if’s of a foreclosure (1st with Bank of America, 2nd with Ocwen). I hear Ocwen can be brutal. My question is, if I must go to foreclosure on the spec., what can I expect from Ocwen (they won’t talk to me yet as I’m not late on anything). I’m leveraged to the hilt and am thinking when is enough, enough? Will they place a lien on my small house? Will they get a deficiency judgement and garnish my wages at 25%? What can you do here?Keep borrowing and praying it sells?
Ocwen Financial is actually great to work with when doing a short sale. It would be better if someone did it on your behalf. I’m sure there are short sale investors out there that would help or even some real estate agents or attorneys. They will want compensated for this, but it wouldn’t have to be a lot. If you’re plan is to sell, I’m sure an agent would be more than happy to help as they would be paid from the commission when the house sold.
Most likely they won’t place a lien on your other property (unless you used it as collateral). Deficiency judgment is possible but a good short sale agent will make sure that doesn’t happen by getting a full lien satisfaction “paid off in full”.
I am looking to purchase a house that is in preforclosure (to live in, not resell). The people actually trashed the house, and we call it the “Stinky House.” They got a refi last year for 206,000 and have not made payments. The honest truth is, I don’t know how they got an appraisal for that last year with the condition of the house. They currently owe about 220,000.
We feel the house, in its current condition, is worth about $150,000. Another investor put an offer in around that amount as well. I have contacted the lender (Novastar) to see what their procedure is.
They said they will need a written contract and a HUD-1 before proceeding.
So, my questions are:
1. when I submit the written contract and HUD-1, should I submit anything else at that point such as photos, letter of explanation, etc?
2. Do I ask them to pay for all closing costs associated (realtor fees, broker fees, etc)?
3. What can I do to protect the seller from an excessive 1099 on this?
4. Any tips to begin the negotiation and what to do if the lender says no?
I think it will be up for actual foreclosure in June or July.
1) Absolutely, anything that will help build a case in your favor.
2) You can, however it’s better just to calculate those in your offer to the lender. The lender just wants to see bottom line numbers.
3) Nothing you can do here really. There is a form the IRS has (Form 982) that will counteract a 1099 for most homeowners. You will need seek assistance with their accountant. This is tons better than foreclosure or deficiency judgment.
4) It depends on if it’s the 1st or 2nd. With the 2nd, because they are at most risk, are more willing to negotiate. Use can use this leverage to your advantage. More than likely, they will not protect their position, so it would be better for them to get something rather than nothing etc.
If it’s the 1st you are negotiating with, you need to convince them you have a great offer. Comps, list of repairs, etc.