Prequalify a Short Sale Candidate

A building, much like a real estate transaction, is only as viable as it's foundation. If the foundation is faulty, the structure (or deal) could fall apart. If you start with a firm footing, you'll have a better chance at closing the transaction.



Before anyone embarks upon a pre foreclosure short sale acquisition, the entirety of the deal and it's players should first be known and pre qualified for having the potential for short sale. What sense does it make to spend time and resources on a project if probability of failure is preordained?



How does one pre qualify a short sale candidate? You must ask some questions, and do a bit of homework. You've got to learn (in no particular order):

1. the type, position, and payoff amounts of any mortgages, liens,
   
   or other encumbrances, and all owners of record;
   
   
   
   
2. the mortgage loan servicer's and Private Mortgage Insuror's role;
   
   
   
   
3. the circumstances of the default, and mortgagors' finances;
   
   
   
   
4. if the mortgagor has made application for a workout,
   
   and what, if any, was the mortgagee's response;
   
   
   
   
5. has the mortgagor filed a petition for bankruptcy, and if so,
   
   the status of the petition;
   
   
   
   
6. the subject property's approximate as-is, fair market value;
   
   
   
   
7. if the mortgagor is willing to sell the property, and receive zero
   
   proceeds from the sale in an effort to protect/preserve their
   
   future creditworthiness;
   
   
   
   
8. lastly, if the short sale proposal is approved, can I complete the acquisition?

It's important to identify and estimate the payoffs for any mortgages and liens of record (property taxes, water/sewer assessments, IRS, child support, judgments, etc.) If the first mortgage loan is a VA or an FHA insured mortgage loan, the Borrower may have special consumer rights, and there may be restrictive short sale servicing criteria that would preclude short sale consideration. For example, if there is a second mortgage behind an FHA insured first mortgage, the first won't agree to a short unless the second agrees to accept $1,000 or $2,000 as payment to release their security interest. Not a dime more.



If you proceed with a short sale acquisition, later you'll need to identify the actual investor who owns the mortgage, the mortgage loan (master/slave) servicer, and any private mortgage insuror who may have an interest... each capable of imposing it's own short sale criteria.



In addition to the mortgagee's ability to consider and approve a short sale request, the mortgagor must qualify for short sale relief. Had they formally sought a mortgagee approved workout? What was the status of that application? What information had they divulged to the mortgagee? Typically, an owner/occupant borrower must have experienced a financial hardship, cannot cure the default, and cannot sell the home at a price that would satisfy the mortgage(s). Additionally, the owner/occupant Borrower would not have the financial capacity to pay the difference between proceeds of sale, and the outstanding mortgage balance. If the Seller has illiquid assets (second home, luxury boats or cars, art or collectibles, CD's, etc.) they may be required to liquidate as a condition of short sale. The mortgagee may also require that the mortgagor agree to a cash payment, and/or an unsecured note to address the deficiency.



If the Borrowers have filed a petition for Bankruptcy, and are subject to a Court approved repayment plan or Trustee's oversight, any contract (listing agreement/Purchase and Sale Agreement) would have to first be approved by the Bankruptcy Trustee, and the Bankruptcy Court. It's the Trustee's job to administer the assets, and maximize recovery for unsecured creditors. Special consideration must be afforded a Seller in, or close to bankruptcy.



Let's consider the property. It's key that you have a good idea as to it's fair market value in it's as-is condition. Ask about the condition. Ask about needed repairs, and take a look at the heating system, electrical service panel, and structural members in the basement or crawl space. Will you be able to devise a persuasive argument in support of a short sale proposal? Will a picture be worth 1,000 words? Bear in mind that it's the mortgagee's perceived value that makes or breaks an application for short sale consideration. A formal Proposal accompanies the boilerplate (mortgagee provided) application and includes data supportive of your argument for short sale approval. If the property has an as-is, FMV greater than the mortgage(s) balances, a short sale is not indicated. Possible, but not indicated.



Once the mortgagee approves the short sale, can you complete the acquisition in 30 days? If not, then the named Purchaser should be someone/something that can complete the transaction. Generally, most mortgagee short sale approval requires that the transaction be completed within 30 days. It's best to be prepared to close or risk a recision of or a modification to the terms of approval.



If, after a review of preliminary field data, you feel that a short sale could be in the best financial interest of the mortgagee, and the only non foreclosure alternative for the mortgagor, you may have a viable short sale candidate.



In my opinion, the best candidate for short sale consideration is a property whose mortgage loan is delinquent, in default, or in foreclosure that has little or no equity, in need of repairs, and whose market value could be cost effectively and dramatically enhanced such that a material profit realized upon resale, or refinance.



If you think you have a potential short sale candidate, but are uncertain, confused, or just haven’t had a comprehensive introduction to short sale basics, I recommend that you read A Short Sale Primer. Also available in print version with an hour of E-Coaching.



(a Florida attorney writes, “I just bought, read, and enjoyed your Short Sale E-Primer. It was a great, brief explanation of the process, and I wanted to thank you for the information.”)