Success Story

Have you ever found a property advertised as a short sale* but the real estate agent said the bank would have to approve your offer? You go to the trouble of putting your offer together, but the agent is clearly trying to get other potential buyers to make offers too. You are attracted to the potential profit in the short sale, but you are afraid someone else will outbid you. What can you do? This article will show you how to take control and sweeten the deal.

You will often hear this statement: “A short sale offer requires the approval of the lien holders**,” but this is not an accurate view of what is really happening. To clarify, let’s cover some basic real estate theory. First, an agreement for the sale of real estate is between the buyer and the seller. Period. If they choose to involve other parties (like the bank), they may because everything is up to them, including which contract they use.

Second, changing ownership of real estate does NOT require paying off liens. While new lenders usually require a clean title, as do most buyers and sellers, the clerk in the land records office never verifies that debts are paid before changing ownership by recording the deed! Examples of this include “subject to” deals and “wrap-around” mortgages.

Third, the influence of a lien holder on a property comes from two places: the power of the lien itself to encumber the property or allow a foreclosure, and any power given by the buyer and seller. Having a lien does not permit the lien holder to “approve” or “disapprove” a purchase agreement. It only means that the lien holder may specify the conditions under which the lien will be removed, according to the terms of the loan documents. Note, the removal of liens is usually required by a new lender when obtaining a new loan.

Understanding these basic concepts will help you in your investing, but here is a strategy to help you get control of almost any short sale deal you find.

Make these changes and additions in the contract you use to make your offer?:

1. Set the offer price as high as necessary to beat the competition. (Stay with me here.)

2. Set the closing deadline just like this: “on or before the date of the foreclosure auction.”

3. Add these three sentences to the “Other Terms” section of your contract:

“This offer is subject to the buyer’s approval of all short sale conditions at the buyer’s sole discretion. To that end the buyer may adjust the purchase price. Seller authorizes all lien holders to share any information with the buyer.”

These terms give the buyer complete control of the deal. Setting the initial price a little higher than the competition gets the offer past the agent, into the hands of the seller. The buyer has walk-away power because he may cancel the agreement if he doesn’t like anything about the short sale, including the price! This literally means that the buyer may change the price either up OR DOWN. Also, setting the closing deadline to match the foreclosure auction means the contract will never expire unless the bank forecloses, which it would rather not do. Time is on the buyer’s side.

Finally, the last sentence authorizes the buyer to negotiate with the lien holders for the short sale, instead of allowing the agent to do so. Lien holders may require a form, often called an Authorization to Release Loan Information, to be signed by the seller before they will talk to the buyer. Having this language in the contract facilitates getting that form signed.

There are many sources of information about negotiating a short sale with a bank or other lien holder. Ultimately they will have two choices: 1) come to an agreement with the buyer on the price and terms, or 2) allow the foreclosure. The bank will go ahead and foreclose if there is not enough value in the short sale; but the buyer has walk-away power with no negative consequences and therefore is in the strongest negotiating position. It shouldn’t be too difficult to get the bank down to their lowest price.

With these modifications to your purchase agreement, you should be able to profitably buy almost any short sale property on the market. Sweet!

Notes:

* The term “short sale” is used to describe a situation where a property cannot be sold for enough money to pay off all the liens (debts) on the property. If the liens are to be removed when the property is sold, the lien holders must agree to accept a payment that is less (or “short”) of the amounts actually owed.

** Lien holders are usually mortgage lenders, banks, mortgage insurers, bankruptcy trustees, plaintiffs, contractors, and federal, state and local taxing authorities (such as the IRS or State Tax Commission).

? The reader is encouraged to obtain legal counsel regarding possible consequences of contract language.

I get frustrated when I hear investors say that sellers are not willing to discount their properties or sell at a loss. The best I can do to convince them they are wrong is to share experiences of other investors that are having great success finding such deals. That is until now because I have some research proof done by zillow.com proving that many houses sell at a loss by homeowners that are under water.

According to Zillow.com, over the past year a staggering 30% of homes sold were sold at a loss. That is good news for investors that are looking for deals. This is not to say homeowners are offering their homes at a loss or want to sell their homes at a loss but do if the right offer is presented.

(This is a subtle hint that you need to be in the market looking for these deals and most importantly need to be placing offers).

Report: One-Third of Homes Sold Under Water

Nearly one-third of homes that sold in the last year went for less than what was owed on them, according to a report released Wednesday by Zillow.com.

The real estate website calculated that homes values fell 9.7 percent compared to a year ago in 163 metropolitan areas. Compared to the market peak in 2006, home values have fallen 12.8 percent. Home prices have declined for seven straight quarters, according to the report.

Over the past year, 30.2 percent of homes sold were sold for a loss. In 17 markets – 14 of them in California – more than half of homes sold in the past year were sold for a loss, the report said.

Source: Zillow.com (11/12/08)

Posted by Carter Brown

When making offers on real estate put some things into your offer that you can use as negotiating tools. These are extra items that you really don’t care about actually getting in the deal. These items can include asking the seller to pay for closing costs, a home warranty, personal items (furniture, appliances, bear skin carpet, etc.), assistance with financing, etc. When it comes time to counter-offer you can concede and give in on these “extra� items instead of increasing your offer. You will be perceived as a willing negotiator willing to give in and concede and will not be seen as a hard nose buyer digging in your heels not willing to budge on your terms. As you take these things out of your offer the seller will feel compelled to give in and negotiate in good faith as well.

Posted by Carter Brown