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.