Can I tie up a short-sale property while I wait for it to foreclose?

Question

A client (buyer) came to me interested in a listed house in the pre-foreclosure process.  The listing agent is not local and doesn't impress me as being able to get a short sale done as there are 4 trust deeds on the property.

The owner of record vacated the home a year ago and will probably accept any offer, as is typical in a short-sale as they will not get any money from the transaction.

Moreover, today, I just had the county recorder change the legal description to reflect the right-of-way easement established when the stated transferred the land to the municipality in the 1880's.  (I just found out that the piece of land that looks a lot like the house's driveway is technically a city street and not properly reflected on the plat)

My client is in no hurry.  In my opinion, his best bet is to wait for foreclosure, get clean title, then negotiate with the bank when we show them that the house doesn't have a driveway.

So I have two questions:

1) If I get the house under contract with the titled owner (at a price my client would take) how might it affect the foreclosure process which I foresee as our only realistic goal?  I'm not too worried that a third party will come in and pick up this prop, but would like to throw a big monkey wrench into that possibility if I could.  I've had contracts on houses that were foreclosed on while waiting for third party approval, but this was a while ago.

2) Is there any way to influence the opening bid at foreclosure (in favor of US Bank) or is there any possibility of buying the note (also at a discount) and have my client foreclose?

Thanks!

.Wm

Wayne Brooks · Answer

It's generally difficult to get a sale date delayed in order to complete a short sale.  I do it often, but generally when I have documentation from the lender(s) that a successful outcome is likely.  Sometimes the bank agrees and files the motion to extend, sometimes we have to.  There is no harm in making a legitimate offer that your buyer would be willing to close on.  The key to getting it done will be who be exactly who the lien holders are, particularly the 2nd and  3rd.  Credit unions are the worst.  You'll need to structure your offer $10k or so lower than your max price, and plan on chipping that $10k in to settle the differences between what the 1st will/can pay toward the junior liens verses what they are willing to accept.  The first typically will contribute 6-8% of the junior liens, and you'll have to negotiate/pay the difference to what they will accept.

J Scott · Answer

Ethical issues aside (I can't really decide if I think there are any or not), my experience has been a little bit different than Wayne's -- though I believe Wayne has MUCH more experience with this than I do, so I'd trust him over me any day...

That said, in my experience, when a short sale gets contracted and the package is submitted to the bank, it's not too tough to get them to push the foreclosure out a month or two or three.  It does require the listing agent (or negotiator) to make any effort calling the bank, but it doesn't seem too uncommon for the bank to be agreeable for at least a couple months.

But again, that's just my experience, and Wayne certainly has more than i do...

Wendell De Guzman · Answer

Regarding your questions:

" To restate the question: If there is an offer on a short-sale that is almost guaranteed to fail, does it typically prolong the foreclosure process?

I guess this warrants a general question: Has anyone ever convinced a 1st, 2nd, and 3rd to take a combined 35+% hit?"

Answers:

Does shortsale prolong the foreclosure process - I agree with Wayne... not necessarily but it can. Case in point: on a recent shortsale I am working on, I was able to get a 30-day extension on the foreclosure auction date (from Feb 4 to March 6 of this year).

"Has anyone ever convinced a 1st, 2nd, and 3rd to take a combined 35+% hit?" - the answer is YES. Here are the numbers from one of my shortsale deals:

Before the Shortsale

First mortgage holder - loan balance $80,000

IRS Tax lien - $100,000

Total lien/encumbrances on the property: $180,000

After shortsale:

First mortgage holder accepted a pay off of $55,000

The IRS released their Tax lien for $1,000

Total pay off plus release of lien: $56,000

Now, I might have gotten just lucky on that one. The discounts I get are not as big as the IRS tax lien being released for only $1,000. But with 2nd mortgages you will get bigger discounts than with the 1st.

Account Closed · Answer

Whatever US Bank paid for the note is irrelevant.  They are not using the formula you are (get back what we paid).  You're just guessing with no info. So don't even think about that anymore.

You're just guessing at the BK filing? Your concern about missing out is a valid one.  Especially if you continue to guess and assume things. :)  Confirm the BK or look it up.  It's public info at pacer.gov. A discharged Ch. 7 BK in this situation could be helpful

The one-off note purchase from an institutional lender is a long shot.  But it's continues to be on my check list.

I'd also try to get the listing agent to drop the listing so I could work directly with the seller.  And I'd be willing to pay the agent a fee if your buyer is able to buy.

Account Closed · Answer

My experiences with short sales says there is no rhyme or reason when it comes to a short sale delaying the sale.  It really depends on where the property is in the process and if the depts. at the bank are communicating with each other. A good listing agent or short sale negotiator will make sure to get confirmation of a change in the sale date so there is a commitment in writing. Your buyer's short sale offer may or may not delay the sale and IMO you have little control over how that goes.

You say that you assume the foreclosure was stalled 10/13 due to BK.  Are you assuming that the borrower filed BK, or do you know for sure? Do you know whether it's a Ch. 7 or Ch. 13?

In addition to the 3 mortgage and the bail bond, are you sure there is nothing else? If the borrower filed BK there may well be other things on title that will make the short sale difficult or impossible.

You say there are 3 liens totaling $170K. What's the amount of the senior lien?

If it were me, I'd be trying to buy the senior note. Or I'd get a deed from the seller and negotiate a short pay off.  I've done both. The easement thing could be a powerful factor in negotiating a discount.

I've gotten a 1st and 2nd discounted to 30 cents on the dollar so I know it can be done.  But you've got a lot of moving parts when it comes to so many jr. lien holders that may refuse to cooperate even though they'll lose when the sr. lender forecloses.

Joel Owens · Answer

Are there not any other properties to locally to go after??

You are in the business so you know what the term " too much hair on a deal " means.

I do commercial real estate now but years ago I was doing short sales when the markets first turned. There was only one person in the banks department that even knew what a short sale was because it comprised less than 1% of their loan resolutions at the time. When markets were performing it was a borrower filing BK or making  a payment arrangement that was the norm to get the loan going again.

Short sale and foreclosures weren't really occurring much. Now they have all these short sale processes in place ( they call it streamlined) but I see a bunch of red tape now.

The seller might not be really selling. They simply listed it as a short to stall. The listing agent probably knows more of what is going on then they are telling. If the sellers are living their mortgage payment free then they have low motivation to move. Yes their is a mortgage but sellers typically stop paying a long time ago when underwater.

I would pass on this one. You could spend  half a year and it goes nowhere. Periodically follow up on it but wouldn't be married to this property with all my time and energy. On short sales the banks have to perform multiple BPO's and sometimes they values do not correlate to the market. It takes a bunch of time and sometimes even then the bank has to foreclose and go REO to get realistic on price.

William Hochstedler · Answer

Thanks everyone for all the info.  I'm meeting with the buyer tomorrow.

We're going to make an offer in the $50K's to get the ball rolling and see what happens.

I'll continue to post the progress here.  But it might be a bit...

Cheers,

Wm

Andy Collins · Answer

I had a short sale a few years ago waiting for bank approval,,the just went ahead and foreclosed on it,,,,

Until the bank approves the short sale, the contract is worth virtually nothing and you can't hold the bank or anyone else to it (unless the bank approves it, then its a different story)

William Hochstedler · Answer

Just got off the phone with my title company.  Turns out borrow filed Chap 13 in 12/12 which was discharged on 7/17/13 and then another Chap 13 on 10/16/13 (cancelling the trustee sale) which is still open.

See you at the courthouse steps?

I like the idea of "buying" the listing.  Will look into that.

Wm

William Hochstedler · Answer

@K. Marie Poe

Thanks for the info.  I would love to buy the note (originally $113K) except I have never done this before and have no idea where to begin negotiating with US Bank.  I can't imagine that they would even consider dealing with a one-off note sale even through a multitude of agents.  Do you have experience buying single notes from large institutions?

I guess, in short, my biggest fear is that the property goes to foreclosure and in 6-12 months, either on the courthouse steps or as a listed REO, it is sold at a fair market price (reflecting all of the defects) which we would be willing to pay today...and somehow we miss out on it.  If US Bank bought the note at 50 cents on the dollar and it goes to sale at $65K, it becomes interesting to any investor.  I think this is a good possibility and am looking to somehow secure our willingness to pay that right now.

Because of the messy abstract and potential bankruptcy (I'm just guessing here and have no details), I don't feel that trying to negotiate this through another agent (who so far has exhibited no familiarity with the property) in a short-sale scenario will get us any closer to that goal.

Any insight greatly appreciated.

Wm

Can I tie up a short-sale property while I wait for it to foreclose?

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