I recently had the chance to reconnect with one of the best darn short sale investors I’ve ever met.
This guy is a total machine, and he’s built one of the most elegant, scalable, systematic short sale businesses I’ve ever seen. He’s made millions systematically quick-turning about a house or two a week for the past 6 years in a row, and is truly in a class where few other investors can fit.
Anyways after we reconnected he mentioned an article he’d written that basically walks through the entire short sale process from an investor’s perspective, one step at a time. I’m not new to short sales, but I was intrigued nonetheless and asked him to point me to it.
Lo and behold, it kicks butt. In fact is may be the best darn walk-through of this process I’ve ever seen. So I wanted to share it with you guys.
Enjoy…and as always, please leave any comments or questions you may have below…
The Complete Step By Step Process On How To Complete A Short Sale Transaction
By Josh Cantwell
With foreclosures on everyone’s mind these days, the interest in investing in foreclosures has skyrocketed. Everyone has a book, seminar, or website . . . where were all these “gurus” last year?
Most opportunity seekers looking to invest in foreclosures are not quite sure where to start. The truth is there are really only two ways to invest in foreclosures. First go buy a bank owned property. Bank owned properties have already been foreclosed upon and the lender now owns it. They typically sell these properties cheap because they need a lot of work. These properties are typically rehab projects. The second way is to try to buy the property before it is foreclosed upon. Most times houses in pre-foreclosure have zero equity. In these cases a short sale must be negotiated in order to create the equity to buy the property.
Several years ago when we first got in the business, you’d be hard pressed to find a Realtor or even an investor who knew anything about short sales. Why? With housing values appreciating and easy money being had, short sales were once considered too much work for the money. Today, they’re still a lot of work, especially if you don’t know what you’re doing — but we’ve proven that a highly profitable, full-fledged short sale business can be built, grow and prosper no matter what’s going on with the market.
Today, with banks defaulting and homeowners under water, real estate agents, investors and homeowners must have a full understanding of exactly how to negotiate and process a short sale. Homeowners in default should educate themselves on this process to avoid the financial pitfalls that go with having a foreclosure on their credit report. Real estate agents must be fully educated on the short sale process to regain lost commissions. A vast number of listings they receive are now “subject to lender approval” and require a short sale be negotiated. Investors looking for solid investment opportunities are now obtaining a growing number of leads that are over-leveraged and in foreclosure. “Equity” deals are tougher and tougher to find.
The concept of marketing for the real estate investor revolves around finding “motivated sellers”. Typically, you would think, individuals who are behind on their mortgage payments are motivated to sell to avoid foreclosure. Most houses in foreclosure these days have zero equity. To construct a profitable real estate transaction the real estate investor must pair up a motivated seller with a successful short sale negotiation.
Below is a guide of the exact steps to take in the short sale process. I have coached hundreds of investors and real estate agents throughout the US through this process using these exact steps. I have watched them close on properties they otherwise would have never been able to close so I know this stuff works.
Here we go…
1. You must identify your “sweet spot” and stick to it. A sweet spot is an area in your town where you want to buy and sell houses. Identifying your sweet spot is fairly easy. Find the areas where houses resell the quickest, then go market and buy properties there. Avoid areas where you know buyer interest is low. Try to stick to areas near your office or house where houses are selling the quickest.
2. Obtain the list of pre-foreclosures in your sweet spot.You can obtain these lists from a courthouse or a list provider. Make sure your list includes the following information: name, address, city, state, zip, lender, and the date the foreclosure was filed.
3. “Scrub” the list with a skip tracer for updated addresses and phone numbers. Skip tracers have access to databases where they can find updated information. To advertise to these homeowners in foreclosure you’ll want the most updated information including address and phone number. Some free services include: w3data.com, zabasearch.com, 411.com, and whitepages.com. Paid services include lexisnexis.com and accurint.com.
4. Market to the list of names and addresses in your sweet spot. Marketing can consist of direct mail, postcards, letters, cold calling, door knocking, voice broadcasts, and free recorded messages. You can also use referrals from centers of influence. Centers of influence are other professionals like attorneys, real estate agents, mortgage brokers and title companies. The idea of marketing for the real estate investor revolves around finding “motivated sellers.” Typically, you would think, individuals who are behind on their mortgage payments are motivated to sell to avoid foreclosure.
5. Let the leads roll in. Your marketing efforts should generate calls to your office from sellers in pre-foreclosure looking to sell.
6. On each “buy call” you must qualify the property and the situation. “Buy calls” are simply the phone calls you will receive from seller who you have marketed. If they call you it’s a “buy call.” The goal is to qualify the homeowner and the property to see if it’s worth your time to go look at the house and attempt to buy it. Also, run comps and score property with the Realeflow’s Deal Filter. Try to avoid condos, townhouses, new construction and new loans when prospecting for short sales. The best properties to pursue include FHA loans, solid resale neighborhoods, large 2nd mortgages, vacant houses, any deal where you already have an end buyer, and any loan that is six years or older.
7. Go see it. Set an appointment to view the property and meet the homeowner for the first time.
8. When viewing the property, make sure to note major repairs, and the property condition. Likewise, pay attention to the appearance of the neighborhood. Does the subject property conform to the area? Is it above or below community standards for that street?
9. Discussion with the homeowners should be guided by the “Positive Results Conversation.” This conversation in an educational talk given to the homeowner by the investor. The purpose is to explain the seller’s options, the short sale process, and how to set expectations regarding how the short sale process works.
10. Start the Short Sale Process. If a short sale makes sense for all parties involved, and the homeowner gives the go ahead, then start the short sale process.
11. Set up an appointment to meet the homeowner a second time in your office with a notary.
12. During the second appointment with the homeowner the option contract and other legal docs will be signed. The option contract is a special purchase and sales agreement used to control the subject property during the short sale negotiations. The option contract also allows the investor to resell the property for a profit. Moreover, additional information will be collected to complete the seller portion of the short sale package. The short sale package is a compilation of documents that lenders require to begin a short sale on a house in pre-foreclosure. This includes: 2 years tax returns, 2 month bank statements, last 2 pay stubs, hardship letter, FDMC financial form, and a listing agreement. Other docs include mortgage statements, property disclosures, and repair estimates. Legal docs must be notarized and consist of: option contract, notice of option, affidavit, disclosures and the bill of sale.
13. Record the Notice of Option Contract in the public recorder’s office.
14. Gather the short sale documents from the homeowner mentioned above.
15. Develop the short sale package to submit to the lender.
The short sale package consists of the following:
a. Authorization to release loan information
b. The short sale cover letter (which explains the offer)
c. The option contract for purchase and sales agreement
d. The HUD 1
e. The Listing agreement (if listed with a real estate agent)
f. Financial Statement (FDMC form)
g. Hardship Letter
h. Homeowner’s Last 2 paystubs
i. Homeowner’s last 2 bank statements
j. Homeowner’s last 2 year’s tax returns
k. Pre-approval letter for buyer’s financing
16. Get authorization. Fax the authorization to the customer service department to make sure you are authorized to talk to the lender about the account.
17. Order payoffs from the mortgage holders.
18. Fax the short sale package to the lender(s). Send this package to each mortgage holder and then just send the purchase and sales agreements and the HUD 1 to any lien holders.
19. Get assigned. Your short sale package will then be assigned to a loss mitigator (LM) at each lender.
20. Get a BPO. The file will be reviewed by the loss mitigator (LM) and they will order an interior BPO. A BPO is short for Broker’s Price Opinion. The BPO is a third party report of the value of the property. This value could be determined by either a real estate agent or an appraiser.
21. Interior BPO completed. This is the most crucial part of the entire short sale process. For a short sale offer to be accepted the interior BPO needs to come in near the offer price. The real estate investor should meet the BPO agent to try to validate their offer price. The goal of the interior BPO is to have the agent or appraiser value the property as low as possible. This will allow for the most options for the homeowner and investor. The investor should bring the purchase and sales agreement, the comparables that are near the offer price, the construction repair estimate, the listing history, and the hardship letter written the homeowner who’s trying to sell the house. See “Art of the BPO.”
22. Get key intel. Learn the value of the interior BPO by contacting and asking the loss mitigator “Where did the BPO come in?” You can also call the agent or appraiser who performed the BPO and ask the same question.
24. Begin to clarify your exit strategy. Was the BPO low enough to buy outright or possibly do a resell quickly (quick-turn)? The property must then be re-marketed to find the end buyer if the exit strategy is to resell the property and structure a back-to-back purchase and resale of the property.
25. If an investor is going to buy the property outright they must be able to purchase the property near 65% of the as-is value. If the property cannot be purchased at 65% of the as-is value then the investor should plan on quick-turning the property (buy & resell) for a profit.
26. Pull title with a local title company. If title is not clean you must negotiate additional liens. Lien holder should accept around 10% of their balance. If the property goes to sheriff’s auction lien holder typically receive zero proceeds.
27. Re-market. If the preferred exit strategy is to resell the property and structure a back-to-back purchase and re-sale, then the property must be re-marketed at this stage.
28. The buyer, who is the option holder, has an “equitable interest” in the property through the recorded notice of option. The option holder, or buyer, has the right to list and sell the property for a profit.
29. List it. If the exit strategy is to resell the property, the house should be listed for resale with a real estate agent on the MLS.
30. Send counter offers to each lender. The following is a general outline of what each lender will accept via a short sale. 1st Mortgage (80-100% of the BPO), 2nd Mortgage (5-20% of balance owed), 3rd Mortgage (5-10% of balance owed), Liens (5-10% of balance owed). Counter offers are done via fax. Fax the counter offer to the loss mitigator at the bank. The counter offer should include the Option contract with an adjusted offer price and the HUD 1 along with a cover letter explaining the counter offer.
31. Fax purchase and sales agreement and the HUD 1 with adjusted offer price to lenders. Increase your offer price through negotiations. All counters must be made in writing with purchase and sales agreement as well as the HUD 1. For both the HUD 1 and purchase and sales agreement the price must match. Then fax the purchase and sale and the HUD 1 to the loss mitigator for approval. Counter offers are done via fax. Fax the counter offer to the loss mitigator at the bank. The counter offer should include the option contract with an adjusted offer price and the HUD1 along with a cover letter explaining the counter offer.
32. Negotiate the final purchase price. The final purchase price will depend on the negotiations and the BPO value.
33. Receive approval letters. Approval letters are issued by the loss mitigators when they accept your offer price. The approval letter will explain the closing date, the gross offer price, the net proceeds that the lender will accept, the real estate agent commissions, the acceptable closing costs and any other lender closing instructions. The approval letter will need to be faxed to the title company or closing attorney.
34. Commit to an exit Strategy: Buy – Fix – Sell; Buy – Fix – Rent; back-to-back quick-turn.
35. A back-to-back quick-turn must have an end buyer at a higher price than the short sale price. Tie down an end buyer with a purchase and sales agreement at a higher price than the short sale offer you have made through the option contract.
36. End buyer must schedule a closing date.
37. End buyer receives the “clear to close” from their funding lender.
38. Close both transactions back to back. 1st the investor purchases the property. Then they resell it in the same day. Each transaction must be funded and each closing have it’s own escrow.
39. The title company files the deeds and funds each closing.
40. Property transfers – Two deeds are recorded. The first deed is from the homeowner to the investor (A-B). The second is from the investor to the end buyer (B-C). The loans (previously in foreclosure) are paid off (short sold), mortgages released, the foreclosure is then ceased and real estate agent commissions are paid. The title company will also issue a profit check to the investor for the difference between what they bought the property for and what they sold it for.
So there you have it, that’s the basic outline for the short sale business. Are there twists and turns along the way . . . you bet. One of the things we like about short sales is that each deal is different, and that we are always learning something new. This outline is more than what we had when we started out, so hopefully it will be useful for those of you interested in short sales and looking for some additional direction.
Strategic Real Estate Coach
About the Author…
Josh Cantwell is a full time real estate investor from Cleveland, Ohio who’s been involved in thousands of foreclosure, pre-foreclosure and short sale transactions over the past 5 years. Josh has been training and teaching apprentice partners since 2004. Josh has vast knowledge and experience in helping coaching clients, mentor students and apprentice partners from across the US in finding, structuring, negotiating and closing short sale transactions for a profit.