Can a short sale be done with these numbers?

Question

I found an owner who wants to do a short sale but I don't even know if these numbers will work and what kind of deal to expect from the bank.

The loan is was originated by Countrywide just before the crash of 06-07 and is now being handled by BofA. The seller has a loan that I'm assuming was a 35 year loan since the paperwork shows that 414 months are still left. The principal balance is over $292,000 on an ARM that's currently at 7.35% interest with payments of $1945 per month. The seller hasn't made any payments for about 40 months and it would currently take over $89,000 to reinstate the loan. For whatever reason BofA did not start foreclosure proceedings until a few weeks ago even though the loan went unpaid for all of that time. The seller tried for a loan reduction but didn't make enough to qualify for a refinance.

The current market value of houses of this size in this neighborhood are around $140,000 to $150,000. The seller has an appraisal from 2005 that shows the property has major foundation, structural, and termite damage none of which has been addressed in the last 6 years. At the time the loan was made Countrywide had their own appraisal that not only provided for the $292,000 loan but also a $50,000 HELOC which BofA now holds the paper on as well. The seller also owes taxes back to 2008 exceeding $5,000.  From a structural POV the place is essentially a scrape project.

One other piece of information is that the seller bought this place as a Homesteader. I don't know if or how that affects anything.

So to summarize the seller owes BofA about $350,000 on a property they feel is only worth about $80,000. I guess the question is can anything be done with this and what sort of price would the bank accept?

Maryann L. · Answer

Vince, first you should know BOA will likely make you hold the property 30 days before you can resell it.  If that hold time makes financial sense, then you should go for it.

If the home value is worth $140,000, then BOA won't take $80,000, because keep in mind they will likely have to pay off those taxes first. They will want to NET somewhere between $112,000 and $128,000 likely based on the type of loan it is, then you can deduct taxes off that amount as well.

Now if the home value is less, you can likely pick it up for less, but you really need to find out what the TRUE value is on the property.

Jamie Gaymon · Answer

No worries, glad to help!

Divorce is definitely a valid reason.  The other part you leave out of the paperwork when you send it in, LOL!

But the exact reason that YOU may not want the house is the same reason BofA doesn't want it either-they know it's not worth the loan amount either!  That's exactly why you're in the drivers seat.

The way you're looking at this is counter-intuitive to a point.  The reason the bank may be more than willing to accept a short sale is because of the long history of non-payment.  Non performing loans keep the bank from lending money for performing loans, which cut into their profits.  So it's pretty much a "cut off the finger or lose the whole hand" scenario for them.

Of course we ARE talking about BofA, so don't expect logic to rule the day when working with them.

At the end of the day, the BPO appraisal is the most important piece of the puzzle for the short sale, because that really does determine what price range you'll be able to buy at.  So your offer does need to reflect the as is value of the house in that market, and really, with a short sale, since the process takes so long, it should reflect what you project that value to be 3-6 months from now.  Even better for you, right?

It sounds like you may not have done a short sale before, I can recommend a company to you that I use to negotiate short sales for me that would put you on the right track, but I don't think I can post their info here, so if you'd like me to send it, PM me.

If you use transactional funding and sell to a cash buyer, seasoning shouldn't be an issue, as far as I know.  You may want to check on that piece, but I'm fairly confident that's somewhat accurate, LOL

Vince M. · Answer

Hi Jamie. Thanks for the input. Right now I'm just in the exploratory stage.

The seller is behind because of loss of income from a divorce. It was an acrimonious divorce as far as she says. I'm guessing she wanted the house and he wanted out. She had no way to make up the income to cover a $2,000 a month mortgage payment. I'm guessing there's also a desire to not pay twice as much as the property is worth now but no way around the fact that she signed for it. I think she feels that it was a fraud for Countrywide to come up with an appraisal that was so high but, again she took the money. My feeling is that the bank may not go for a short sale because of the history reflected in the long period of non-payment. I find it strange that BofA would let it carry on for so long before starting foreclosure proceedings. I wonder if they have the original loan papers.

The bank will have to take quite a hit on this because she won't be able to pay and I don't see how they can get anywhere near the loan amount plus the HELOC amount as an REO given the condition of the property.

The seasoning requirements would be a major factor on if I got any further involved in this since I'd only be interested in a quick flip.

Jamie Gaymon · Answer

1-Why is the seller behind?  If there's no legit reason why your seller is behind 40 months, the bank's not giving them a short sale.  So if there's something major (no job, diveroce, pay cut, illness, etc...) then maybe.  If they're just not paying because they think the property isn't worth the price they agreed to, not so much.

2-The price the bank will accept in a short sale depends almost entirely on what evidence can be provided to show that the house is worth what you say it is.  So it's not so much a matter of what the bank will accept, as it is a matter of what can you prove the house to be worth?  The appraisal from '05 tells you that an appraisal in 2011 would be worse than that one, so it's safe to assume the house is worth less than that.

3-What is your exit strategy for this house-are you wholesaling, renting, or fix and flipping?

Determine what you think the market value of the house is in perfect condition, figure out how much it will cost to get it to perfect condition, then determine what you would like to offer the bank for that property.  There are tons of formulas floating around out there, use the numbers that will allow you to make the profit you'd like to make from the deal.

Hope this helps!