If the term short sale is new to you, it is best understood as getting a lender to accept less than what is owed on a mortgage note. In other words, by successfully negotiating with specialists in the lender’s loss mitigation department, investors can quite often convince them to discount the mortgage note. You are most likely already familiar with or have seen private investors who offer to buy notes at a discount. Their advertisements can be found in most real estate publications or classified sections of larger metropolitan newspapers and typically read something like “I BUY NOTES.” Investors specializing in the purchase of notes seldom buy them at 100 percent of face value. Notes are commonly discounted as a percentage of face value.
Let’s look at an example. Several years ago I sold a mobile home to a young couple for $17,500. The couple agreed to a down payment of $2,500, leaving a loan balance of $15,000, which I agreed to owner finance at an interest rate of 12 percent amortized over a 10 year period. After one year of receiving payments from the couple, I decided to sell the note to an investor. The loan balance at the end of the first year was $14,173. The investor offered me $11,338, or 80 percent of the face value of the note. This represents a difference of $2,835 between the face value of the note and the amount I was offered for it. Your first reaction might be, “Who in their right mind would accept less than the full amount of a note?” The answer is many people. In fact, there are entire industries developed around this concept. Large retailers and manufacturers sell their receivables every day at a discount to raise cash for working capital.
This brings us back to the concept of the short sale. Lenders will gladly accept a discount on notes that have been foreclosed on because it often makes sound financial sense to do so. In the case of a first mortgage for, let’s say, $300,000, lenders will consider accepting as little as 60 to 70 percent of the full value for the simple reason that doing so will mitigate impending losses that are likely to occur if they try to dispose of the property through conventional means on the open market. First of all, the condition of the property will most likely have deteriorated, and the longer it sits vacant, the more the deterioration will continue. Second, the costs of retaining the property in the lender’s portfolio can quickly add up. These costs include lost interest on the note for money that could be loaned elsewhere, property taxes, utilities, maintenance and upkeep, legal fees, and the list goes on and on.
Property that has been foreclosed on shows up on the lender’s balance sheet as a nonperforming asset. If the ratio of nonperforming assets approaches or exceeds the allowable limits, the lender will be placed on the federal regulator’s watch list and at some point action may be taken against him or her. The bottom line is that lenders are very motivated to move these bad loans off their books as quickly as possible and are therefore motivated to accept short sale offers. The process of short selling requires the investor to act as an intermediary between the owner of the house in foreclosure and the lender. Remember that during this period, the homeowner, not the lender, is still the legal owner of the property, so the investor must work through the homeowner and obtain his permission to contact the lender and negotiate in his behalf.
If you are ready to sell your home fast, White Sands pays cash for homes in any condition. Contact White Sands today to see how they can help you sell your home.