Short sale process

[Vicki K.]

Neighbor down the street from me puts a "For Rent" sign in his yard. We look online - no MLS listing. Property up for rent by owner on Craigslist. I email the guy and ask him if he has considered selling his home. He tells me he would absolutely love to but is way up side down on it to make it happen.

He owes:                         $184K or so

Property market value:    $115-125K

Loan is though:                Bank of America

I have spoken to each other in the past. He knows I am own rentals so he came by to ask me for some advice about being a newbie landlord.  I told him to think about a short sale instead as this is a losing proposition for him. No cash flow; just headache. 

How is the bank calculating an acceptable sales price? Is the market price of the home the determining factor or the amount the person owes. Will an offer of $80K be acceptable? At that price point this house is a phenomenal deal. Depending on how updated it is (I haven't seen the inside yet), I'd be willing to go up to $90K even. The seller is very motivated. Has considered walking away, but doesn't want to ruin his credit. I own 5 homes in this specific subdivision and they are fantastic rentals.

Any advice on the pricing as well as how short sales are structured would be greatly appreciated.

[Johnny Kang]

Larger banks tend to be a little more difficult to negotiate with on price.

Banks know they will take a hit when they accept to do a short sale, but then again, they don't mind doing this since loans are insured against defaulting, plus banks get to carry over their losses indefinitely, so the range may vary (again, depending on the bank) anywhere from 50% of FMV (Fair Market Value) to 75% of FMV.

I usually start my offers around 40% of FMV. You can always go up, but not down and the bank is expecting you to make a low initial offer. So $80,000 is a good start so don't get so anxious to start off at $90,000. The key thing when you're doing short sales is to make sure the seller is 100% on board working with you, and they trust you completely because as you're spending time going back and forth with the bank on the price, as long as the seller is on board with you, you have the luxury of seeing a deal through until the bank and you (buyer) reaches an agreed price. This goes along with what Wayn Brooks mentioned "listing it even though we already have a buyer game."

When I do short sales, I give evidence (rehab costs from a licensed contractor with their stamp seal, crime rate (if applicable), lowest comps I can find, flood zone (if the property is in a flood zone), mold issues (if any), title issues, squatters, improper assignments (robo-signing that fueled the mortgage melt-down; you can check out saiaudit.com for more info), and any other evidence I can show to demonstrate why it's in their best interest to let the property go at the offer price I've made. You'll probably even get to the point of countering the bank's counter on your initial offer and play that game a little while; but if it gets to a point where they won't go any lower than the highest amount you are willing to pay, you can always go higher up in the bank's chain of command and fight your way through to someone who can come to an agreed price. (I have a partner who've been doing short sales since 2001, even before anybody knew what they were. If she doesn't get her way on price, she'll track down VPs of banks, CEOs and even board members until she gets her way). Knowing how to make money on deals doing short sales is a skill in as much as you finding out whether you're going to let the "other guy" win, or you win. It's not always like this, but you have to have the attitude that "I'm going to make this happen." 

I've heard many people say "work with agents who have experience with short sales." This is not good enough, simply because the goal of the agent is not in line with an investor's goal. Meaning, agents make more money when they sell a property for the highest amount. So even if it's a short sale, they'll want to sell it for the highest amount possible. You, as an investor make the most money when you buy it as low as possible and sell it as high as possible, quickly. What an agent wants is not what you want. 

Because of this conflicting interest, I find direct short sale deals with homeowners, which then gives me "control of the deal." I then find an agent who's happy to get the listing, since I'm the one who's bringing the deal to them and working the deal.  

Hope this was not too much but I've seen way too many people work short sales for months, only to have their efforts go to waste because they do not have a fundamental understanding on how to really work short sales. 

Johnny :)