Posted by: Roby Robertson | March 14, 2009

Lake Norman Real Estate;Anatomy of A Short Sale

As with most things in life, people tend to follow trends.  In today’s real estate market the new trend that is en vogue is Short Sale.  I get a couple of questions a week, from buyers looking in the Lake Norman and Charlotte area, about short sales and their availability.  Some do not even know what they are but they think they want one.  I have sold some Lake Norman Short Sales and they can be very time consuming and frustrating at times.

So, I found this great explanation from Ken Cook, Cook Property Ventures, Inc. and with his permission decided to reprint it. 

New investors, it seems, are intrigued by words and phrases to which they have recently been introduced. Often I will speak with a prospect on the telephone and just by listening to what they are saying tell you about where they are in the investment process. Newbies (that’s not an offensive term, by the way) and well studied but lightly experienced investors generally have one thing in common: a great use of words they don’t (fully) understand.

Today’s term is Short Sale.

This is a big one and it’s used quite often around investor’s clubs and seminars across the nation. But what, really, is a short sale? How do they work? Why should I or should I not pursue short sales?

I’m so glad you asked!

Let’s first look at the short sale from my standpoint as a lender. For this scenario let’s say Bob bought a house 2 years ago and his mortgage broker used my lending arm to get the loan he needed. Bob didn’t have any down payment but qualified easily, at that time, for a 100% loan.

Recently Bob lost most of his income because his employer, a different mortgage broker, went out of business because they based everything they did solely on refi’s. Now Bob works at a local bank where he makes about 1/3rd of his previous salary. Bob can no longer afford the $2800 payments on his home. He is constantly 2 months to 3 months behind with payments and I’m getting ready to foreclose.

So you, Mr. or Ms. Investor, find out about Bob’s situation and Bob knows he is about to go into foreclosure and I don’t have much equity in his home so I’m really not too happy about the whole situation. Now I’m going to have to pay court costs, attorney fees, filing fees, and Bob is filing bankruptcy which will tie my property up for an indefinite period of time. You and Bob talk and he thinks the best thing for you to do is call my company, speak with my Loss Control Department and see if you can negotiate a short sale.

“A what?” You ask.

“A short sale,” says Bob. “It’s where you offer the lender less than I owe on the home because there is no equity available but they are going to have to spend money to foreclose on my loan but I’m filing bankruptcy and if I file while I’m still on title to the house they’re not getting anything for some time and can’t throw me out without a judge’s order.”

“Really!” You exclaim. “So how much should I offer them?”

Bob gets his calculator, some paper and a pencil, his mortgage coupon booklet and does a few quick calculations. “Well,” he posts. “I bought the house two years ago for $398,900 and that’s how much my loan was. It was worth about the same but now it’s worth about $395,000 and I’ve paid my loan down to $397,200 – that’s my pay-off as of today. If I were you I would start by offering them 15% less than I owe.”

“Fifteen percent?!” You query in a statement. “Do you think they will even consider my offer?”

“No, but it will telegraph your intent … that you are interested in the property,” says Bob.

Now, Bob can’t just say he can no longer afford the property. He’s going to have to file a “Hardship Statement” to my Loss Control Department. It’s going to have to tell the story about how he lost his job and his wife is about to go into labor with their 4th child and they don’t have any medical insurance and their savings, 401(k) and stocks are completely depleted. He’s going to have to prove to Loss that he no longer in any way qualifies for the loan he got just 2 years earlier. In essence he’s applying for a loan in the reverse order – he’s un-applying. And he cannot qualify for any other product I offer.

Now that my Loss Department has your offer and Bob’s un-application they are going to start crunching numbers and doing some serious evaluation. They are going to hire an appraiser and an economic evaluator. They’ll assemble all the numbers and make a prediction on the value of the property over the next few months. From that number they’ll subtract all the costs associated with foreclosure, repossession, repairs, and marketing costs to sell the property again. Believe it or not 15% may not be too unreasonable.

Now as a lender I’ve struck a deal with a real estate broker to market my REO’s (real estate owned properties) at a discount rate. Say 2%. But I can’t negotiate down attorney fees, court costs, sheriff’s fees, legal publication fees, etc. So even if I don’t spend the money to get the property marketable I’m still going to suffer some costs and the sales price (not the value) may be lowered because of the condition of the property. So, once again, 15% may not be unacceptable. In fact, 20% to 25% may sound good – according to the property, the economics of the situation and the amount of the outstanding debt.

Either way, we’re going to be happy to get that loan “off our books”.

Now, if there is equity on the property, for example if my Bob property is now worth $450,000. Forget it. You’re not getting it. I don’t care if I have to sit on it for 15 months through a complete bankruptcy I’m hanging on.

But go ahead, make me an offer before I have to foreclose and see if you’re in the ball park. If my Loss Manager doesn’t respond you should just wait a couple of weeks and ask why. It takes a while to crunch the numbers and if you’re way low we may or may not counter. If you’re close, we’ll counter.

I do recommend that you use the services of a real estate professional that already has experience with or has attended my short sale seminar to negotiate your deal. It takes your emotions out of it and makes for a much more pleasant experience.

I hope you now better understand the anatomy of the short sale. They are fun, beneficial for you, beneficial for me, and keep a foreclosure off the record for our mutual human.

(c) 2006, Ken Cook, Cook Property Ventures, Inc. All Rights Reserved.
Investment funding in Georgia and Florida available through Novation Mortgage.

I can tell you that there are homes in a wide range of prices already designated as short sales in both the Lake Norman and Charlotte areas.

If  you would like the most current list of homes that are already offered as short sales in the Lake Norman and Charlotte areas, please contact your Lake Norman Area Agent at 704 451 7051 or by email!

See Also:

Be The First To See Lake Norman Hot New Listings as soon as they become available.

What would my Lake Norman Home Sell For?

Why Lake Norman is such a great Destination


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