Many times your ability to turn a lead into a bona fide deal takes time, perseverance and outside-the-box thinking. In the arena of preforeclosures and short sales it is definitely to your advantage knowing how to facilitate forbearance agreements.
What is a forbearance agreement other than your ticket to BIG deals? All a forbearance agreement boils down to in real estate is a lender working with an individual defaulting in part or whole on their mortgage obligations. Your goal as a real estate investor is all about creating “win-win” situations and this technique fits that criteria very uniquely.
Here's how this works and the first thing you need to know right now….you're not going to make it to financial freedom facilitating forbearance agreements. See, you'll come into sellers along the way that are trying desperately to hold onto their houses and some very well may be able to but the odds are against it by the time they call you the investor to come and bail them out of the financial perils.
Sammy Seller will call you stating he is a couple of payments behind on his house and for you to help. In your initial conversation with Sammy, its evident that he feels like his job situation is about to change and he's just fallen on some temporary hard times. Even the most sincere people trying to work out their financial hardships will still know the foreclosure process first hand.
Let's get it down to what it means to you and Sammy Seller. First off, you're running a “FOR PROFIT” real estate business and you need to make a buck or two (few thousand would be nice). Sammy wants to stay in his house and in most cases this is NOT the best case scenario you need to work with.
Before getting into working out a forbearance agreement with Sammy, if there's a chunk of equity in the property then it is MUCH more acceptable to work with liquid funds if you have them available to make Sammy's loan current. However, you will definitely be keying into making sure you have recorded interest on the property. Think in terms of worst-case scenario and Sammy defaults to you and/or his lender again… then you're in a position to foreclose and capitalize on a property with a chunk of equity. I mention this part to show “yes” that is an option but it still is not the primary focus on this backdor profit centered angle I want to teach you here.
Let's get back to the main focus of working a forbrearance agreement and how it relates to a quality acquisition angle. In this scenario there's little to any substantial equity in the property and Sammy's behind on his payments but he's still very set on staying in his house. Let us just assume he can't see the writing on the wall that in most likelihood his house will eventually be in foreclosure within the year.
Sammy comes to you and after evaluating Sammy's situation and noting his position to stay in the house, leaves you with this angle of “FORBEARANCE FOR MOTIVATED SELLERS!”. Your reply to Sammy will be something like this, “Sammy I know you want to stay in the house and I buy properties to resell for a profit as I am an investor. This situation doesn't really fit my scope of being a real estate investor, HOWEVER I can help facilitate a forbearance agreement with your lender if for a fee of $500 with $250 up front and $250 due upon final forbearance worked out with the lender”.
Now don't get too far ahead here in your thinking. This is NOT about road to riches collecting $500 facility forbearance agreements. Just stay with me here for a while and I'll explain more detailing on the real scoop. Right now though Sammy feels pretty comfortable he can put together that type of money in order to possibly save his property from foreclosure. So Sammy says “yes” and now what? Now is time to get something in writing.
You will assimilate a simple one page document with Sammy of what your expectations and limitations are. Some general points of reference are:
- You do not guarantee in any condition that the lender will grant Sammy terms that will ultimately work out for him.
- Your position is simply to gather the facts of the loan in its current default and will find out exactly what the lender requires in order to reinstate the loan to current status.
- Payment conditions are that Sammy will pay you $250 up front and another $250 upon conditions ultimately agreed upon between Sammy and the lender.
- VERY IMPORTANT that you state very openly that you are not presenting legal advise but are acting in good faith to assist Sammy to communicate with lender.
After signing your agreement with Sammy and collecting your first $250, then its time to move on. At the same time you will also obtain from Sammy an “Authorization To Release Information” which will allow you find out all the specifics of the loan and what the lender requires to reinstate along with all forbearance stipulations the lender MAY provide. Remember that lenders in good faith will work with most homeowners to reach some agreement but if the homeowner is WAY into the foreclosure process then they may play hardball and require full satisfaction of funds including late payments to satisfy loan obligation.
Here is what you'll be doing and that is contacting the lender to find out current loan status and then to simply inquire on possible forbearance options. See, lenders DON'T WANT TO FORECLOSE!! Most lenders will work with the homeowner in some type of modification of existing loan in order to avoid foreclose….this is call FOREBEARANCE!!!
Just a couple of examples of how lenders may modify existing loans would be:
- Rolling existing payment in arrears along with late fees into an entirely new loan—sort of like a refinance.
- Allow for payment plan of 3 to 6 months in order to catch payments up.
In any circumstance though you must note and it will be stressed to Sammy that most certainly in order to work out a forbearance agreement he needs to come up with some extra cash. For example if his payments are $800 a month and he's three months behind then his next payment would need to be the $800 plus another $400 to start the forbearance plan. You just want to help facilitate what the lender will accept and works out in Sammy's budget.
Why will Sammy agree to all of this….his motivation is high to keep his house but he knows he just needs help to get it back on track. Sometimes homeowners just get intimidated or flat out frustrated in dealing with the lender and they need to speak to someone who can help them understand more clearly their options. This someone is YOU and when Sammy can talk and meet you personally, it can relieve the anxiety they may have put off on just dealing with the lender. And as well all know being an ostrich and sticking one's head in the ground doesn't make the situation go away and especially when an impending foreclosure is at stake.
A large majority of loans when closed are sold off within months to other lenders. This means that when Sammy originally closed on his house two years ago with a bank down the street, the loan is now serviced by someone three states away. This is frustrating to some homeowners when they get behind the 8-ball of payments and don't have anyone face-to-face to talk to about their struggles and how to possibly work out of the financial mess their in.
All right, NOW let us talk about what my whole focus is here to you. Collect some bucks along the way helping people out but making it worth your time monetarily by collecting a fee from the homeowner. Let me save you the heartache right now as I've experienced and you will too that “yes” you will get stiffed on that last payment at times. What makes you think that if they've been in default on their mortgage and other creditors before that they can afford to pay you the remaining $250 fee?
What you're really in this for in working out forbearance agreements is this: THE MAJORITY OF THOSE WHO YOU WORK OUT FORBEARANCE AGREEMENTS WILL END UP IN FORECLOSURE ANY WAY!! With some the inevitable will happen and they will not be able to save their house from the foreclosure process. Other than Ghostbusters, who are they going to call?—YOU!! The person who went out of their way to help them and who they have a personal relationship with now.
See, the entire process of facilitating forbearance agreements with individuals is to be first in line to take your best shot at the property while it is in pre-foreclosure. You now can fit in your best profit-centered technique and what would work best for the situation. Go for the short-sale first and also evaluating on the feasibility of taking over the property subject-to the existing financing. Heck, there may even be enough equity in there to buy out right (would be rare though).
Even when successfully facilitating a forbearance agreement for a seller….it has only just started. I recommend contacting the homeowner AT LEAST every other month for the first year just to touch base and see how things are going. When that house goes into all out foreclosure, you want to be first in line.
Some of the other great aspects about working out forbearance agreements with sellers is your now “inside” track. This means you know intimately the seller's financial condition on the house along with key relational contact information of the lender. This can make all the difference in the world when it comes down to getting a quality deal put together or being just another average real estate investor wondering where all the deals are. I'll tell you where the deals are and they are right under your nose in working out forbearance agreements.
The initial process of working out forbearance agreements does not sound that glamorous but it can pay HUGE dividends. So, instead of chunking all the leads you get for people in financial distress with little equity you now need to take serious consideration into working out forbearance agreements with sellers.
It now all comes down to this in that you CREATE your own deals by taking different approaches and working smarter, not harder. Lastly…as you well know its coming, “Good hunting as luck has absolutely NOTHING to do with it!”.