A Short Sale Disaster - My First Short Sale
I consulted with a very knowledgable real estate attorney before entering into my first short sale. I believe the documents and structure of the deal he recommended will protect me from having a disaster, and I want to share for the benefit of others. For the seasoned short salers, please let me know if this is similar to the way you structure your deals, or what your other means are. Don't skip competant legal and tax advice. Before trying this yourself, consult with your attorney and accountant. If you don't have one, get one!
I used 5 documents created by my attorney:
1. The Home Seller Family Trust agreement. The seller signed this document which created a family trust for her. This document states that she is the original Trustee, but also includes a paragraph that nominates me as her successor. This same paragraph also mentions that I will create a Mortgage payable to my LLC for my efforts.
2. Quit-Claim Deed- The seller signed this document transfering the property title from her to the newly created family trust.
3. Limited Power of Attorney - Seller signed this document giving me the authority to sign any documents having to do with the sale of the house and act on behalf of the seller.
4. Resignation of Trustee - Seller signed this document resigning herself as Trustee of the family trust, and naming me as the new Trustee. I now have complete control to sell the house.
5. Mortgage - I signed this document using my authority under the Limited Power of Attorney. This is how I will pull out my profit.
So I'm not buying the property, I'm just controlling it. The 2nd lien holder initiated the foreclosure. I have negotiated a short payoff with them at a 50% discount. This was done with one phone call and required absolutely no documentation or package (They didn't even need to see the Release form). I had them on the phone at 2pm and by 4pm I had a short payoff letter from them faxed to me. Unlike what I've read, the 2nd lien holder did not give a time limit (21 days, etc) that the payoff (and sale) had to be completed by.
This deal structure has many benifits:
1. I won't own the house. No capitol gains tax to pay.
2. Dealer status not an issue.
3. Family Trust being on title will not cause title seasoning issues for my buyer.
4. Because there's only one sale taking place (from the family trust to my buyer) there's no dramatic increase in sale price to have to justify to my buyer's lender, which is a common problem when buying and reselling quickly.
By the way, these documents cost me $400. Instead of buying a short sale course, I invested in good legal advice. With the proceeds from this deal, I will buy a short sale course and learn some more advanced short sale stratagies.
I look forward to your comments.
Jamie
Excellent!
You may want to put this in the article section, too!
Now if you can only package it up and advertise it, you could be the next "guru"
May they all go that well for you... one thing I find out of the ordinary is the capitulation by the second mortgagee.
Also, in the majority of short sale procedures, the act of quit claiming the mortgagor's interest to another individual, or another entity invalidates eligibility forcing the mortgagor, or mortgagor's attorney in fact to lie.
By creating an entity to purchase the property, you have the ability the complete the acquisition, or, substitute the entity's members and essentially accomplish a (disguised) assignment.
I think you may have created a bit more paperwork, and an extra step or two, but if you are comfortable with this and it works for you, terrific!
acerview,
Who is the beneficiary of the Family Trust?
I appreciate some experienced investors taking the time to give their input.
64Ford
Thanks for the encouragement. Isn't it funny? One day you know nothing about a short sale (same applies to other types of deals), and a few weeks later you've gotten a deal and you're a guru. Until you find your next deal has a twist you haven't seen before, and then you're right back to where you started.
TheShortSalePro
I was very suprised at the second mortgagee's ease of doing business. This is on a house in good condition that has equity. Too good to be true? I wouldn't believe it myself if I didn't have it in writing from the bank. The second mortgagee is a regional bank, Charter One. Don't know if that helps to bring some clarity.
As far as a Quit Claim deed affecting a Power of Attorney, I'm not sure what you're getting at. The Power of Attorney reads... Home Owner, individually, and as Trustee of The Home Owner Family Trust... My only concern was that the Mortgage (#5 from original post) was executed before the Home Owner resigned as Trustee of the family trust. With the Mortgage executed, the Home Owner resigns as Trustee and names me as her replacement. Now as Trustee I have the authority to sign the paperwork to sell the house to the home buyer. I'm not sure where the lying comes into play. Please help me to understand. If I understand your point, I can pose it to my attorney.
I read your reply the other day in the "Transfering A Short Sell Note" topic where you talked about entity stucture. It's a very intriguing concept. It sounds like you're definitely disagreeing with others that have said to deal with the bank as an individual, because banks are tired of dealing with investors, etc etc etc. The information you have provided leaves me with some questions. If my exit strategy is to retail to a home buyer that will live in the house, are they going to be open to this creative method, becoming a member of my LLC? How would I provide proof to the bank that this "hollow" LLC has the ability to finance the deal? How would the person I add as a member of the LLC get financing in the name of the LLC to be able to buy the property? I'm very interested in learning better/faster/smarter ways of doing a short sale. If you can fill in some of the blanks, I (and others) can consider this method for subsequent deals.
I'm VERY comfortable with a first deal that works and doesn't get me into trouble with the law or the IRS. The more short sale deals I do, the higher my standards of excellence will become. If you were sophisticated enough to have layered entities and a steamlined process on your first short sale deal, my hat's off to you.
Dave T
The Home Owner is (and remains) the Grantor (beneficiary) of the Family Trust.
[addsig]
For the benefit of others, I'm posting my answers to a private message.
Quote:
<br>
<br>1. How did you find this deal?
<br>2. How did you finance the deal?
1. I used a doorhanger campaign. For about $1,900 I had 11,500 doorhangers printed and distributed to a particular zip code that I wanted to do business in. For those looking for a cheaper way to go, I've read that getting signs printed and posted in the area your're interested in can be just as effective.
2. For the $1,200 I gave to the Home Owner for moving expenses, I got it out of my checking account and paid her cash. For the $10,000 in repairs the house needs, I will use either a line of credit or a convenience check from a credit card. Because I'm not buying the house, only controlling it, the home buyer that I find to live in the house will get bank financing to buy it. Had the second lien holder put a deadline on the discounted payoff I would have used a line of credit or a convenience check from a credit card for this payment too.
Jamie
_________________
The more you seek Knowledge, the more Wealth will seek you.[ Edited by acerview on Date 10/02/2003 ]
For the benefit of everyone I'm posting my reply to an email.
Quote:
what did you read to learn about short sales up to consulting the attorney?
I started on the Internet. I went to a search engine and searched on "foreclosure", "short sale", etc. I went to the Google news groups and did the same thing. I found thecreativeinvestor web site (and others), and reviewed message boards. I found articles and tidbits from Dwan Bent-Twyford and Sharon Restrepo among others. I found online recorded radio shows.
I went to the public library. Searched for books and coarses that dealt with foreclosure and short sales. Didn't find anything there.
I went to a used bookstore and Ebay to see if I could find used or out of print material. Didn't find anything there.
I went to the book store and grabbed every book about foreclosure. I flipped through them to see if they contained specific information or just general ideas. I ended up buying one book and have used it as a reference.
There may be other sources I used that I'm not thinking of right now. The main theme is to seek knowledge. Make it your goal to find out everything there is to know about a short sale. Treat is like anything else. If you wanted to learn how to bake a cake, how would you go about it? Pay $3,000 and go to a bakery bootcamp? (No disrespect intended for Real Estate bootcamp gurus. They have their place.) Or roll up your sleeves, get busy, and read every book and article and talk to every person until you had the answers you needed?
But let's not forget... Gaining the knowledge of how to structure a short sale is only one aspect of doing the deal. You have to know how to locate motivated sellers, how to find a Tenant/Buyer, etc. Earlier in the year I purchased a Direct Marketing course. It was money well spent.
Take action and keep making improvements with every day and every deal.
Good Luck!
Jamie
[addsig]
Jamie
I'm happy for your success. At the same time, I must tell you that I'm envious.
My first few short sales didn't go anything like yours. As a matter of fact ,none of my short sales have gone like your first one!! Don't think this is the way it is- because it may never happen to you again. It's great that it happend on your first try.
You made a good move with your attorney who is quite reasonable. I could "fly speck" everything he did for you. I use similar techniques albeit in my mind, better. But, for a quick flip, you're good to go..
Two or three things I'd lke you to think about.:
1. Why use a quit claim deed when for the same effort you can use a Warranty Deed to title the property into the trust.?With a distressed property owner you don't have any more deed assurances but from a quality of title point of view, the title insurance companies feel more confortable with a Warranty Deed.. Parentetically, I live in a community property state. I have to get a quit claim from my wife whenever i transact. . Some title companies have insisted that I get a Grantor's (same as a Warranty) deed from her..
When you become the successor trustee you have a fiduciary responsibility to guard the corpus of the trust. Being the trustee, being the Attorney-in-Fact , and being the mortgagee sometimes presents a problem of "the fox guarding the hen house". The problem lies with the title company. If its OK with them every thing goes smoothly. If they aren't happy- you either have to fix it or they wont insure title, and then the lender wont lend.
I always have a limited power of attorney. One time there was a problem in title company attorney's mind (an oxymoron) AND the P.O.A. gave me the authority to do fix it. Legalman said,"no dice". Fortunately I was on good terms with the owner and she signed the exhibit which was necessary to satisfy this jerk. He was wrong, but it's their football. I break out in cold sweat everytime I think that she could have moved to points unknown, she could have refused to sign the document, she could have felt that she was exploited and try to stir up stuff.
2. This sounds crazy and I've never done it. As meticulous as you are, you should have a good fix on the amount of net equity you will realize. What it you were to have the seller sign the mortgage in that amount to your LLC and make it so that it includes pricipal and interest with no payments for say 8mo or all due upon resale or refinancing. No recourse. No deficiency if the mtg amount should exceed your net equity.
amount. Principal and interest not to exeed the net equity.
Lastly, while it's unusal for a 2nd mtg holder to take a 50% discount in 2 hours. I now know that miracles do happen. Generally, it someone can't make their 2nd mtg payment they can't make their 1st mtg paymnent. In fact, I dealt with a lot of defaultees foreclosed by their 1st lend who were current on their second-as irrational as that may sound. Have you check on the status of the 1st mortgage.
sammyvegas,
Thanks for your post. I'll consult with my attorney to see what he thinks about the points you've brought up.
What is the similar, better method you use?
Also, what has your experience shown to be a usual discount a first or second lien holder will accept (with first forclosing or with second forclosing)? And how long do negotiations usually take?
Jamie
_________________
The more you seek Knowledge, the more Wealth will seek you.[ Edited by acerview on Date 10/06/2003 ]
Jamie,
Thanks for a great article.
I personally think that once the investor masters basic techniques for Short Sale process, then biggest issue lays in the Title Seasoning. Complexity of Profit Realization from the transaction usually underestimated by novice investors and very often unexpectedly kills the deal at the very end. This process seems to address the issue.
Would you care to elaborate a bit on the topic of how you will extract your profits? I am a little confused about the part where you creating a mortgage. How does it actually work?
If I understand sequence of events correctly:
In step 1 you only form Home Sellers Family Trust Agreement that names you as a successor of original Trustee (Home Owner) and mentions that Successor (you in that case) will in a future create a mortgage.
In step 2 you get a Deed (QC or WD) from Home Owner.
In step 3 you are receiving Limited P.O.A. from Home Owner (by the way, what is this P.O.A enables you to do exactly, is it just restricts you to operations with the property?)
In step 4 you and a Seller switch places in the Trust by having Seller sign a resignation and naming you as new Trustee.
In step 5 you actually execute a Mortgage from the Trust to your LLC
Here are all my questions:
Are you creating a Mortgage using your Limited P.O.A. naming Sellers Family Trust as a Mortgagor and your private Limited Liability Company (LLC) as a Mortgagee?
Do you record this mortgage at the county office to create a Cloud on the property Title? What is the percentage of the profit do you use for the Mortgage amount?
What are the terms of this Mortgage?
Regards,
Dmitry.
Dmitry,
Great questions!
Quote:
(by the way, what is this P.O.A enables you to do exactly, is it just restricts you to operations with the property?)
The P.O.A. enables me to execute all real estate and closing documents related to the sale of the property. It specifically enables me to sign documents such as a mortgage.
Quote:
Are you creating a Mortgage using your Limited P.O.A. naming Sellers Family Trust as a Mortgagor and your private Limited Liability Company (LLC) as a Mortgagee?
The Home Owner individually and as Trustee of the Home Owner Family Trust is the Mortgagor. My LLC is the Mortgagee.
I sign the Mortgage on behalf of the Home Owner using powers granted to me in the P.O.A.
Quote:
Do you record this mortgage at the county office to create a Cloud on the property Title?
Yes, the mortgage is recorded with the county.
Quote:
What is the percentage of the profit do you use for the Mortgage amount?
In this case the Mortgage amount is about 200% of the profit I expect to receive. Keep in mind I need to get payment for more than just profit from this Mortgage. I'm doing repairs to the house, so I need to get back the money I spent on repairs. In this case it looks like I will be able to pay the second mortgagee's short payoff amount out of the closing (once I sell the property) proceeds. If I had to pay that amount before closing, I would need to get that money back through this mortgage as well.
When the property is sold I will accept a short payoff amount for the mortgage that is equal to the amount of equity in the property.
Quote:
What are the terms of this Mortgage?
The Mortgage is due in full within one year. No other terms are specified.
Jamie
[addsig]
Quote:
On 2003-10-01 05:07, acerview wrote:
I consulted with a very knowledgable real estate attorney before entering into my first short sale. I believe the documents and structure of the deal he recommended will protect me from having a disaster, and I want to share for the benefit of others. For the seasoned short salers, please let me know if this is similar to the way you structure your deals, or what your other means are. Don't skip competant legal and tax advice. Before trying this yourself, consult with your attorney and accountant. If you don't have one, get one!
I used 5 documents created by my attorney:
1. The Home Seller Family Trust agreement. The seller signed this document which created a family trust for her. This document states that she is the original Trustee, but also includes a paragraph that nominates me as her successor. This same paragraph also mentions that I will create a Mortgage payable to my LLC for my efforts.
2. Quit-Claim Deed- The seller signed this document transfering the property title from her to the newly created family trust.
3. Limited Power of Attorney - Seller signed this document giving me the authority to sign any documents having to do with the sale of the house and act on behalf of the seller.
4. Resignation of Trustee - Seller signed this document resigning herself as Trustee of the family trust, and naming me as the new Trustee. I now have complete control to sell the house.
5. Mortgage - I signed this document using my authority under the Limited Power of Attorney. This is how I will pull out my profit.
So I'm not buying the property, I'm just controlling it. The 2nd lien holder initiated the foreclosure. I have negotiated a short payoff with them at a 50% discount. This was done with one phone call and required absolutely no documentation or package (They didn't even need to see the Release form). I had them on the phone at 2pm and by 4pm I had a short payoff letter from them faxed to me. Unlike what I've read, the 2nd lien holder did not give a time limit (21 days, etc) that the payoff (and sale) had to be completed by.
This deal structure has many benifits:
1. I won't own the house. No capitol gains tax to pay.
2. Dealer status not an issue.
3. Family Trust being on title will not cause title seasoning issues for my buyer.
4. Because there's only one sale taking place (from the family trust to my buyer) there's no dramatic increase in sale price to have to justify to my buyer's lender, which is a common problem when buying and reselling quickly.
By the way, these documents cost me $400. Instead of buying a short sale course, I invested in good legal advice. With the proceeds from this deal, I will buy a short sale course and learn some more advanced short sale stratagies.
I look forward to your comments.
Jamie
acerview, if you don't mind, what are the number specifics on this peticular transaction. How much of a discount on the 2nd, how much equity was there in the beginning, and how much you think you can make when it is said and done.