In this series, I we will discuss some short sale basics - what is a short sale, what is the foreclosure process, and how to identify a possible short sale listing, and the "wrong" way to approach this scenario.

Part One - So you have a short sale, now what?

What is a Short Sale?

Simply put, a short sale is when a lender decides to accept a payoff that is less than what is owed to them on the mortgage.  A lender might choose this option if they believe that the property may go into foreclosure due to seller hardship.  A lender cannot make someone pay the mortgage, and a foreclosure will end up costing a lender far more money in the long run, so it's up to you to convince the bank to accept this option. There is an old saying - The first loss is the cheapest, and it is certainly true in this case.

Other options to avoid foreclosure are:

•1.       Deed in Lieu - This option involves the seller calling the bank and saying "I'm done, here are the keys..."  The bank may or may not even accept this option, and they will require paperwork to be filled out, and procedures to be followed...

•2.       Forbearance - This one's my favorite.  This little gem means that if you are behind $5,000 in interest, the lender will give the borrower a payment plan to pay back the delinquency.  On top of their regular mortgage payment.  So, if our seller is struggling to make the payment, and the bank tells them to add $500 extra to it to satisfy the forbearance-what makes them think they can pay that?  I think it's a scam by the lenders to suck as much money from the homeowner as they can before they foreclose.  I have had clients who have told me that they have cleaned out their 401K's to pay a forbearance, only to be threatened with foreclosure again down the road.  Oh, and they will have to fill out paperwork, there are procedures...

•3.       Bankruptcy - I am not attorney, and I will not give out legal advice, and neither should you, but bankruptcy may not protect their home.  In fact, it may guarantee that they will lose it.  Again, the lender will want paperwork...see a pattern?  The paperwork is the same, whether it is for a short sale, a deed, or forbearance...

 Identifying the Short Sale

We all know that the market is tough right now.  Maybe your listings aren't down, but the listing prices are still above what the market will bear.  Now in walks a seller, and they tell you that they need to sell.  They may be in pre-foreclosure.  They might have some other distress, at this point, it doesn't matter.  You do your market analysis, and figure that based on comps, that you can realistically list the property for $300,000.  By realistically, I mean REAL MARKET VALUE.  Not, What the seller wants to sell for, not what you think it "should" be worth, I'm talking about what will it take to list and sell this property, in this market, right now, this minute, and attract a real offer.  The seller then looks at you and says "But I owe the bank $350,000!"  Congratulations!  You now have a short sale!

The "Wrong Way"

Now, before I get into what you should do next, let me illustrate what usually happens in this scenario:

This is what your competition usually does...The agent lists the property at loan value, ie; way above real market value.  The agent shows the property, gets an offer, THEN goes to the lender and asks "Will you accept this offer?  Please?"

This is the backwards way to do it.  I mean, why would you waste all the time and effort to list and market the property, without having a clue of what the lender will accept.  Worse off, after spending months of agonizing frustration going in circles with the lender, let's say that by some stroke of luck you succeed in getting a bank approval.  Assuming your buyer hasn't abandoned the offer by now, you get to the closing table and find out that after all this work, the lender wants to pay you 1% commission, or maybe even nothing.  Sound familiar?  I'm sure you've heard agent horror stories, and they are all true -If you do not understand the short sale concept.  There is a better way, and it's called the ICG method.

Next in the series: Determining if a deal is viable, and the general foreclosure timeline.