The Mortgage Forgiveness Debt Relief Act and Debt Cancellation
The Mortgage Forgiveness Debt Relief Act and Debt Cancellation |
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Short Sale Financing
Short Sale Financing
Once both parties have agreed to your proposal, you have submitted all of the necessary information to the lender, and the lender, having examined all of these documents, has approved the Short Sale—then it is time for you to produce the agreed-upon funds. If you have this much money readily available and are prepared to invest it in your Short Sale, then this is a simple matter of paying the lender from your personal account. However, most Short Sellers, especially those who are first starting out, will not have this much capital available. If this is the case, then now is the time to acquire Short Sale Financing.
Effectively, there are two sources you can pursue to acquire Financing: Hard Money Lenders and Private Investors. Both of these have advantages and disadvantages depending on the circumstances involved. Generally speaking, most Short Sellers will rely primarily on Hard Money Lenders when beginning their Short Sale careers, so that’s the option we’ll focus on initially.
Before we get ahead of ourselves, let’s define just what exactly Hard Money Lending means. Hard Money Lending is the practice of companies’ investors lending money to speculators and other investors for short term, high interest rates. Unfortunately, this interest rate usually is quite high: somewhere between 12% and 20% is standard. Since that is such a significant percentage to pay as interest, the question is: Why should a Short Seller utilize Hard Money Lending?
The answer is that the services offered by Hard Money Lenders more than make up for this high interest rate. Specifically, Hard Money Lenders are invaluable for Short Sellers because they provide a large portion of the necessary funds and, more importantly, they make this money available quickly. This is hugely important when it comes to Short Sales because, after the deal has been approved by the lender, you will have a very short period of time to produce the necessary funds. Traditional lenders often take a very long time to approve any sort of sizeable loan; Hard Money Lenders, however, are fast, and can get you the money you need by the time you need it.
Most Hard Money Lenders will be willing to provide up to 65% of the After Repair Value (ARV) of the home. So say, for example, that you have a Short Sale in which the purchase price of the home is $45,000, you believe that $15,000 worth of renovations are required, and the ARV is estimated at $100,000. In this case, a Hard Money Lender will lend you up to $65,000, which will be sufficient to cover both the purchase price and repairs, and so you will not need an additional investor. However, if the values were $80,000 for purchase, $10,000 for renovations, and $110,000 ARV, a Hard Money Lender would typically lend only up to $71,500, meaning you would need to bring in an additional investor.
The high interest rate charged by Hard Money Lenders is partially offset by the fact that you will not pay for a whole year’s interest. Usually, hard money lenders will require a minimum of three months’ worth of interest payments. Assuming you sell the house in that time frame or sooner, you will only pay a small portion of the annual interest. For example, if you acquired a $60,000 Hard Money Loan at 18% interest and sold the house in two months, your interest payments would come out as:
$60,000 (Principal)
X 0.18 (18%)
$10,800 Annual Interest
$10,800
÷ 12 (12 Months)
$900 per Month
$900
X 3 (3 Months Minimum Interest Payments)
= $2,700 Total Interest Due
$2,700 would be the total interest payment on your loan. A large amount, yes, but a relatively minor cost when compared to the profit you gain from the Short Sale.
However, sometimes you will pursue a Short Sale with the intention of holding onto the property for an extended period of time in order to make bigger, more drastic renovations to greatly increase the value of the property. If this is the case, then Hard Money Lenders are probably not your best option, as that interest rate becomes a significant issue as time goes on. In these situations, your best option is to utilize Private Investors. Private Investors charge a lower interest rate than Hard Money Lenders—usually 7% to 12%, a decrease which becomes more and more substantial the longer it takes for you to renovate and then sell the home.
There are a few drawbacks to working with Private Investors. Whereas Hard Money Lenders are the representatives of corporations or financial groups, Private Investors are individuals who are investing their own money. Consequently, and most significantly, Private Investors will therefore oftentimes require greater convincing before they provide you with funding, which can be problematic if you are facing a tight deadline.
But Private Investors also offer benefits beyond the lower interest rate. Most notably, over time you will be able to build a strong, personal relationship with a Private Investor, and you will therefore develop a level of trust which is simply impossible to create with a Hard Money Lender. When both the Short Seller and the Private Investor trust one another, everything moves much more smoothly. Neither side will have to screen the background of the other and the Private Investor will not feel inclined to constantly check in on the Short Seller’s progress. As a result, the Short Sale process as a whole will move along much quicker. Trust is a great asset in any business relationship, and it can be incredibly valuable to a Short Seller.
I discuss Hard Money Lenders and Private Investors, as well as other Short Sale Financing options, in much greater detail in my Short Sales Magic Home-Study Course. This is a comprehensive program which you can consult in your own time, designed to teach you everything you need to know about Short Sales. And if you would like even more in-depth, personalized instruction, I encourage you to consider attending my Short Sales Boot Camp. Whether you’re an experienced Real Estate expert or a beginning Investor, both my Home-Study Course and Boot Camp are great options for anyone interested in Short Sales. For more information, please visit www.shortsalesmagic.com.
What Is A Short Sale?
What is a Short Sale?
Foreclosures can be messy, unpleasant affairs for everyone involved. Obviously, the most devastating aspect for the Mortgager (the homeowner) is the loss of his house, which is inevitably a painful, demeaning experience. But that is not the only negative effect of Foreclosure on a homeowner: he also suffers a major blemish on his credit report which will significantly lower his Credit Score, and he loses any equity which he had invested into the property prior to defaulting on the Mortgage. With all of these factors combined, Foreclosure can be an extremely difficult calamity to overcome.
However, what many people do not realize is that a Foreclosure is also undesirable from the lender’s perspective. Foreclosures entail significant fees for the lender, especially if they must utilize the court system as a part of the Foreclosure process. In many cases, lenders are extremely eager to avoid that long, drawn-out process, but they also (understandably) want to recover the amount loaned to the homebuyer. If the Mortgager defaults on his loans and has no evident means of repaying the remainder of his debt, and yet the lender wants to avoid Foreclosing, what alternative is available to the two parties?
The answer is a Short Sale. A Short Sale is a means for the Mortgager and Mortgagee to avoid the costly, painful process of Foreclosure in a way which benefits both parties. The homeowner will walk away without the devastating effects of a Foreclosure and the lender will receive a greater percentage of the amount due than it would if it pursued a Foreclosure. So what is a Short Sale?
Essentially, a Short Sale is an agreement between the lender and homeowner which states that the lender will accept a lesser amount than is owed. The homeowner then sells the property, at a lower price than the amount owed, and turns over the proceeds to the lender. As a result, the lender receives a sizable portion of the money due to it, and the seller avoids the stigma and damage to his credit score which accompanies a Foreclosure. Additionally, oftentimes the seller will receive a modest sum of money at the completion of the Short Sale, depending upon the agreement with the buyer.
This buyer will almost always be a Real Estate Investor who specializes in Short Sales. The Real Estate Investor assumes possession of the home at this discounted price with the intention of selling the property shortly thereafter. Because the Investor acquires the home at a low rate, he is able to sell it at or slightly below market value and still reap a considerable profit. That is why a Short Sale is such a great option for Real Estate Investors to pursue: they offer the possibility of a speedy, substantial reward. In fact, Short Sales offer the potential for bigger profits than you can find in virtually any other aspect of Real Estate Investing!
However, Short Selling can also be a tricky, potentially frustrating process. Any Investor who chooses to pursue a Short Sale must be prepared to encounter unreasonable bank negotiators, stubborn and unrealistic homeowners, the need to quickly accumulate Investment Capital, and properties which will require a significant amount of refurbishing prior to selling. No Real Estate Investor should attempt to execute a Short Sale without a complete understanding of the steps involved and the work which it will entail.
If you are genuinely interested in learning more about Short Sales and potentially becoming a Short Seller yourself, you need to educate yourself. I strongly urge you to consider my Short Sales Magic Home-Study Course. This is a comprehensive program which you can consult in your own time, designed to teach you everything you need to know about Short Sales. And if you would like an even more in-depth, personalized instruction, my Short Sales Boot Camp is currently accepting reservations. Whether you’re an experienced Real Estate expert or a beginning Investor, both my Home-Study Course and Boot Camp are great options for anyone interested in Short Sales. For more information, please visit www.shortsalesmagic.com
What is Foreclosure?
What is a Foreclosure?
Houses are expensive. Even a modest home will almost certainly be priced above $100,000. Consequently, most homebuyers do not have sufficient funds available to pay off the cost of their new property at the time of signing. In this common scenario, the only viable option is for the homebuyer to acquire a Mortgage. A Mortgage is, essentially, a loan which allows the buyer to assume possession of the property with the agreement that he will repay the amount of the loan over the course of a set number of years. The lender retains the Lien for the property, which signifies the right of property, whereas the homebuyer will gain right of possession. Once the loan has been repaid in full, the Mortgage is terminated and the home is fully and completely the property of the homebuyer.
However, many times the Mortgager—that is, the borrower, the homebuyer—fails to repay his loan. This is known as defaulting. Mortgagers default for many reasons, but it is almost never a refusal to pay. Rather, Mortgagers usually default because they are unable to produce the necessary funds. When this unfortunate situation arises, and it becomes evident that the Mortgager is both incapable of repaying his loan and will remain unable to pay for the foreseeable future, then the Mortgagee—the lender—will begin the process of Foreclosure.
A Foreclosure is the legal process through which the lender terminates the Mortgage and reclaims possession of the property. When the lender decides to take this action, the homeowner will typically have a period of time during which he can retain possession of the property by producing the delinquent payments owed. Once this period has expired, the Foreclosure will proceed in one of several ways. The two most common forms of Foreclosure in the United States are Judicial Foreclosure and Nonjudicial Foreclosure. There are several other types of Foreclosure, such as a Strict Foreclosure, but these are rare, applying only in very specific situations.
A Judicial Foreclosure, as the name suggests, begins with the lender filing a formal grievance in court against the Mortgager. The homeowner will be notified and will then have the opportunity to defend himself in court. If the court finds that the claims made by the lender are valid, they will approve Foreclosure proceedings and authorize a Sheriff’s Sale. A Sherriff’s Sale is a public auction of the Foreclosed property. It is a means for the lender to recover the amount owed on the Mortgage. In many states, there are laws in place which dictate that, in the event of a successful Sherriff’s Sale, the proceeds from the sale are first used to reimburse the lender for the Mortgage, and then are distributed to any additional Lien Holders. Then the remaining proceeds, if there are any, are delivered to the Mortgagor. The reason for these laws is to protect the homeowner’s equity if the debt owed is significantly less than the value of the property—if, for example, the homeowner had paid off the majority of the Mortgage prior to undergoing financial hardships and defaulting.
Once the Sheriff’s Sale is completed, one of two things will happen. If a sufficient bid was placed, the winner will be required to present 10 % of the winning bid in cash immediately, and the rest via a Mortgage or private money thereafter. The court will then confirm the sale, the deed will be recorded, and the winner will then become the new owner of the property. If, however, no sufficient bids are made (the lender determines a minimum bid required prior to the beginning of the auction), then the home will become the property of the lender, known as a Real Estate Owned (REO) property.
A Nonjudicial Foreclosure is very similar to a Judicial Foreclosure, with the major exception that the entire process is done without the participation of the courts. This allows the proceedings to continue much faster, and without expensive court costs. In most, but not all, states, a Nonjudicial Foreclosure is only permitted if a power of sale clause was included in the Mortgage agreement—which is very common. Whereas in a Judicial Foreclosure the lender must file a lawsuit in court against the Mortgager, in a Nonjudicial Foreclosure the lender will send the homeowner a Notice of Default if Mortgage payments are delinquent. If these payments remain delinquent after a certain period of time, the Lender will then issue a Notice of Sale to the homeowner, as well declaring their intention to sell with the country recorder. The lender will notify the general public of the upcoming auction, which will occur much like a Sherriff’s Sale, except that there will be no Sheriff overseeing the proceedings. The only other notable difference is that the lender itself is free to bid in the auction. Upon the auction’s conclusion, the same process is repeated as in a Judicial Foreclosure, and the home becomes the property of the highest bidder.
I hope that this overview has been helpful. But keep in mind that it is only an overview. If you are truly interested in learning about Foreclosures and related investment opportunities, I strongly recommend that you consider my Short Sales Magic Home-Study Course. This is a comprehensive program which you can consult in your own time, designed to teach you everything you need to know about Short Sales. And if you would like an even more in-depth, personalized instruction, my Short Sales Boot Camp is currently accepting reservations. Whether you’re an experienced Real Estate expert or a beginning Investor, both my Home-Study Course and Boot Camp are great options for anyone interested in Short Sales. For more information, please visit www.shortsalesmagic.com