A 30,000 Foot Peek at Three Default Opportunities
There are many options available to homeowners and investors alike when a default occurs. The investor is seeking to make money and the homeowner is seeking a resolution. Working together they can cumulatively decide which exit strategy works best for each of their given situations and perspectives. There are many factors that make up this all important decision. The more information and options an investor can bring to the homeowner the more likely a positive outcome can be obtained.
Here is a short example of some questions that require answering, consideration and study prior to deciding on a helpful strategy:
- How long has the homeowner been in default?
- Has a foreclosure action been filed yet? If so, at what stage is the action?
- What is the current market value of the subject property?
- Does the homeowner enjoy any equity in the subject property? If so, how much?
Below are three examples of the many exit strategies available to homeowners in default.
Short Sale
The need for a “short sale” occurs when a property is over encumbered. Simply stated this means the homeowner owes more on their property that it is worth.
There are many ways to approach a short sale; this is simply one example of what works for me. When the situation fits, my favorite technique is to make a written offer directly to the lender as the short purchaser. This serves to bring the lenders intentions directly to the forefront. All the parties immediately learn if the lender has any intention of entertaining a short sale, and what the short price might be. I’ve found that this method gets a decision from the lender faster than some other methods.
Even though the decision may arrive faster, the lender will still be required to determine all the other issues sensitive to lenders in short payoffs. For example, the lender must be certain that if they are being asked to take a loss that no other party stands to monetarily benefit. (This includes any junior mortgagee and the borrower.) Additionally, the lender will schedule third party inspections and require hardship documentation be forwarded from the homeowner, including the all important hardship letter.
In any event, the homeowners can not receive any sale proceeds (I believe that this fact will be soon changed) as evidenced by the lenders review of a signed closing statement (HUD1). From an untrained perspective this can appear to be a tricky situation, making the only apparent benefit to the homeowner the elimination of the possibility of a foreclosure action appearing in their credit file.
Equity Sharing/ Subject to
The pending foreclosure action will eventually take its toll on the homeowner. They may become desperate and accept any deal that would get out from under the pressure; even if it costs them their hard-earned equity.
This technique helps take the pressure off of the homeowner by reinstating their delinquent loan. The foreclosing lender is brought current and remains in place until it is paid off by the proceeds provided by the sale of the property.
In exchange for the investor provided relief, the homeowner would agree to sell the vacant property and share in the proceeds. The investor may also make necessary repairs in an effort to make the property more appealing to and end-user.
(Please notice the word “vacant” in the above paragraph. The homeowner must move out of the subject property in order to make this work. I can not state this more stringently.)
For those investors choosing to work with homeowners after the foreclosure sale there is the right of redemption.
Right of Redemption
The right of redemption is the right granted to the defendant (and in some states, any defendant, not just the homeowner) to pay the loan off in full (redeem) after a sale has taken place. The prevailing party could have been the lender (plaintiff in the foreclosure action) or a third party investor, the right of redemption survives and is identical in either event.
Investor opportunities presented by the right of redemption is most affected by two factors; how long the right of redemption exists and who has the right to redeem?
In states such as Florida, any defendant may redeem, (this includes some junior lien holders) and the defendants’ right of redemption expires upon the issuance of the certificate of sale. The certificate of sale is a document prepared and issued by the clerk of the court immediately upon full payment of the amount bid at the auction. Full payment in Florida is normally required within 4 hours of the completion of the foreclosure auction. Suffice it to say there are little or no redemption opportunities available in Florida.
Not the same can be said for the state of Ohio for example. The right of redemption is a right currently reserved solely for the defendant/ property owner and expires upon the court’s confirmation of the foreclosure sale. The confirmation can take up to 30 days to obtain.
Therefore it might be safe to say that the defendants’ right to redeem belongs exclusively to the property owner of record and expires approximately 30 days after the foreclosure sale. The opportunity exists for Ohio investors to exploit any foreclosure sale when the resulting sales proceeds exceed the amount of money owed to the plaintiff under their final judgment.
In summary, there are many ways to approach and work with a borrower in default. Determining the course of action which tends to benefit the borrower more than the investor should be the investor’s foremost conviction.
Mr. Meyer is an accomplished real estate student, investor and trainer. He has participated in thousands of real estate transactions from foreclosure auction purchases and home retention (loss mitigation) to note and mortgage purchases and extensive foreclosure litigation.
Mr. Meyer will be launching a website in early 2008 (www.180LoanWorkout.com). The website is designed to address some of the concerns of delinquent borrowers, and to expose them to available options while gently guiding them towards a solution. This ambitious venture will require the participation of many local, well trained real estate investors, and may include intervening negotiations with lenders, home retention transactions and short payoffs and purchase opportunities.
Mr. Meyer currently operates Rockland Trust Corp (www.RocklandTrustCorp.com). Any questions or comments should directed to: Rich@RocklandTrustCorp.com
 E-mail: Rich@RichardBMeyer.com
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Richard Meyer is a proactive, create your own momentum, real estate theorist as well as the ultimate real estate student and a genuine outta-the-box thinker. (Whew, what a mouthful, I mean keyboard full) Rich seeks to convey a sense of humility, individuality and the importance of thinking outside the borders of conventional real estate wisdom when assessing default investment opportunities. He has personally participated in literally thousands of real estate transactions ranging from foreclosures (courthouse steps purchases) and home retention transactions to mortgage note purchases and (almost) everything in between..