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 Foreclosure Solutions! Short Sale, Loan Modification,Forensic Audit etc... 
Facing Foreclosure?
Kentucky and Indiana realtors, investors, and debtors facing foreclosure, ask me from timewhat the best ways are to avoid foreclosure. Consider this a primer.
Short Sale
I recently brokered the sale of a house for $85,000 to an investor. The house appraised for$120,000, giving the investor substantial immediate equity. The lender took a $60,000 loss.The owner/seller was forced to sell his house, for which he received not one red cent, andhad to move into rental. How is it that all parties walked away from the closing tablesatisfied?!
In the beginning...
When a home owner owes his lender more than he has borrowed, he's said to be "upsidedown on his mortgage". This can come about in many ways, the principal amongst themoccurring when he simply stops making mortgage payments, often because he is in seriousfinancial difficulty. If his mortgage payment is $1,000 per month, and he stops paying, orpays intermittently, the fines, interest and principle can rack up pretty quickly. And if theowner can't pay the mortgage, chances are he hasn't been able to make necessary repairsto his home. This situation is almost invariably accompanied by despondency, which againleads to neglect of the house.
 
Stir into the mix bankruptcy, and perhaps divorce, and you'll understand it's not surprisingto find the homes of these owner/debtors are often seriously degradated. That leaky roof isprobably the last of the owner's problems.
The "F" word
Foreclosure. It's not a happy prospect for the lender or the borrower. Lenders have differenttolerances for late payments. However by the time the debtor is late for the fourthconsecutive month the vast majority of lenders begin foreclosure proceedings. In Kentuckythe foreclosure sale of the home by public auction takes generally anywhere from 6 monthsto a year from the time the foreclosure procedures began. It can take longer - I saw oneartful debtor drag on the foreclosure proceedings for more that 20 months! Her mortgagepayment was $1,300 a month. After 20 months that became a significant debt compoundedby late fees, interest, legal costs, and the potential cost of selling the property at a publicforeclosure sale. To say nothing of the continuing, moment by moment deterioration of theproperty. By the time she moved out the bank had written off in excess of $80,000.
The lender's and borrower's conflicting interests .
Capitalism is a wonderfully contrived system. It hands not only the power-barons a potentarray of weapons with which to fight, but also the poor and destitute. Though the battlefieldis nowhere near even, double digit interest thrust too deeply down an indigent debtor's
 
throat may precipitate his "nuclear" retaliatory option - Chapter 7 bankruptcy. And so thesetwo, symbiotically entwined, are locked in an elegant dance, teetering between dividendsand disaster, profit and poverty. One serious mis-step, and the band stops playing.Thus, from years of bitter experience, lenders have learned that it's often better (cheaper)to attempt to gain the cooperation of the owner and have him agree to voluntarily sell andvacate his home, rather than evict him under foreclosure. Lenders also understand that thechance of ever recovering the money owed to them by the debtor is slim. But many debtorschoose not to sell because, around the time they realize they will never catch up on theirpayments, they often have another "Ah Ha!" flash of insight: that if they stop paying theirmortgage and just wait for the foreclosure axe to fall (or better yet, engage in a hatfull of tricks to keep that axe at bay) they can live "rent free" for at least 6 months. So now thedebtor turns from borrower to squatter, perceiving it to be in his best interest to prevent theforeclosure for as long as possible. And if the house, the lender's "security", should fall apartin the meantime, so be it.
The solution
The lender is in a position to offer the borrower a very important concession for hiscooperation: to write off the entire debt if the borrower finds a buyer to buy the house at aprice and terms acceptable to the lender, within the time stipulated by the lender. This isthe essence of a short sale. Lenders set their own guidelines for what they will accept. Theymay say they need to get fair market price, but will in fact often be prepared to sell formuch less. They do not want to chance selling this house at auction and risk receiving avery low price. Or worse yet, receive a bid so low that the property does not meet theirreserve price, and they end up owning the property. In this case the property isadministered by the lender's REO (real estate owned) department, which will then list theproperty with a realtor. And the cycle begins again......The Lender initially said The Willows house was worth $120,000, and wanted it sold atabout that price. It got the $120,000 figure from someone it had hired to do a BPO. BPO isshort for "Broker's Price Opinion." It is similar to a CMA (Comparative Market Analysis) andserves the same purpose: to arrive at a fair market value for a property. Most are done as a"drive-by," meaning that the "driver" (usually a realtor, maybe an appraiser) drives by theoutside of the property, takes one to three photos and leaves. He then completes thelender's BPO form on-line and e-mails it with the picture. Sometimes an "internal" isrequested, in which case the realtor goes into the property, takes about 3 internal and 3external photos and sends these through to the lender with the completed BPO form.When the debtor had realized he would not be able to save his house in The Willows, hecontacted me to see if I could help. He did not want a foreclosure on his credit report, whichwould have prevented him from getting a conventional mortgage for three years. Even witha Chapter 7 bankruptcy, the wait period is only 2 years from dismissal. He also wanted tohave his debt forgiven. I was able to accomplish both these goals, saving him about sixtythousand dollars.
The short sale process .
 As a Realtor, the first thing I did was explain to my client all his theoretical options,including deed in-lieu of foreclosure, loan renegotiation and others. He settled on short sale.I listed The Willows property, and had him sign an authorization for me to contact thelender to see if it would agree to a short sale. Remember, when I list the property, theowner/debtor is my client (not customer). This means I must always act in his best interest.The lender is not my client and I owe it no such duty. In a normal sale the seller and buyer
 
have greatly divergent interests: the seller wants to sell at the highest possible price, andthe buyer wants to buy at the lowest. In a short sale there is no such contest between theparties: the seller wants to sell at any price the lender will accept, and will generally agreeto any price offered, contingent upon the lender's acceptance. So in a short sale, the lendertakes on the mantle of "seller" vis-a-vi the buyer and these are really the parties whonegotiate the contract. Now get your head around this one: as listing agent in a short sale Iam often in the peculiar position of actively attempting to negotiate for the sale at thelowest possible price acceptable to the buyer! (But always with the caveat that this is in theseller's best interest, and does not jeopardize the sale). This anomaly has manyramifications for the way I conduct and negotiate these transactions.
Price, Terms and Timing
Price
: So how much will the lender lop off that price? I've generally found that as the day of auction approaches, lenders become more malleable. Pretty inefficient, because they loose alot of time and money that way. I supplied the lender of The Willows property with objectivematerial indicating that the drive-by BPO was inaccurate, given the condition of the house.The lender then had an internal BPO done. That was key to getting this particular deal done.I also sent off photos and comps of my own. In some cases I've sent the lenders well over100 photos. Pictures speak louder than words, and it's critical, when the property isdamaged, that the lender understand the shape it's in . Remember - the BPO realtor may bedoing up to 50 BPOs a week - he could care less about this one deal. But as listing agent Ineed to keep the lender informed of all issues that coincide with my client's best interests.The second Willows BPO came back at $100,000, and the lender initially tried to obtain thatfigure. Ultimately, with the foreclosure sale due to occur the next day, it reduced thatamount to 80% of the $100,000 plus $5,000 to pay off non-mortgage related liens. At 4.50pm the lender agreed to stop the foreclosure sale scheduled for 11.00 am next morning.But hey, it ain't over 'til the fat lady sings! Because the loss on this loan was $60,000, andbecause the lender had authority to settle up to $30,000 only, we had to wait for final wordfrom the mortgage insurance company, which we eventually obtained, but not withoutmany hours additional work.As you see, the price of The Willows property was determined by the lender looking at thebottom line - how much net it would receive. And in order to get this number, all lenders inshort sales request a "fake HUD-1" or a "net sheet" submitted simultaneously with the offer.In a normal real estate transaction the HUD-1 is drawn up at the end of the transaction,after agreement is reached. - in a short sale the title search is performed immediately uponlisting, even before there's an offer, so that the figures can be applied to the net sheet assoon as needed.
Terms
: The most common terms distinguishing these deals are that the lender oftenrequires terms such as "sold as is" and "proof of finance or funds required with offer", andto protect the seller, the realtor should insert terminology indicating seller's acceptance issubject to release from all liability for debt. None of this is carved in stone, and I'venegotiated repairs and other concessions from lenders. Each case is unique. Paper will sufferany indignity - write the offer!
Timing
: The REO, Foreclosure and Bankruptcy departments often appear to be understaffedand overwhelmed, so don't expect instant responses. Some will take weeks to reply. Makesure the buyer and seller understand this. But once a deal is struck, the lender will oftenexpect an unreasonably quick closing, and will attempt to penalize you with days interest forclosing after a certain date. This all goes back to the net sheet calculations; because you
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