How to Get a Lender to Say "Yes" to a Realestate Short Sale in Foreclosure

Difficulty: Moderate

Instructions

Things You'll Need:

Purchase and Sale Contract
Authorization to Release
Last Two Years Taxes/W2's
Last Two Months Bank Statements
Last Two Months Paystubs
Financial Statement
Hardship Letter
HUD1 Net Sheet
Optional: MLS Listing Agreement and Buyer Preapproval Letter

Step 1

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Determine Fair Market Value (FMV):

The FMV can be determined by evaluating sold, comparable properties in a similar or close proximity to the subject short sale property. A Realtor will have access to the MLS (Multiple Listing Service) and can create a CMA (Comparative Market Analysis) for the subject property. This analysis will identify sold comparable properties with same square footage, bedrooms, baths, garage and other similar characteristics as subject property. Request the Realtors use a sold time frame within 6-12 months when pulling properties in the immediate or surrounding areas. Usually the short sale lender will not consider any sold comparables that are older than 12 months and that are further away than 2 miles from the location of the subject property.
Step 2

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Evaluate Sold Comps Systematically:

Contrary to popular and often misguided belief, you can use a formulaic system to work in your favor when determining what to offer on the short sale property. This system has been around for years, but for some reason you may have not heard of it mentioned dealing with real estate. Here is the system. You will use the law of averaging. The way this works is like this.

Let's say you have eight sold comparables that are all similar in size, square feet, bedrooms etc. Here is how you apply the formula. You would take out the two highest comps and the two lowest ones and average the rest.

EXAMPLE:

You have a property you think is worth $145,000.

You have a realtor pull a CMA and you find eight sold comparable properties that match the criteria above.

The MLS (Multi Listing Service) shows the following:

$159,000
$154,000
$153,000
$161,000
$148,000
$143,000
$146,000
$151,500

Using our formulaic approach you would take out the two highest sold comparables ($159,000 and $161,000). Then take out the two lowest sold comparables ($143,000 and $146,000). This would leave four others.

$154,000
$153,000
$148,000
$151,500
-----------

You would then take an average by simply adding up the sum of all the sold comparables and dividing them by the total number of properties left. In this case, that number would be four.

Total: $606,500 divided by 4 = $151,625

You can reasonably justify the house may sell for $151,625 instead of the $145,00 you originally estimated.

Make sense?
Step 3

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Reveal the ARV (After Repair Value):

This terminology is slang often used with real estate investors. It is similar to the FMV with a few differences. The ARV is made up by the amount of repairs the investor thinks the property needs in order to sell quickly on the open market using FSBO (for sale by owner) techniques and not using the MLS. It can be argued the ARV is more of a guess or suggested value derived by using sold comparables from houses that were NOT sold by a Realtor. One way to explain the difference is a Realtor will typically use a FMV (Fair Market Value) evaluation method when a real estate investor may elect to use an ARV. An appraiser can use both value methods, but generally sticks to the ones that come from off the MLS. In my opinion... the ARV is a less accurate and dependable value than what come off the MLS. It is good information to know both.
Step 4

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Figuring out the Lenders BPO:

The BPO (Broker Price Opinion) is perhaps the single greatest value factor the lender will use to determine the acceptance of your short sale offer. A BPO is a generalized opinion or value of a property the lender uses to determine what the property is worth on paper. They are ordered by the lender and then sent to a Third Party Company, such as BPO Direct, First America, LandSafe, etc. These companies have a list of Realtors for each state. Most BPO's are ordered and conducted by Realtors. The BPO can be an Interior or Exterior type. If an Exterior type BPO is conducted it means the Realtor (BPO agent) did not go inside the property to evaluate its condition. This could be due to the homeowner vacating the house or not being cooperative with the BPO agent when requesting a time to come appraise the house. Let's look at the different types of properties and how they are affected by the BPO.
Step 5

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What is The House Type?

Dealing with "Pretty House" type short sales (categories later defined), you will find the BPO will typically come in 10-20% lower than FMV or ARV. Based on this, you might consider offering 60% of the ARV or FMV value for your initial purchase offer. Of course, this depends on the amount of repairs needed for the property. If you have what can be classified as a "Pretty House" short sale, which would show very little needed repairs, don't expect to get a huge discount from the lender for it. If you cannot JUSTIFY a reason for the lender to accept either a small or large discount ... don't expect them to give one to you. This also dispels the myth that all houses heading towards foreclosure are good short sale candidates. They are not.

Here are some classifications and examples to make it easier to determine how much of a loss the lender may agree to accept.

Cory Boatright's Short Sale Classifications:

* PRETTY HOUSE
* UGLY HOUSE
* SCARY HOUSE

EXAMPLES:

* Pretty House: (Generally in safe, desirable areas and houses selling fairly quickly)
ARV/FMV: $100,000
REPAIRS: $5-10,000 (5-10%)
BPO: $80-90,000 +/- 5%

* Ugly House: (Generally a light rehab or fixer-upper, handyman special house in fair neighborhoods)
ARV/FMV: $100,000 (With Ugly Houses this number tends to be the "as is" value instead of ARV.)
REPAIRS: $11-20,000 (11-20%)
BPO: $80,000 +/- 5%

* Scary House: (Generally in areas that are not desirable, massive repairs needed, lots of crime isn't uncommon)
ARV/FMV: $100,000 (With Scary Houses this value tends to be the "as is" value instead of ARV.)
REPAIRS: $35,000 (21 - 35% +)
BPO: $65,000 +/- 5-10%

You can have a Scary House located in a great, fast selling neighborhood and combination of the others, but generally speaking Scary and Ugly Houses will not be located in excellent neighborhoods. Remember this is a guideline, not an exact science. The BPO agent will generally consider the "as is" value for both Ugly and Scary Houses.

Now let's discuss the different loan types the lenders will consider a factor per short sale submission.
Step 6

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Learning the Loan Types:

Here is the "skinny" on the different loans types and how they affect your short sale. When you learn these, you can increase your closing rate for lender accepting your short sale by as much as 50%! Here's why: if you know more about any property it provides you better leveraging and ultimately negotiation strategies to target. Not all short sales are created equal.

Here's why:

* Conventional loans. These loans are found all over the place. They provide the most flexibility especially dealing with short sales. Using the $100,000 example, you might start out your offer submitting 60% x 100,000 (FMV) = $60,000... The $60,000 is actually 70% of the BPO Price. However it is very common to see the lender accepting around 80-85% of the BPO price, which would be around $68,000 - $72,250.

This model can fluctuate a little bit, but this is a common average. The BPO (value opinion also considered the PERCEIVED value of the property) to the lender is the MAIN FACTOR. Therefore in this example if you thought the BPO was going to come in around $65,000 ... You would take 82% of THAT number, which would be $53,300. The lender may very well accept $53,300 based on their perception of the value of the property (their asset).

* FHA loan. This is not a scientific grading scale. It is the model used by many short sale investors as a guideline. You can and will have other factors that make you stray from this. If you are dealing with an FHA type loan or any government backed loan, they are going to recoup a set amount if the foreclosure is completed. For example with FHA loans, the insurer will basically guarantee the lender 82% of an FHA Certified Appraisal amount. Notice I did not say BPO. For these loans, you will need an FHA Certified Appraisal for the lender to consider in their evaluation process on the property. The BPO will not suffice on these types of loans. You can massage the numbers 1-2%, but 82% is listed in their guidelines.

Here is a compiled list that I provide in my home study course. You can go online to find a similar list for free too.

o All FHA loans are insured by the federal government.

o As long as the lender follows FHA guidelines, they are guaranteed at least 82% of the "as is" appraised value.

o FHA-type loans will not use a BPO. Instead they will require an FHA Certified Appraisal. Use the same techniques on the FHA Appraisal that you would for a typical short sale deal.

o If the debtor is
Step 7

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Memorizing the Percentages:

You must know the minimum accepted NET offers (of the BPO or FHA appraisal) the lender will consider.

For example: If an appraisal came for a VA loan for $200,000 the lender would consider accepting $176,00 for it. Keep in mind, the $200,000 may or MAY NOT be the actual value of the property, but it will be the value the lender uses to determine how much they can discount. In this example that would be 88%.

Here are more percentages you need to memorize.

* VA 88%

* FHA 82%

* Freddie Mac (FDMC) 92%

* Fannie Mae (FNMA) 90-92%

* Conventional Loans 80% (no set limit)

IMPORTANT: Understand that these are NET percentages to the bank. If you have your offers padded with things like Realtor commissions, closing costs and additional fees, these are NOT to be included in this percentage.

SECOND EXAMPLE: The BPO on one of your deals comes in $100,000. Offers that may be accepted based on the above criteria would be:

* VA 88% = $88,000

* FHA 82% = $82,000

* Freddie Mac (FDMC) 92% = $92,000

* Fannie Mae (MNMA) 90-92% = $90-92,000

Something else to consider is this: all LOCAL banks, usually the smaller ones, will almost always NOT ALLOW more than a 10%-15% discount off the property depending on the amount of repairs needed to fix. Local banks tend to be more conservative in their approach to discount the property. This is partly due to the network of local affiliates the bank can call to get more than one opinion of repairs needed or value of the subject property. OK... now you know more than 90% of Real Estate investors. Let's keep moving and get you the acceptance letter.
Step 8

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How to Deal with Junior Lien Holders:

If you are dealing with a junior lien holder such as a second mortgage, you are basically going to negotiate with them the same way as the primary/first lien holder. You will find that many junior lien holders will not require as much information to make a decision quickly on discounting their loan amount. They will generally order a BPO or have an appraisal on file. It could be an older or current one. Make sure and ask about it. Sometimes a lender will actually tell you a BPO price. Now before you get all excited and think that is GREAT…think again! Typically, they will LIE to you about the price and actually inflate it. Yeah…I know… you never thought lenders lied, did you? Well…they do…and they do it a lot.

When you are dealing with a first mortgage holder it is not uncommon to find out they will only allow $500 - $1000 towards paying off any junior liens, judgments etc. All lenders are a little different, but the norm is $1,000. This is another reason why you will deal with more junior position lenders that are willing to take pennies on the dollar to satisfy their loan positions with the homeowner. In fact, you will often negotiate for 80-90% discounts or get approval for 10-20 cents on the dollar! It is can be beneficial if you get the first lien holder to accept a short sale and then present that information to the junior lien holder IN WRITING! If the first lien holder is willing to take a deep discount, where does that leave the junior lien holder? As you can imagine using the strategy of showing the junior lien holder where first lien holder has agreed to short sale can be a powerful negotiation technique.

Remember any junior lien holder who is holding an over-leveraged asset (the house) is in a HORRIBLE position. They realize this and if you can build a strong case why it would be in their best interest to discount their position rather than risk losing EVERYTHING at the foreclosure auction sale. It will generally not only help them, but it can make you, the investor, a HUGE PILE OF MONEY too.

Why?

You just created equity out of thin air. That is the power of short sale negotiations.
Step 9

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In Closing:

I just revealed what is probably the most concise definition of putting together an adequate short sale offer ever printed. The power of this document once put into action, can literally make the user of it extremely wealthy. Other real estate home study courses, books, audios etc. leave out what this document discloses. It is the "meat" of preparing a satisfactory short sale offer. There are no more secrets you need to know about doing short sales. I just shared them all to you. If you take the steps for preparing a short sale offer exactly as shown above and apply them in your real estate short sale business, the sky is the limit for your success getting them approved.

Remember... be a servant.

Cory Boatright
Loss Mitigation Specialist
Short Sale Fundamentals
http://www.ShortSaleOlogy
www.ShortSaleFundamentals.com

Comments

coryboatright said

Flag This Comment

on 8/30/2008 Mobo - Thank you so much for your encouragement

Mobo said

on 8/10/2008 Great article as usual. For somebody as young as you, Cory, you are truly a wonder. Mobo. :)

on 6/19/2008 Certainly YouKnowMyName --- I agree it is different for certain areas. I would estimate probably 90% of the time it is 80-90%. The exception being on far East Coast and West Coast or areas that had super high appreciation the last few years. It also depends if the repairs are noticeable.

luvtolearn said

on 5/26/2008 excellent article Cory! I look forward to learning more from you via your website! this article is a 5 star as far as i'm concerned! How do you post the stars?