Anyone actively investing in foreclosed and distressed properties has no doubt come across one major problem. Finding deals with equity! Trust us, this is a nationwide problem.
There are so many foreclosures out there; unfortunately most of the homeowners owe what their property is worth. We find that most investors walk away from deals with no equity. They either don't know what to do with a no-equity deal or they are unwilling to put forth the effort necessary to make the deal work. In situations like this, we SHORT SALE the mortgage.
“What is a short sale?” You ask. To short sale a mortgage means getting the bank to accept less than is what is owed as payment in full. There are several steps that will ensure your success when short selling mortgages.
First of all, you must have the homeowner under control. Many investors are under the misconception that they can buy the property directly from the bank while it is in the foreclosure process. Not true! The bank does not own the property until the moment of the courthouse sale. You can buy the mortgage and finish the foreclosure process, but you cannot buy the property. You'll have to work hand-in-hand with the homeowner if you plan to short sale mortgages.
Here is how it works: A homeowner calls you and talleys he is in foreclosure; owes $95,000 on his property; it's worth $100,000 and he is 8 months in arrears. He wants to move on with his life but can't sell his house because he owes what it is worth. Here is where you come to the rescue. You meet with the homeowner and have him sign an “Authorization to Release” form (this gives the bank permission to speak with you about the account) and a sales contract for the amount you are willing to pay for his property. In this scenario we are going to offer $50,000.
Next, you call the bank and ask for the Loss Mitigation Department. This is the department that handles properties that are in foreclosure. Tell the person handling the account that you are trying to help Mr. Smith with his foreclosure and you are willing to buy the property from him. However, due to its poor condition you are only willing to pay $50,000 as payment in full. Fax the sales contract for $50,000; comps in the area; an extensive list of repairs that are needed to bring the property up to marketable condition; a net sheet (a title company will help you with this); and some really bad pictures. The bank will then review the information and make a decision. Let's say they counter at $65,000; you counter again at $55,000; they accept! It's that simple! We short sale many, many mortgages every year. Banks are not in the business of owning properties. They would rather short sale a mortgage than go to the courthouse steps.
We'd like to share an incredible deal one of our Foreclosure Fortune Hunt graduates put together. Her name is Cathi Dubois. Cathi was helping some friends find a home in which they would live. They came across a property valued at $200,000 in a distress situation. The property had a mortgage of approximately $197,000 and was in need of several thousand dollars of repairs. Based on the fact that the current owner owed what the property was worth Cathi did what any prudent investor would do, she did a successful short sale. She contacted the bank and began the process. Her first offer was $50,000. The bank laughed and told her to make a higher offer. After several phone calls, the bank agreed to accept $130,000 as payment in full. That is a $67,000 short sale! With the new payoff of $130,000, she then wholesaled the property to her friends for $140,000 and made a smooth $10,000 in less than a week!!!
Personally, we think she gave the property away too cheap (smile). This is a typical case where having a firm grasp on creative real estate enabled Cathi to turn a “nothing deal” into a “something deal” just by picking up the phone. She made money (and a lot of it) on a deal most investors would have passed by. The bank was happy with the short sale, Cathi made $10,000, and her friends bought a home with $60,000 equity!
So the next time you get a call from a distressed homeowner with no equity, what will you do? Walk away or make a few simple calls and turn your time into cash? We certainly hope you will make the small effort it takes to short sale the mortgage. It is such an easy way to make money in an industry where great deals are tough to come by. When you short sale a mortgage, not only are you helping yourself; you are helping a very distressed homeowner and giving them the chance to start over. One can never go wrong when win/win is the solution.