I had a meeting this week in Las Vegas with some high net worth investors and a colleague of mine who runs a large real estate brokerage that focuses on asset management and foreclosure disposition for very large mortgage lending clients.  He was explaining the process of foreclosure auctions and mentioned that the vast majority of properties that go to auction have a starting bid that matches the amount of the debt against the property.  Since most foreclosures are tremendously over-leveraged, the typical auction result is the return of the property to the lender.  Makes sense… nobody would want a property with massive negative equity to begin with.

But the really interesting part of this discussion came when he was asked why some lenders will drop their starting bid price to a much lower level, potentially even creating attractive deals.  His answer shed some light on the difficulty with short sales, and I thought I’d share this info with you here.

He explained that most mortgages are “serviced” by a company separate from the person or entity that originally funded the loan.  These “servicers” are governed by a “servicing agreement” that specifies things like how to collect payments, what to do when payments are late, how are foreclosures handled, and many other things, including:  How to handle the bidding when a property goes to foreclosure auction.

As it turns out, most servicing agreements stipulate that the servicer has to try to sell the property at auction for the full amount of the debt.  As a result, there are very few real “deals” at foreclosure auctions.  But some of the servicing agreements are more realistic and allow the servicer to base the starting bid pricing on the current market value minus the costs of foreclosures, repairs, holding, etc.  It’s on these properties that a good deal can sometimes be found at foreclosure auctions.

And all of this leads us back to short sales.  The reason that my colleague said that short sales are so hard to complete is because most of the servicing agreements that exist today do not address the issue of short sales and how they can be handled.  As a result, most short sales have to be evaluated on an individual basis and may even require the direct approval of the original lender.  And if the loan servicing agreement on the loan that you are trying to short sale does not have specific guidance concerning short sale criteria, you’ll be fighting an uphill battle to get it approved, regardless of how well the transaction is handled on your end.

The only good news here is that there are a precious few people who have sufficient insider connections in the lending industry that they have the uncanny ability to get short sales approved.  This is a rare skill, to be certain.  At present, I’m working to procure some free training for you about this topic from a man who is directly involved in over 300 short sale negotiations per month and is considered by the ‘gurus’ in our business to be the primary expert in the topic of short sale negotiation.  In fact, most of the people who claim to offer short sale negotiation services simply outsource their files to this man.  If I am able to get him to offer this training, be sure to sign up for it right away.  Not only is his competence far beyond anyone you’ve ever heard from on the topic of short sales, but his reputation is beyond reproach.  Watch your email in the next day or two for an invitation.

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