Negotiating A Short Sale – The High Road To Huge Foreclosure Profits
Buying foreclosures can be extremely profitable for real estate
investors. However, most of these homeowners are mortgaged to
the hilt. They have no equity, and big loan payments. In fact,
many actually owe more than the property is worth!
Most investors will walk away from these deals because they see
no obvious profit. However, you can “create” your own equity by
negotiating a “Short Sale” with the bank or lender.
What is a Short Sale?
The concept behind the short sale is simple: your goal as a
real estate investor is to convince the bank to sell for less
that is owed as payment in full. Of course, this concept is
easy - buy the foreclosure from the bank at a big discount,
sell the real estate, and make money!
How to Negotiate the Short Sale with the Mortgage Holder
Once you have your secured a contract with the homeowner and
have your paperwork in order, you'll be ready to deal with the
loss mitigation department of the bank. Short Sales success
relies on dealing with the loss mitigation department at the
bank. Although most lenders look at short sales as a necessary
evil within the lending industry, that doesn't mean that the
bank will just roll over and do your bidding.
Understand the Bank's Perspective
With foreclosures at a 52-year high, the loss mitigation
department at the bank is busy, if not highly overworked. Turn
this disadvantage into an advantage - sell them the benefits of
your short sale.
Short sales contracts help lenders unload unwanted property and
spare many expenses associated with the foreclosure process.
These expenses include, but are not limited to, court costs,
bankruptcies, repairs and marketing. This is in addition to the
$300,000 to $800,000 (or more!) normally held in reserve by
lenders. Federal regulations require this reserve, which is
usually many times over the actual price of the bad debt.
As the investor, keep these benefits at the top of your mind.
After all, it's up to you to convince the lender that cutting
their losses short is the best option.
It's time to hone your negotiating skills. Here are 3 Steps to
help you out.
Step 1: Have Your Paperwork Ready
There is paperwork that all lenders will require in order for
you to submit your offer for the short sale. Second, many of
the larger institutional lenders have their own short sale
package (their own forms to be filled out and signed).
Since many of these forms have to be signed by the
homeowner(s), it's best to have them with you when you meet
with the homeowner to work out a deal. At a minimum you should
have the homeowner fill out and/or sign:
· Authorization to Release Information (homeowner's permission
for the bank to speak to you)
· Purchase and Sale Agreement
· Hardship letter (showing why the homeowner can't make the
· Financial statement (showing the assets, liabilities, incomes
· Estimated HUD1 or Net sheet (showing the bank what they will
Second, find out if the lender has a package they want
completed. You can do this usually by calling the lender and
asking them to fax you the package. Get the lender information
from the homeowner in a phone call, so you can get the package
before you go out to the house.
Step 2: Approaching the Loss Mitigation Department:
One of the first challenges you'll face with the bank is
getting your call to the right person. Some banks have systems
set up in a way that when you call put in the homeowner's
account number, the call transfers to the appropriate
If the bank doesn't have a system like this, call around to
find the Loss Mitigation Department. Many banks have different
names for this department, so you may spend some time getting
bounced around. Other names to try out are “foreclosures
department”, “short sale” department, or “loan modification”
Make sure you introduce yourself and be nice, polite, and
patient when you reach the right person. This is the person
that can make or break your deal. It's helpful to have some
form of a script in front of you to get the conversation.
When you speak with them, make sure you cover the following:
· Introduce yourself.
· Name the homeowner, the account number, and the fact that you
· Ask for the fax number.
· Let them know you're faxing over an “authorization to release
information” so that the loss mitigator can talk to you.
· Stay on the phone as you fax this information.
· Explain to them that you're interested in a short sale.
Once they have the paperwork in front of them, the negotiations
Step 3: Begin Your Negotiations
Every bank has its own personality and approach when it comes
to short sales. Some teach their employees to at least show
resistance up front. One reason for this is that many investors
call them expressing interest in a short sale, with no clue how
to do it! These loss mitigators usually have about 80 to 300
files on their desk. They just don't have the time or desire to
teach you! Let them know you don't need them to!
Many new investors have been advised to not reveal that they
intend to invest in a property. However, it is better to be
upfront and let them know that you are an investor, and you are
buying the property.
Being honest and upfront allows both parties know what is
required of them, and what needs to be negotiated.
While speaking with a loss mitigator, make sure to emphasize
the following points:
1. You're an investor and you know what you're doing. Although
you do want to make profit, let them know you're not out to
steal the property from them.
2. You understand that they are busy and appreciate the
valuable time they are spending to negotiate with you. Find out
what will make it easier on them.
3. Remember your selling points. The bank wants to avoid the
homeowner filing bankrupty, and the bank needs to unload
unwanted property without taking a huge loss. (And yes, while
you are in it to make a profit, you're not trying to rip them
off! You're just trying to use your expertise to do what you're
4. A short-sale is a win-win situation for everyone!
Once you have spoken to the loss mitigation department and
given them your paperwork, the lender will need information
about the property, the borrower and the deal that you are
proposing. If the person you are speaking with tries to test
your resistance, make sure you answer as many questions as
thoroughly as possible to let them know you are a professional.
Hang in there, answer and ask as many questions as possible, and
they'll be more apt help you out along the way and walk you
through what it is that you need to do.
The most important fact that the broker needs to know is: How
much is the property worth? Banks usually hire a real estate
broker or appraiser to evaluate the property. This is called a
broker's price opinion or “BPO”. The BPO is one of the largest
hurdles you need to clear when perfecting your short sale
negotiations. In the next article, you'll learn the in's and
out's of the BPO and how to negotiate the BPO down to create
profit for your short sale.
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