HEY!! Short Sale Vs Subject To?
Hi!
I'm a newbie trying to figure out pre-foreclosures, subject to's, and short sales. I have been thinking about what I've been reading on these topics on TCI forums, and have come up with some questions and thoughts.
I believe the idea of a short sale is to create equity where there is none by offering the bank to lower the payoff amount. In other words, if a homeowner owes $100k on a property worth $95k for some reason (perhaps a refi or depressed price or 100% or more LTV loan, etc.), and is in trouble. They can't sell through an agent because they can't afford the 6% commission. They probably don't want to spend the time and $$ to do a FSBO, either (advertising costs, must be home to show to potential buyers, must pay title insurance, etc.). You can offer to give them some money (how much?) if they give you the right to negotiate with the bank for them. You put together a story for the bank about how horrible the house is, state of disrepair, in a bad neighborhood, owner is in a world of hurt, etc. Then offer the bank 60% of FMV or something (not sure about the numbers on this part yet, as I'm still educating myself). If the bank accepts (I've read that some do - not sure about lender in SoCal where I live yet), then you've created equity! Now, you can fix and flip to wholesaler, not fix and flip to rehabber, fix and retail to buyers yourself (attractive if you are an agent!), etc. You can give the current owner some money out of the deal. Doesn't that sound great?!?
My questions revolve around if this might work with a homeowner who is NOT upside down on their mortgage (i.e., owing more than house is worth). In other words, can you use this technique rather than a sub2 in order to increase already existing equity, rather than just in situations where you have no equity. I would think that the seller is much more motivated to do the deal if they are upside down than if they have equity. Perhaps that is what I don't understand about sub2 deals in general. What motivates a seller to basically give you their equity?
I'm assuming part of the appeal of the sub2 technique is that you don't necessarily have to involve the lender at all, right? Assuming you're willing to take on the DOS clause risk, you just start making the mortgage payments on behalf of the seller, right? In a short sale, I assume you'll be paying off the mortgage at a discount, using either your own cash if you have it, or by financing, right? I suppose you have to go to a hard money lender for this, or would a conventional loan work here? I'm assuming since you'll have a reasonable LTV if you get a good discount from the lender, then getting a conventional loan won't be a problem if you have good credit and reasonable debt/income ratio?
Am I way off base here? Can anyone help me understand this better?
Thanks in advance for all your wisdom!
Happy Investing!
Kevin
In any situation in order to get equity in a property you will need to have a motivated seller. That could include divorce, lack of cash, moving, repairs, etc.
It is tough to take a pretty house and justify it to the bank that you need to short sale it. They will come out and inspect it if there is a decent loss. If you can not prove it then it will not happen.
Subject to is also something that requires them to be motivated for them to trust you taking their loan. Usually paying off the back payments helps with that trust. If they are not in that situation thier best bet is to sell it on the market, and get full price. Or you can come in and offer 6-7% less, plus add the holding time of the loan they would have to pay while listing to get it sold.
I go for the throat. I offer the bank $25-$30 LESS than market value. If I get it great If I don't no feelings hurt. I am in business to make money, serious money.
If there is no 30% discount, no deal.
You need a motivated seller and a motivated bank. While most banks won't go for this, many do. As winter approaches, they don't want or can't foreclose and so the time to get deals is now. Some banks will laugh at your offers but an offer is an offer. They'd be wise to discount everything to 30% and sell ALL of their inventory instead of battling for 100% FMV deals. They'd sell more properties all day long by liquidating them to investors. But they are just as greedy as we are.