short sale foreclosure information?

Question

I am new to real estate short sale investing.
One client (seller) is behind in payments about $20k. Trustee (auction) sale is on March 12. Has a 1st and 2nd loan with the same bank. Total owe is $624k. Properties in this are are taking 90 days to sell. Comps around this area are for $700,000.
What are my option?
How much should I offer the banks? What are my profits and my expenses?? How much should I get it for and List it for once the bank accept my offer??
What happen the the behind payments of the seller? Is the seller liable for anything or he is free of the home debt or taxes????

Answer 1

I think you should go for a less expensive property for your first flip. There is huge income potential in this house, but your question leads me to believe you don't know what you're doing. Start off with a cheaper property, there is less profit but also less risk. I'm estimating a payment of 3-4,000 a month, it won't take long for most of your profits to erode.

Answer 2

First, you do not know enough at this time to make this deal work. Consider this a learning experience.

Maybe you can partner with someone. Short sales take a bit of time (can be months or even over a year). They are hard to predict as the lender does not have to agree. Lenders commonly change their mind for the oddest of reasons. You also have the seller who is under emotional stress. Note there are laws in some states that make short sales hard to complete successfully as there is an assumption that the seller is losing out. Little do the people who pass such laws realize that short sales can be the way to stop a foreclosure from being a black mark on the seller's credit. Maybe some stated think it is better for the court or trustee to kick out the seller than to reach an agreed settlement.

The sale is less than a month so you will either need an extension or a very flexible lender who can scramble to get all the details sorted quickly. If you are expecting to borrow the money there is no time for a convention loan process.

The link below will have information. It is one of the oldest website for RE investing. Some of the forum members are active short sale investors. Post questions and read the free materials.

Some specific answers to the questions you did raise.

1. Be careful about calling people clients. It might imply a legal responsibility that you do not want. Or the need for a license.

2. The $20K in back payments can be forgiven in a short sale. The lender is looking at the bottom line figure. Mostly drive by the value of the house and less what they are into it for.

3. If there is a loan guarantee on the 1st then the discount will be capped at the level where the insurance kicks in.

4. The loans could have been sold so the 1st and 2nd might not still be with the same bank. The bank could be servicing the loans but not the legal owner.

5. If it takes 90 days to sell then you need to be able to afford to hold that long or longer. Also the 90 days is likely for properties that are not run down. Someone who is losing their home do not keep the maintenance up to date so expect a longer sale period or more costs to get the property ready for sale.

6. You note the comps come in at 700K. You need a significant reduction in the debt (short sale) to make this deal work. One model is to start with the comps, deduct 30% for your profit margin, then subtract all costs for repairs, closing costs, holding costs and anything else you will have to pay. You will end up with a low number. That is the maximum you should pay.

The above allows you to cover all the costs and to price the property for resale below market. Assume that you will rarely get a full priced offer in a slow market so the 30% margin will definitely end up being less at the end.

7. What are you expenses? You really need to be on top of this. Get estimates. Know your market. Understand you carry costs (financing and utilities, etc). If you do not know your costs then you can not tell if you will make a profit.

8. List the property to sell. Be below market a bit so that when people are scanning the listings this is one they have to call on. You want them to put it on their short list of properties to buy. Every day you own it is a day you spent money that might have been profit. Hence the sooner it sells the better. It also frees you up for the next deal.

9. The IRS will want to tax the seller on the debt they did not have to pay. It is taxable income. There is a way for the person to file a form with the IRS so that they will consider not taxing the seller on the forgiven debt. Hence it is not always clear if the person will own taxes on the debts that went away. Note they did originally receive the money so they should be taxed. Better to be facing a possible tax bill than to have a foreclosure on your credit report. Any tax owned will be much less than the amount of debt forgiven. Not all people will have to pay the tax. Hence it is a minor issue and one you largely should not get involved discussing. Similar to someone entering the emergency ward at a hospital. Best to save them from dying and then later discuss the long term impact from the injury. As noted there might be no taxes due.

Answer 3

The 20,000 behind does not belong in the equation. If the payoff is 624k, that is what it will take to buy it unless you can get a short sale (which i recommend) and get it for maybe 550-575k. The problem is that in many areas, homes over 250k just aren't moving. If you bought at 624k, the value (which you presume to be 700k) could go down. Don't forget you would be responsible for the payments each month as well. You need to hedge your bet by moving into it if you can afford the payments.
Additionally, if you kept it 2 years, you would not pay tax on the capital gains. I agree with the other responder, you should start smaller and work up; maybe check into 1031 exchanges as well. Don't be the sucker that they saw coming from a mile away.

Answer 4

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