Rarely the lender will finance a buyer if he has excellent credit and qualifies for another loan, and the lender believes the buyer will be living in the property. The only reason this wouldn't happen is because of the lender's internal policies or additional existing liens on the property.
A strict policy of lenders is that the homeowner may not receive any proceeds from the sale of the property if the lender agrees to the short sale. However, a short pay is when the lender discounts the mortgage just like a short sale, except they are willing to sell the property back to the homeowner.
The motive for this "change-of-heart" with regard to the homeowner is purely economical. The lender believes it is in their best interest to get rid of the property and they will be receiving the same amount in the final analysis.
Let's look at a situation where the lender might sell the home back to the current owner. If there are liens (IRS or tax liens) or judgments that will not be extinguished at the foreclosure auction the lender will have to assume these liens to sell the property. But by selling the mortgage to the homeowner, the homeowner has the problem with extinguishing these liens and the lender will net more money even with taking a discount on the mortgage.
One thing that immediately comes to mind is "Where will the homeowner get the money to buy the mortgage?" The lender doesn't care and the homeowner needs to start finding an investor, private lender, or relative who has the money to buy the mortgage or who can get financing to get the mortgage purchased from the lender. Remember the new mortgage is going to be at 80% or less of the old amount which is "instant equity" to the homeowner since he is still on the deed.
If someone else puts up the money for the purchase of the mortgage, isn't this just a short sale in sheep's clothing? No, because the lender is allowing the homeowner to retain title to the property unlike what happens in a typical short sale where the homeowner loses title immediately at the time of closing.
The huge advantage of a short pay is the homeowner retains title and possession of the property which is the wish of 85%+ of homeowners in foreclosure. The downside is the challenge of raising the money necessary to purchase the mortgage.
The homeowner is potentially in competition with an investor who he may not know, but who is also looking to get his property and offers the lender more money to buy the mortgage.
If there is any way the homeowner can raise the money to buy the mortgage, he should do it only after asking the lender if he will do a short sale and then approach a trusted comrade to buy the mortgage until the homeowner can get refinanced in a couple of years.
Yes, often the lender will consider selling the note at a discount when it won't do a short sale. The difference to the lender is the cost and time saved in selling the note versus the drawn-out time required to complete a short sale.
The options to the lender are to: 1.) complete the foreclosure through the court system, which it will have to do if there are additional liens against the property that must be "extinguished".
2.) complete a short sale to an investor who may or may not close on the transaction, despite having given a deposit and showing proof of funds.
3.) selling the mortgage note to a buyer in a few days at a discount they would have accepted on the short sale, and have no further headaches.
Generally this decision is an easy one in accepting the best offer that nets the lender the most money in the least time. However, some lenders have policies about what discounts they will take and often they have an internal policy of not selling their single mortgages at a discount to investors.
This varies greatly from lender to lender and I am always surprised when I make an offer only to be told that the loss mitigation representative says "I'm not sure".
If we want to make an offer to the lender to buy a note, we preface the conversation with "We often buy the mortgage note (trust deed) at the same discount we would pay for a short sale and we continue the foreclosure".
We go on to explain that the lender can be out of the mortgage in seven days or less instead of 30 - 60 days or more. The benefit to us as investors is to get the transaction done and know we control the property. You do not have to have the deed to the property because you can continue the foreclosure and get the property at auction.
The auction offers another opportunity to make money on the foreclosed property if there are other bidders because your discounted note is good for the full face amount as an auction credit.
For example, if you buy a $100,000 note for $80,000, at the auction you would bid $100 to start which means your first bid is $100,000 plus $100. The next bidder bids $100 which is actually a bid of $100,200. If no other bids are made the bid for $100,200 is accepted and you will get $100,000 for your $80,000 note! The result is a clear profit of $20,000 or 25% without ever seeing the property.
We use this method when a homeowner will not take our offering price and says "I'll let the bank have it first!" Well, in this case you become the bank and you get the property for less than the homeowner would have sold it for.
The homeowner can use this same technique by having a friend or family member buy the note from the lender, allow the homeowner to stay in the property and carry the mortgage on the property at the full face amount.
Many investors and homeowners called this an "advanced" strategy. The only advanced aspect of this technique is actually asking the lender, and making a case for why you are doing it. It is very important, to have your attorney do a complete title and lien search even if you know the homeowner.
This technique of buying the mortgage loan at a discount is simple, straight forward and benefits the lender and the note buyer. Historically, lenders will gladly accept 78% - 80% of the balance due and will negotiate to as little as 50% if the property is in serious need of repair or has substantial code violations against the property.
Caution, if there are additional liens against the property, you may have to continue the foreclosure that the lender has already paid for in most cases.
Dave Dinkel has sinced written about articles on various topics from Foreclosure Help, Internet Marketing and Advertising Guide. Dave Dinkelhas over 33 years experience in real estate investing which has given him aunique perspective into the real estate market. Dave is the author of thebest-selling e-courses. Dave Dinkel's top article generates over 33100 views. to your Favourites.