Is it too late to approach a foreclosure?

[Edith Penaloza]

I'm a new Investor in Houston, TX looking for my first property to rehab & flip.  I'm looking at all these foreclosures but I'm questioning the timing.  If the properties are going to be auctioned on the first Tuesday of next month and it takes minimum of 15 days to close with Hard Money in some cases from what i hear is there anything else that can be done to acquire that property? Any advise/input would help.

Thanks!

[Denise Evans]

I would not limit myself to short sales of active properties listed on MLS.

The withdrawn or expired listings are good places to look for opportunities. Look for things with the word "lender" or "short" in the comments field, as in "subject to lender approval" or "potential short sale."  Many of those potential short sales fail because the property is listed at a price that is too high to generate any interest, and so never receives an offer.

I love short sales as an investment route. Yes, they are extra work. But, you can generally buy properties at 15% to 20% less than fair market value, you have plenty of time for due diligence and to raise cash, and you have none of the competition you encounter at auctions or post-foreclosure REO sales.

"In foreclosure" is generally a nebulous term. It might mean that the borrower is in default and waiting for the ax to fall. It might mean the lender's file has been transferred to its foreclosure department for pre-foreclosure inspections and possibly property management, workup and analysis. It  might mean notices are now running in the newspaper.

With rare exceptions, I can usually stop a foreclosure with a valid short sale offer, as long as there is at least one week left before the auction. You will need to have ready to send the lender (servicing company, usually) the following:

• Authorization letter from borrower letting you talk to the lender. There is no particular form to start the dialogue. Many lenders have particular forms they want filled out afterwards;
• Borrower's full name, address, property address (if different from borrower's address), account number, last four digits of SSN and sometimes a birth date.
• Fully executed contract.
• Copy of earnest money check. This can usually be as low as $500, even on a many hundreds of thousands of dollars of purchase price.
• Estimated settlement sheet showing net proceeds to lender. The bottom line, where the title company usually puts money to/from Seller, must show $0. All net proceeds after payment of normal and customary closing expenses and a real estate commission not exceeding 6% should go to the lender. If there is a 2nd lien, you can show $3,000 going to the second lien holder. If there is more than 1 junior lien on the property, pass on it unless the opportunity is worth all the extra effort it will take to get them to sign off.
• Ideally, proof of funds for the equity portion of the purchase. If you are trying to stop a foreclosure, it should be among the papers you end the bank first, when you request a postpone of the auction. This gives you credibility as a real purchaser, and not some desperate attempt to buy more time, by a friend of the borrower. You will need it eventually,as part of the short sale package. Proof of funds can consist of a copy of a bank statement or investment account statement, or a letter on bank or investment company letterhead saying you will have the cash available at closing for the equity portion of the purchase.
• Ideally, loan pre-approval letter for any financed portion of the purchase.  You do not need this to stop a foreclosure, but you will need it before your short sale will be approved. It just adds credibility if you have it when you are asking for a foreclosure postponement.

The lender will then tell you what other documents you will need. Usually it is some combination of a form with monthly revenues and living expenses, plus assets and liabilities. Some sort of hardship statement for why the borrower cannot continue making his payments. Typical reasons are loss of job, reduced income from job or business, divorce, death in family, health issues affecting employment, overuse of credit cards, medical bills. 

You will need at least the last year's tax return for the borrower. Some lenders want more than one year. Some want just the 1040 pages and some want all schedules.  Pay attention to the tax returns and the information they show. If they show rental, royalty, or dividend income, but the assets/liabilities sheet does not reveal any rental real estate, oil and gas interests, or stocks/bonds, then the negotiator will think they are being scammed. You can simply attach an explanatory sheet, such as "Rental real estate previously owned by borrower has been foreclosed. A copy of the foreclosure deed is attached.  All stocks went to wife in divorce. Copy of divorce decree attached.  Sold all oil/gas interests to raise money to send kid to college and for living expenses. Copies of sales documents attached."

They will want copies of all bank statements for the prior one to three months. Borrowers can typically have up to 3 months of living expenses in the bank, and the lender will not require bringing cash to closing. If there is more than that, the lender will want some of it. They want all pages of the bank statements. If the bank statements say "Page 1 of 7, Page 2 of 7, etc" and you omit Page 7 because it is just the reconciliation page, the lender will reject your package as incomplete. And, they want copies of statements, not a print-out of the online account activity.  Virtually all banks allow you to download an print prior statements.

If the bank allows payment of $3,000 at closing to the borrower, for moving expenses, it will need proof the borrower is still living at the property. That is usually a copy of a recent utility bill.

If there are junior liens, the first lender will need written agreement from junior lien holders approving the estimated settlement sheet showing their payments. If you can't get junior lien holders to release their liens, the short sale is doomed. So, the first lien holder wants proof the juniors are on board, otherwise it is a waste of time. If NationStar is the second lien holder, they will not give you approval unless the first lien holder approves first. Don't stress. First lien holders know NationStar is bizarre.  They make an exception for them, and will approve a short sale even without the NationStar prior approval.

Good luck!