Learn the Short Sale Foreclosure Process

What is a Short Sale?

In this discussion you will learn a short sale foreclosure process that can reap an investment rental property buyer high rewards.

What is a short sale? In the world of real estate it is a sale of real property that is below the total amount of mortgage notes held against the property. Anytime you can buy property for less than the value of the notes, it is considered a short sale.

There are two time periods when you can do a short sale foreclosure:

• Between the time a home owner is served a default notice, such as a lis pendens, and the real estate foreclosure auction - this is often called a pre-foreclosure sale


• After a bank takes possession and the property is REO - bank owned real estate . The property may or may not be on the market, but is definitely for sale

In the first situation, you have become an exclusive agent for the seller and are the sole negotiator with the bank. However, the bank may be less flexible, believing that they may get a better price at the auction or if they own the property.

In the second situation, there may be many buyers competing for the same property. However, if the property has been sitting on the market of the banks books for a long time, they can become very flexible.

In either case, however, the short sale foreclosure process is the same, though buying when an owner is in pre foreclosure takes more paperwork.

To answer the question of what is a short sale, you must take some time understanding foreclosures. When one of the lien holders on a property starts the foreclosure process, they notify the homeowners of their actions. Depending on the foreclosure laws in the State that the property is located, there may be as little as 30 days to multiple months before a foreclosure auction takes place.

During that time period you can contact the homeowner and become an exclusive agent to negotiate with the bank. Depending on how many mortgages the homeowner has, you may be able to get a very good deal. Note holders in a second or third position will take pennies on the dollar if the first lien-holder is foreclosing because they do not want to own the property.

However, if the first note holder finds out that you are paying junior note holders, they will not negotiate a short sale.

When buying foreclosures after the foreclosure sale auction, you only have to deal with one bank.

The short sale foreclosure steps you should follow in a pre foreclosure sale are:

1. Get a written authorization from the homeowner with their permission to negotiate a short sale purchase - include their loan number on the authorization


2. Have the homeowner write a handwritten hardship letter detailing the reason why they fell behind in their mortgage payments

Get a phone number of the bank from one of their mortgage statements. Call and ask for the phone number of the loss mitigation department for the bank. You will often get a request for the authorization at each step - so have a fax machine handy

3. Before you can speak to the loss mitigation person, you will be asked for the authorization - again


4. Once you speak to the loss mitigation department, one person is usually assigned to the property - write their name down and find out the banks requirements for a short sale. These often include:


1. Purchase and sales agreement


2. Two years of tax returns


3. Three months of bank statements


4. Copies of W-2's


5. A financial statement of their assets and liabilities


5. I then contact the homeowner and get all the documentation together


6. I compose a cover letter indicating the number of pages and types of documents being faxed. I always indicate that time is of the essence and note the possible auction date


7. When negotiating a short sale foreclosure remember that the loss mitigation officer will have to get approval - often from a group of people - and this can take time. I call the loss mitigation person at least once a week - they rarely call you


8. Once you have a short sale agreement, contact your attorney and prepare a HUD-1 statement. The banks require a HUD-1 settlement statement to make sure that the seller and any junior lien-holders are not getting any money.

The major difference from this point when doing a short sale foreclose with bank owned real estate is that the bank usually will solicit multiple offers. They loss mitigation department usually tries to look for the highest bidder. The other difference is that the property may be in worse shape then when it was owner occupied.

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