Investor Short Sales Finally Happening

May 15, 2010 Hans Anderson United States Foreclosure Articles, 3

investor short sales Finally Happening by foreclosure-investing">Alexis McGee

Let’s define what short sales are to start – this is when a homeowner wants to sell their home but their total loans and liens exceed the value of the home.

You know my opinion of short sales: My time is better spent building relationships on the REO side so I can get many deals from a few sources, and work a lot less. However, short sales are becoming more and more prominent and investors can no longer ignore them.

Part of the problem in working short sales is you now have many people to negotiate your deal with. First, you must negotiate with owner in default to buy the home, with the owners getting no proceeds, just to stop the foreclosure, allowing the owner to get a fresh start. Next, you and the seller must get approval from the lender to take less than owed on the mortgage (and in most cases multiple mortgage lenders). A short sale requires a lot of paperwork and a lot of time! In the past it took 90 plus days just for a response.

investors and Realtors who target short sales may have just gotten some help from an unlikely source – the Obama administration. The Treasury Department is rolling out a new program designed to encourage more short sales of distressed borrowers’ homes as an add on to its earlier “Making Home Affordable” loan modification efforts.

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In cases where borrowers can’t qualify for a loan mod – maybe because they’re unemployed or have excessive debt loads, the Treasury is now pushing for “streamlined” short sales to avoid foreclosures.

short sales — that’s where lenders accept less than what’s owed from the proceeds of a negotiated home sale — can provide excellent opportunities to pick up properties at bargain prices.

Though short sale prices are often higher than what would be available at foreclosure sales or foreclosed (REO) homes, typically short sale houses come in much better condition. That’s because the defaulting owners have continued to live in the property and maintain it.

The idea may sound straightforward, in practice it is not. First, the bank needs to be convinced that a short sale will yield it more money at the bottom line than a foreclosure. That is not an easy task.

Plus, you’ll need to have a buyer for the house – one who’ll pay a price acceptable to the bank, and has financing to close the deal. If you happen to have a second mortgage or home equity credit line on the property, you’ll also need to negotiate how much that lender will receive from the sale proceeds.

This is all very tricky. In depressed real estate markets, the second-lien lender may be holding a note that’s worthless in a foreclosure because plummeting property values have wiped out the collateral. Yet that same bank is in a pivotal position: It has the legal power to block the short sale by refusing to sign on.

Equally troublesome in short sales is the fact that banks, mortgage servicers and bond investors often have conflicting requirements for documentation and financial yields.

Enter the Obama administration’s new streamlining plan, “Home Affordable foreclosure Alternatives Program” (HAFA). Besides requiring lenders and servicers to use uniform documentation, pre-approved short sale terms and accelerated turnaround times, the plan also provides financial incentives for key players:

* Homeowners who successfully complete a short sale under the program receive $1,500 to defray relocation costs.
* Mortgage servicers can receive $1,000 per case.
* investors get $1,000.
* Second-lien holders receive up to $3,000 from the sale proceeds.
* Real estate agents – the rules prohibit banks from forcing them to cut their commissions from the listing agreement as part of the final deal.

Most major lenders are still studying the fine print of the Obama program. But early reactions from big banks appear to be positive.

However, there could be one major issue…

The Obama plan tilts to consumers by requiring second-lien holders to drop all financial claims against short-selling borrowers beyond the $3,000 they take out of the deal. However, they currently obtain short-sale compensation from sellers as the price of their participation – in cash or through promissory notes – far beyond $3,000. So we’ll see how this pans out.

There is lots of work and precise timing to make your profit. If you want an easier, smarter way to find great deals, you need to focus on “getting on the inside” with REO agents and asset managers, so you can help them unload their non-performing assets and get a great deal for yourself at the same time.

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