First of all, a motivated seller is a person who has to sell the property or face foreclosure in the immediate future–and wants to avoid it.
There are many reasons people face foreclosure. For example, a husband and wife having marital problems may have decided not to make any further payments on the property. In the current market, you will often find that properties have devalued to the point where more money is owed to the lender than the property is worth. This means that there is no equity in the property at all. Sometimes, properties are bequeathed at death and the person inheriting the property can’t afford the taxes or mortgage. Or, in these economic times, the primary income earner may have lost his or her job. It’s not uncommon for both income earners to have lost their jobs, unemployment to have ended and savings to have run out. In other words, the homeowner(s) has no more options but to try to unload the property to avoid ruining their credit.
By not ruining their credit, they have a shot at a new start. Ruined credit will devastate them for many years into the future.Sometimes, sellers are short-sighted when it comes to their credit and how they will be impacted if they go into foreclosure. They are usually emotional at the time and future consequences are not considered. A short sale benefits them to some degree because they can avert the bank foreclosing on the property.
After talking to a few homeowners, you will clearly see the difference between a willing seller who wishes to get on with his life and one who is not. Most of the time, the criteria to look for is:
* they are a legitimate hardship case,
* they are 3-4 months in arrears on the mortgage,
* their property needs repairs they can’t afford and,
* the property will be auctioned.
When you begin to work with a motivated seller, the lender wants to know that this property will be foreclosed on based on a true hardship case and nothing else. In fact, the lender requires a hardship letter from the seller detailing exactly the situation, with pay stubs, if sellers are still employed, showing there isn’t enough money to pay the mortgage amount. This letter may be hand-written as it is a plea for the understanding by the lender to help however they can. Regardless, more often than not, the lender has already filed a Notice of Default on the property making time of utmost importance.
Short sales are a way of helping a homeowner who really needs to get out from under a looming foreclosure. While it is in their best interest to work with you, not all will be willing. You are trying to create a win/win situation. However, if you determine the seller is not motivated to make the best deal on a bad situation, don’t be afraid to walk away from the deal. Go to the next property on your list. The odds are you will find a desperate homeowner who appreciates your help and is willing to work with you.
I just want to finish this post with a word of caution. Not all short sales will be a good deal. For example, be aware that necessary repairs may cost you more than you can make on the property. It’s essential to find out everything you can about the property and make notes. You need to know if and how many liens are on the property, whether there is a second mortgage, the number of months of missed payments and the total amount in arrears plus, the the amount of back taxes owed. Ask to see any paperwork the lender has sent the seller regarding the property.
Keep in mind that not every property is in foreclosure due to a lack of ability to pay the debt and expenses. In fact, the homeowners may have money available to bring their mortgage up to date, but, since there is no equity in the property, they opt for foreclosure regardless of what it will do to their credit. Only after you ferret out all the information on the property will you be able to determine if meet your criteria of a good investment.
A future blog post will talk more about the way to find motivated sellers and how to make your offer.
Until then…
