How To Handle This...suggestions?

[JerseyJeff 0]

I spoke with a seller today who bought a house as an investment property with his girlfriend (He's the only one on the mortgage). He has an 80/20 mortgage for about 275K. He had the closing costs included in the mortgage, no money down. He had the home totally redone. He has since broken up with his girlfriend, and owes the construction company who did the repairs 28K. He borrowed money from his mom to pay the construction company initially but still owes 28K. He's paying the mortgage on this home plus the rent where he lives and needs to get rid of this home. He listed the home FSBO for 315K. He says this is his breakeven number. He claims two homes in the area are listed at 309K and 319K. He's viewed both and they both need 30K+ in updates to get to where his home is. It's a 2/3BDRM/1 BTH.

 

I haven't comped the house yet as I'm trying to figure out how I can approach the deal. He's not interested in LPing because he needs to sell ASAP because the construction company is putting pressure on him for his payments. I don't have any cash and little experience so I'm wondering what my options are here.

 

I could try to get an option to purchase on the home for 310-315K and then try to sell the option to someone, but I'm curious if it is worth 345K, why someone hasn't bought it yet especially since it's totally redone (in my market, this is the low end of the pricing spectrum). The only reason I can think of is that it was only first listed in last Sunday's paper. If I'm going to do something I need to lock him up ASAP.

 

If I had more experience/confidence (haven't done any deals yet) this might be a good situation to do a sub-2 and take over his payments. The only issue is that he needs 28K now to pay the construction company.

 

If I were just to get a pure option for 30 days and try to sell the option, why would he agree to this? I'm assuming he wouldn't pay the realtor commissions required if he went with a realtor. What are some other benefits and/or how do I approach him with this if in fact this is the way to go?

 

All suggestions and advice welcomed. I'd like to call him back tomorrow at lunch (EST) and make a pitch.

 

Thanks,

Jeff

[transactionsengineer 0]

Jeff,

 

How much is your seller willing to pay to have someone sub-2 the home from him?

Your seller will have to pay the realty transfer taxes and fees to transfer the warranty deed. I would do such a deal but the seller would have to pay me. Afterall, someone has to pay consideration in a contract.

 

From what I can see, the seller owes $275K + 28K and the seller wants $315K. The seller is not a desperate seller when he wants to make a profit albeit a small one. Break-Even? Not happening.

 

Get a short sale on the construction company's $28K by offering a small amount and buy the debt. You do this by telling the construction company that if the seller goes to foreclosure, the construction company will get nothing.

 

Get a short sale on the mortgage. To do this, the seller had to have missed at least one payment. The seller has to contact his lender for a short sale package.

 

Tie up the property for what he owes on it. Make him an offer on the short amount plus the construction pay-off amount. Short sale everything and make a profit.

 

You are an investor, not a charity social worker. Take it or leave it. When he gets desperate enough with no offers, he will turn around.

 

Find out more about the girlfriend and contact information. If she is ugly, forget it.

 

Daniel

[JerseyJeff 0]

Daniel,

 

Thanks for the advice. A short sale crossed my mind as well (he isn't late on the mortgage yet), but I am very new to REI which is why I'm doing LP's. I understand the ins-outs of LPing, but all I know about short sales is what you confirmed for me in your response. Even though that may be the most profitable option, I feel like I'm getting in over my head if I go that route being I know so little about short sales.

 

I would like to get in/get out which is why I suggested getting an option to purchase, sell it, collect a fee, and move on. I don't even have an LLC set up yet.

 

Understanding that a short sale may be the best/most profitable way to go, is getting an option to purchase for as low as I can and then trying to assign it to someone for a fee an option here? I know you're all thinking I'm crazy for not doing a short sale, and that it isn't as hard as I'm making it seem, but remember back when you began and never did a deal; I'm just trying to close something and build from there.

 

All advice welcomed.

 

Thanks again,

Jeff

[JerseyJeff 0]

UPDATE:

 

I spoke with a realtor I have developed a relationship with to comp this house and upon checking, surprise surprise, this guy has the house listed with someone at $324K. It's been on the market for a month so I guess if it was worth 324 it would've been sold already as I'm in a hot market (cooling) and this home is on the lower end of homes around here price-wise.

 

Jeff

[JerseyJeff 0]

A side question:

 

Daniel (and others),

 

How do you pitch the idea of short sale to the seller? What should you say and what shouldn't you say? How do you broach the topic?

 

Thanks,

Jeff

[transactionsengineer 0]

A side question:

 

Daniel (and others),

 

How do you pitch the idea of short sale to the seller?  What should you say and what shouldn't you say?  How do you broach the topic?

 

Thanks,

Jeff

<{POST_SNAPBACK}>

 

First thing that you do is ask him how long his contract with the real estate company will exist. Agreements with realty businesses in the northeast are usually 6 months to a year. In NY if you make a deal while he is under contract with an agency, the agency has the right to receive a commission and can take you to court to collect it. Have your seller request a release from the agency and get a signed letter of release.

 

To present a short sale to the seller, you will need to get him on your side. To open, I would tell him that I know he has tried to sell his home without much success at $324K. As the market cools and the winter months approaching, it would be wise for him to consider other options.

 

This opens up for you to present other options. When you present lease options, short sales, sub-2, etc., do not worry about hurting his feelings because you are there to help him. You become the only salvation he has. You are the expert so get comfortable with knowing what each of the areas are or can do to help him.

 

It is a good idea to get him to sign an authorization to release information. A form is attached with this post for your use. Edit the document any which way you like.

 

When you get on the topic of a short sale and explain what it can do for him, you ask him to contact the lender for a short sale package. Some lenders call the department that handles this type of request Loss Mitigation, Pay-Off, Pre-foreclosure, etc. There are times you may have to explain what a short sale is to a customer service agent who is not trained. If the seller can't do it, you have an authorization to release information and can contact the lender on his behalf. You are purchasing the real estate but cannot possibly afford an over-encumbered home. You are requesting that they consider a short sale on the loan.

 

Go through the paperwork and have the information sent to YOUR HOME OR OFFICE. This is very important because if you have the information sent to the seller's home, he can then have a friend make him a deal and sell the home later at a huge profit. After you receive the information and know what price the lender is willing to accept for the entire loan, you begin negotiating with the seller for a contract, option, sub-2, etc.

 

Your contract is for the purchase of the home at the short sale amount, not the amount he owes. If the seller is behind in the utilities (Gas, Electric, Water), you can add that into the price. NOTE: Utilities do not include telephone, cable TV, satellite dish or his psychological treatment of porn subscription since the loss of his girlfriend.

 

Please come back and let me know how it turns out.

 

Daniel

Authorization_to_Release_Info.doc

[JerseyJeff 0]

Daniel,

 

Great information. Thanks.

 

Thanks for the auth form; MichaelC includes one with his manual as well.

 

When you get on the topic of a short sale and explain what it can do for him, you ask him to contact the lender for a short sale package.

How do you get on the topic? I know a way I might be able to satisfy your loan for 70% of face value doesn't seem like the way to go. Suggestions?

Also, I know the basics of short sales, but what are the benefits to the seller? Is it simply avoiding foreclosure and damaged credit? Any others?

 

I had done some basic research of short sales in the past (Conti and Finkel) and they suggest you contact the lender directly. They also suggest you sign an agreement with the seller stating you have an option on the home assuming the mortgage company agrees to satisfy the loan for x dollars; only after the agreement is signed do you call the lender. But you recommend calling the lender first, and then approaching the seller. Does it matter?

 

Who do I say I am and what is my involvement when speaking with the lender? When speaking with the construction company? Also, when do I tell the construction company they will get paid? When I re-sell the home? Don't I also need letter from each lien holder stating the loan will be satisfied upon payment of x amount of dollars? Can I make the payment to satisfy or does it need to come from the seller?

 

Like I said, I'm very unfamiliar with short sales, hence the thousand questions, and hesitancy to approach the seller with it.

 

Thanks,

Jeff

[transactionsengineer 0]

Jeff,

 

Thanks for the auth form; MichaelC includes one with his manual as well.

 

I haven't received his manual yet so I didn't know the manual had a copy of the authorization.

 

How do you get on the topic? I know a way I might be able to satisfy your loan for 70% of face value doesn't seem like the way to go. Suggestions?

 

When you open the doorway to other options, you will talk about short sales. Your seller wants to relieve his burden of an over-encumbered home. You are presenting options. Let your seller tell you if he thinks it is right for his situation. This is why you get him on your side.

 

I know the basics of short sales, but what are the benefits to the seller? Is it simply avoiding foreclosure and damaged credit? Any others?

 

Some are relieving financial pressures, homeowner hardships, depreciating values, market cooling down, bankruptcy, neighborhood depreciation, etc. The biggest one is with a short sale the seller is able to finally sell his home.

 

I had done some basic research of short sales in the past (Conti and Finkel) and they suggest you contact the lender directly. They also suggest you sign an agreement with the seller stating you have an option on the home assuming the mortgage company agrees to satisfy the loan for x dollars; only after the agreement is signed do you call the lender. But you recommend calling the lender first, and then approaching the seller. Does it matter?

 

I recommend that you contact the lender with the seller. It shows that you have a cooperative seller that is working with you to accomplish this goal.

 

Who do I say I am and what is my involvement when speaking with the lender? When speaking with the construction company?

 

You are a perspective buyer.

 

When speaking with the construction company? Also, when do I tell the construction company they will get paid? When I re-sell the home? Don't I also need letter from each lien holder stating the loan will be satisfied upon payment of x amount of dollars? Can I make the payment to satisfy or does it need to come from the seller?

 

Everything is paid at closing.

 

Like I said, I'm very unfamiliar with short sales, hence the thousand questions, and hesitancy to approach the seller with it.

 

I don't mind the questions. If I can answer it, I will. If I can't, maybe someone else here can. It is all designed to give each of us support.

 

There are plenty of books on short sales. You can find some cheap ones on Ebay or Amazon. I learned it through trial and error. When I got started, I heard about the idea and called a company named Beneficial Finance. I don't see them located at the same place and am not sure if they are in business but I got the information I needed to make deals work. Information on short sales are available. You just have to look for it.

 

Daniel

[JerseyJeff 0]

Daniel,

 

I haven't received his manual yet so I didn't know the manual had a copy of the authorization.

No problem. I appreciated the offering.

 

When you open the doorway to other options, you will talk about short sales. Your seller wants to relieve his burden of an over-encumbered home. You are presenting options. Let your seller tell you if he thinks it is right for his situation. This is why you get him on your side.

I still don't know how to present the idea though? If I tell him his lender may be willing to settle the loan for less money and he should call them, what does he need me for then?

 

I recommend that you contact the lender with the seller. It shows that you have a cooperative seller that is working with you to accomplish this goal.

And by this you mean a conference call with all parties on the line?

 

Everything is paid at closing.

When a lender agrees to a short sale, don't they usually want the loan satisfied ASAP with cash? If everything is paid at closing, what happens if it takes a few months to move the home?

 

There are plenty of books on short sales. You can find some cheap ones on Ebay or Amazon. I learned it through trial and error. When I got started, I heard about the idea and called a company named Beneficial Finance. I don't see them located at the same place and am not sure if they are in business but I got the information I needed to make deals work. Information on short sales are available. You just have to look for it.

I agree. I just wasn't planning on diversifying my REI porfolio until I had LPing down with a few deals under my belt, but this seller and thread has brought us to where we are now. When the market cools, and interest rates rise, there should be a lot of foreclosures out there on homes with little equity so short sales was something I was going to look into, but again, after I had a few deals under my belt with LPing.

 

Again, I appreciate all the help. If anyone else has any advice/thoughts/questions about this subject, please chime in. There has been a lot of good information offered so far.

 

Jeff

[transactionsengineer 0]

Jeff,

 

I still don't know how to present the idea though?  If I tell him his lender may be willing to settle the loan for less money and he should call them, what does he need me for then?

Please re-read my first response. You will create the opening to present the idea.

He needs you because you are the only expert that has come to him with the idea.

 

 

And by this you mean a conference call with all parties on the line?

It does not necessarily have to be a conference call. You can be in the same room or he can call and let the people know that you will be faxing an authorization form signed by the seller to talk about a topic of concern.

 

When a lender agrees to a short sale, don't they usually want the loan satisfied ASAP with cash?  If everything is paid at closing, what happens if it takes a few months to move the home?

Lenders want money ASAP. It doesn't always happen that way. You are not in a foreclosure situation so no rush is needed. Don't let them pressure you.

If the lender forecloses, in NY it would take almost an entire year to complete. Can they accept a year of no payments?

 

Remember, the parties need you. You do not need them or the deal.

 

Dan

[JerseyJeff 0]

Dan,

 

Please re-read my first response. You will create the opening to present the idea.

 

Okay, after I...

First thing that you do is ask him how long his contract with the real estate company will exist. Agreements with realty businesses in the northeast are usually 6 months to a year. In NY if you make a deal while he is under contract with an agency, the agency has the right to receive a commission and can take you to court to collect it. Have your seller request a release from the agency and get a signed letter of release.

 

To present a short sale to the seller, you will need to get him on your side. To open, I would tell him that I know he has tried to sell his home without much success at $324K. As the market cools and the winter months approaching, it would be wise for him to consider other options.

Should I present the short sale as, "I've worked with lenders before and I've sometimes been able to get them to agree on accepting less than owed in satisfaction of the outstanding loan. I would then buy the home for the agreed upon amount with the lender. Is that something you would be interested in pursuing?"

Is that too much info/not enough/just right? I understand what you are saying, I'm looking for the right words on how to introduce the idea to the seller.

 

He needs you because you are the only expert that has come to him with the idea.

Let's assume that I've spoken to the lender and they're willing to accept a short sale. I call the seller back and tell him this and proceed to get an agreement with him. What is stopping him from saying, "Hey, thanks." and call the lender himself and say, "ok, my lawyer/investor/advisor/friend called and spoke to someone about me paying less than what's owed to satisfy my loan. What needs to be done by me to do this?" and I'm out of the deal.

 

or he can call and let the people know that you will be faxing an authorization form signed by the seller to talk about a topic of concern.

Okay, this clears it up a bit.

 

Lenders want money ASAP. It doesn't always happen that way. You are not in a foreclosure situation so no rush is needed. Don't let them pressure you.

Do I have to wait for this guy to miss a payment? What if he is able to stay current? Is a short sale just not an option for this situation then?

 

One last one, what percentage discount do you normally look for 1st? what about 2nd's? with the same lender?

 

Thanks,

Jeff

[transactionsengineer 0]

Jeff,

 

These are good questions.

 

Should I present the short sale as, "I've worked with lenders before and I've sometimes been able to get them to agree on accepting less than owed in satisfaction of the outstanding loan.  I would then buy the home for the agreed upon amount with the lender.  Is that something you would be interested in pursuing?"

Is that too much info/not enough/just right?  I understand what you are saying, I'm looking for the right words on how to introduce the idea to the seller.

 

You do not have to mislead to your seller if you have never worked with a lender on a short sale. Since you are part of this forum, your team has been doing these type of deals with various lenders before. I think the team concept works here.

 

 

Let's assume that I've spoken to the lender and they're willing to accept a short sale.  I call the seller back and tell him this and proceed to get an agreement with him.  What is stopping him from saying, "Hey, thanks." and call the lender himself and say, "ok, my lawyer/investor/advisor/friend called and spoke to someone about me paying less than what's owed to satisfy my loan.  What needs to be done by me to do this?" and I'm out of the deal.

 

You will receive a letter stating what the lender will accept. The letter is addressed to you. You can clearly state to your seller that the lender offered you the following deal. If your seller wants to circumvent you then you will call the lender representative who sent you the letter and inform them the deal is off. Your seller will not circumvent you. It has never happened to me.

 

 

Do I have to wait for this guy to miss a payment?  What if he is able to stay current?  Is a short sale just not an option for this situation then?

Discussing the possibilities with a lender doesn't hurt you at all. Without a short sale, you can't do a deal. The seller can't sell it. Expenses increase over time. It is in the best interest of all parties concerned to discuss the situation.

 

what percentage discount do you normally look for 1st? what about 2nd's? with the same lender?

 

For now, leave it up to the lender to decide. If they give you 40% off, it's good. If they give you 50% off, it's better. It all depends on the situation and what the lender decides. It is all negotiating.

 

Seconds with the same lender - The lender will give you a greater discount on a second position loan than on a first position loan. In any case, it is still up to the lender.

 

If I asked you what percentage discount would you need to make the deal happen, you have to make a decision but you know what works for you.

 

Daniel

[JerseyJeff 0]

Daniel,

 

Wow. What great information. Thank you...

 

Are there any other surprises that come up along the way?

 

What if the seller just tells you he has a 1st? Do you do a title check or anything to see just how many liens are on the property and with whom? Does this get costly? Other ways to see what's going on with the property?

 

After you get the lender to accept a lower payment, do you just sign an option to buy with the seller, nothing fancy?

 

Thanks again,

Jeff

[transactionsengineer 0]

Jeff,

 

Are there any other surprises that come up along the way?

 

Hmm. You must inform the lender that you do not want a deficiency judgement brought against your seller at a later time. A deficiency judgement is the difference between the full mortgage amount and the short sale amount. The lender has a right to sue your seller for the lost amount.

 

Another thing that will happen and you cannot prevent it: The IRS will issue a 1099 to your seller for the gain in equity position from the short sale as if it was income to him. It isn't your problem since you most likely will never see this seller again

 

What if the seller just tells you he has a 1st?  Do you do a title check or anything to see just how many liens are on the property and with whom?  Does this get costly?  Other ways to see what's going on with the property?

 

Checking title is cheap. Title companies are competing so you can get a title search for $350. The fee is usually deducted back to you when you buy title insurance from that title agent.

 

You are selling on contract so don't worry about it. Your buyer will get a title report done.

 

After you get the lender to accept a lower payment, do you just sign an option to buy with the seller, nothing fancy?

 

I would get a contract and sell the contract or sell the entire property. I would sell at slightly below market value eventhough I contracted for the short sale amount.

 

To handle earnest money, write down the amount of earnest money on the contract and include the following words, Payable at Closing The reason for this is if there is no closing, the contract is defaulted and you owe nothing to the seller.

 

For option information, you can address your question to MichaelC. He is the pro on this forum so he should be consulted for this information.

 

Daniel

[JerseyJeff 0]

Hmm. You must inform the lender that you do not want a deficiency judgement brought against your seller at a later time. A deficiency judgement is the difference between the full mortgage amount and the short sale amount. The lender has a right to sue your seller for the lost amount.

Should this be put in writing in their packet that they send me?

 

Another thing that will happen and you cannot prevent it: The IRS will issue a 1099 to your seller for the gain in equity position from the short sale as if it was income to him. It isn't your problem since you most likely will never see this seller again

I'm assuming you don't tell this to the seller. Most contracts have disclaimers/waivers that you are not a lawyer and that the seller should seek legal counsel before entering into the agreement. I'm sure one could be put in there for tax advise/ramifications as well, if it isn't already in there.

 

You are selling on contract so don't worry about it. Your buyer will get a title report done.

Good to know. So just call the lenders that he states have a lien against the home. In the example of the construction company he owes 28K to, I don't think they have it secured against the home, so would I just forget them, or as good faith and good business, try to short sale them as well?

 

I would sell at slightly below market value eventhough I contracted for the short sale amount.

Why? Because you're already making a decent profit and want the home to move fast?

 

To handle earnest money, write down the amount of earnest money on the contract and include the following words, Payable at Closing The reason for this is if there is no closing, the contract is defaulted and you owe nothing to the seller.

Earnest money is the money paid that makes the contract legal?

 

For option information, you can address your question to MichaelC. He is the pro on this forum so he should be consulted for this information.

If you're getting a contract, there shouldn't be any option money involved, correct?

 

Thanks,

Jeff