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The Perfect Storm - Get ready to short sale!

There looms a perfect storm on the horizon, a storm that will highlight the need for realty professionals to fully understand the construct of successful preforeclosure short sale transactions.

scheduled expoding ARM resets (subprime 80/20s, ARMs, interest only, etc.)
the increase in minimum monthly credit card payments, and not so coincidentally, changes in bankruptcy law, and
a correcting/deteriorating real estate market

Now that the real estate market has cooled, and mortgage lenders are tightening up lending criteria, fewer delinquent borrowers will have the needed equity to refinance their loan, or to sell their home to avoid forecloure.

What is a Short Sale?

Just about everyone investigating the various methods or techniques of speculative real estate investment have heard or read about preforeclosure short sales.

They've heard or read about ‘short sale secrets' which purportedly unlock the door to mortgage lenders' huge giveaways resulting in the monitization of previously unrealized profits and untold riches.....

So what is this thing called a short sale?

There are many definitions floating around that all describe a preforeclosure short sale. Basically, it's a workout program.

What's a workout program?

A workout program is an alternative course of action designed to prevent expensive foreclosure proceedings for the mutual benefit of the mortgagee and mortgagor (lender and borrower, respectively). Workout programs include, but are not limited to loan modifications, forbearances, reinstatements, preforeclosure sales, and preforeclosure short sales.

Getting back to short sales. A short sale is a workout program in which the lender(s) agree, under certain conditions, to accept less than the full payoff amount due from the borrower. The amount accepted by the lender(s) is predicated on the property's as-is, fair market value and the preforeclosure sales price, usually lower than the loan balance, and then accepts a percentage of the proceeds as sufficient payment to release its mortgage lien.

Sounds easy, doesn't it? Well, much like every ‘outside the box' technique, it isn't quite as easy as it is made to seem. You see, all loan products and loan servicers are not the same. Mortgage loan servicers tend to address delinquency and foreclosure issues pursuant to its own criteria utilized for specific loan types. That criteria can be rigid or relaxed.

The short sale process includes prequalifying the potential short sale candidate, building a business relationship with both the seller and mortgagee(s), devising and presenting a conforming and compelling proposal, negotiating for favorable results, and closing a win/win deal is what "short sales" are all about.

USA_Dave introduces his new book, An Ethical Approach, which was written in response to the predicted correction of real estate markets and the growing foreclosure problem throughout the United States. "I see a perfect storm on the horizon. First, there are exploding ARM resets where thousands of artifically low interest rate loans will reset at higher rates. Many homeowners won't be able to afford the increase, and won't be able to refinance, either. Second, the combined effect of changes in bankruptcy criteria and the increase in minimum monthly credit card payments will force more people into unaffordable Chapter 13 repayment plans, and lastly, the growing inventory of unsold homes." In it, he pulls no punches when he advises homeowners that can no longer afford their homes to sell ASAP, but also describes bona fide loss mitigation techniques designed to help families beat foreclosure and remain in their homes. An Ethical Approach is also a procedural primer for real estate brokers, brokers' agents, and speculative real estate investors explaining how to ascertain then facilitate foreclosed homeowners' best interests, and how to properly and ethically construct preforeclosure, and preforeclosure short sales. Proceeds dedicated to support SPOCH. Tax deductible contributions welcome, too!

Check out ForeclosureFocusUSA

Posted by David Petrovich on 02/09/2007 09:35 PM

Comments (21)

foreclosure, preforeclosure sale, preforeclosure short sale

21 Comments on The Perfect Storm - Get ready to short sale!

FEB

2007

Great article. We have seen a ton of shortsales here in Las Vegas.

I'm working on a short sale right now for a client who is upside down. It gets very frustrating because it takes so long to get a response from the bank after we get an offer. We have the second offer now hopefully this time our buyer will wait the short sale process out. We had another offer back in December but it took so long we lost our buyer.

I include in the listing information "a response from the foreclosing mortggagee could take from 45 to 90 days or more" depending on the state's laws and customs. By prequalifying the Buyer as to time constraints.... you can avoid having your deal die on the vine.

Hi David,

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FEB

2007

I have not experienced this "short sale" technique, and luckily our market increased again in 2006, so maybe we won't have much need. I do love to understand and visualize the financing techniques being used in other parts of the country. I find they teach me new ways to finance my customers "ethically"

I may just grab that book.

If your market "increased" with the use of subprime low doc/stated, 80/20, ARMs, etc. you may see some folks' payments skyrocket, pressed to sell as an alternative to foreclosure, and require a preforeclosure short sale.

FEB

2007

David, thank you for the information. This is an area I am very interested in. I look forward to reading your book.

You know, I hadn't taken the time to think about how much the slowing market will affect the number of foreclosures across the nation. It's rather obvious though...

In Indianapolis, we've been averaging over 1,000 new foreclosures every month for about two years and it doesn't seem to be slowing. We're constantly negotiating short sales and just when you think you're finished with one, the house next door has gone into foreclosure as well.

I'd say it stems from two major problems:

1. People who are over-leveraged with poor terms.

2. Rising property taxes.

There are obviously other reasons, but these seem to be the two I encounter most often. Good post.

Dave, thanks for the info and the link. This is an area I've started to research since I'm seeing an expanded market for it in Maryland.

FEB

2007

Hi David,

Thanks for the great info.

The "short-sale days"...I remember them well. Not sure about other places, however in the early-mid 90's in southern ca. we had plenty. You learned the lenders you could work with, and those you couldn't ,... those covered by pmi. At that time. about 1 out of 5 transactions was a either short-sale or reo property. And no doubt, the impact on our market place was significant.

At times, as agents in hot markets we have been more like "order takers", yet in a more challenging market it's time to learn the importance of negotiating. It's also a time to help our consumers, negotiating prior to a foreclosure.

In the long run, a good Realtor can provide an importnt service to consumers when it may be possible as negotiate a short-sale as an alternative to foreclosure. So far in my area of Orange County I've only heard of a few at this time.

Only time will tell!

Great topic in this ever changing market. My heart hopes your wrong but my brain concedes to your conclusions. We could be in for a tough time over the next 18 months or so.

Don

We are just starting to see a few short sales in this area.

David, just yeserday I was discussing this very thing with a friend but didn't have a full understanding of the process. I'm bookmarking this for further review. Great work.

I've been involved with 2 short sales, one on the seller side (an estate where the owner refinanced and rolled in closing costs, died without a will, and no one paid on the loan for more than 6 months) and most recently with a buyer attempting to purchase a home from an unrepresented seller (FSBO). Neither had a happy ending.

The independent administrator for the estate property did accept an offer from an unrepresented buyer on the house, subject to the lender's approval. The contract was for $265,000, about $100,000 less than the loan amount and foreclosure fees. The debt servicing company for the bank sat on the BPO and let the home foreclose. It sold at the foreclosure auction for $211,000. The buyer needed to finance the purchase and couldn't bring cash to the auction. He's now my client and we're working through the emotional issues of him (actually the girlfriend) losing the home he was willing to pay more for.

My client trying to buy a for-sale-by-owner is equally disappointed. We didn't know we were in a short sale position with our initial offer. The bank was actually going to postpone the foreclosure for a month so we could close. Then then figured out that if they added in the foreclosure fees, it would be a short sale. But not by much. After that, the title search turned up a second lien. My client wouldn't increase her offer. The second lien holder, the day before the foreclosure, paid enough to get the seller current and give him a buffer of another two months. They would not approve the short sale. Both banks seem to think they can get $100,000 more for the home. The seller is now in a deeper hole and the banks will end up with the house.

You'd think they'd want to cut their losses and move on, but apparently not!

I suppose you have to pick and choose which scenarios have short sale feasibility. Historically, as an analytical short sale choreographer, I've enjoyed a success rate of about 75% I define success as a closed transaction, though not necessarily at the original offered amount. In most (read: ALL) short sale negotiations, the mortgagees have the power. Concessions can often result in a 15% discount to FMV. But when you are able to present information not available to the lender, challenging their perception of value, can you crack their defenses.

FEB

2007

great information. thanks for the education. As a lender in MA, I haven't seen or heard of many of these in my area yet, but now I know what it may look like.

SEP

2007

Excellent post. SS are going to be big here in Florida & i'm trying to learn all I can.

JUN

2008

It's always interesting to revisit old posts that accurately predicted what was going to happen. It tells you a lot about the author.

Thanks, Paul. But I fell short predicting the lenders' acute failure in their servicing capacity. At a time when experienced loss mit staff was essential... in their wisdom and in response to falling stock prices, the lenders were laying off hundreds if not thousands of servicing personnel... creating avoidable backlogs

Avoiding Foreclosure Takes More Than HOPE

OCT

Thanks Paul, I am just now learning about the short sale area and you have been a great help

Wishing you the best

Mike

OCT

Great post. This article couldn't have been more right about the storm on the horizon. There is an absolute flood of real estate short sale and loan modification in the market right now. There doesn't seem to be an end in sight at the current moment.

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