Bottom Line - Bankruptcy Tips For The Short Sale (Foreclosure) Investor

Bottom Line - Bankruptcy Tips For The Short Sale (Foreclosure) Investor

If you're an active short sale investor, you may or may not have experienced a deal whereby the homeowner files for Bankruptcy (say a Chapter 7) during the negotiation.

Then bang, right in the middle of your deal, the Loss Mitigator (the one you've been working with for two months!) at the lender slams the proverbial door in your face.

What happens is that the bankruptcy court personnel files what is called a "Stay of Foreclosure," and effectively the property is pulled out of the direct foreclosure process. Note, however that bankruptcy does not stop the foreclosure, it only postpones or re-defines the auction date.

What are your options?

First, it is theoretically possible to have the homeowner's bankruptcy attorney file a third party authorization (on your behalf) with the lender to keep the negotiation (not the sale) in motion. As a practical matter, I have not seen much acceptance of this.

Second, you'll have to continuously watch for the discharge date of the Chapter 7 to re-engage the lender. If you have a buyer, or if you want to pick up a property yourself as soon as it's released from bankruptcy, know that the bank can actually sell the home at auction at any time after the bankruptcy is discharged. They do not have to restart the notice of default clock nor do they have to notify anyone of their intent to sell/foreclose. They can simply tell the county to act, and by that time, it's too late to complete your short sale transaction.

So here's the Tip: If you're interested in doing a short sale and are just waiting for the bankruptcy to be discharged (to start back up on your negotiations), make sure you are maintaining contact with the bank throughout the bankruptcy. Period. They have to know you have a deal and will pursue as soon as discharged.

Otherwise your great deal might go to the auction right before your eyes.

The key point is to understand that we have to be ever more diligent on calculating the offer. Note, formulas used to calculate offers on long-term hold real estate are not at all related to fix and flip formulas, and these deals are normally disastrous for the unsuspecting investor.

We talk much more about this in the What2offer mentoring program. After years of doing these calculations by hand, my partner and I have developed an online real estate software to make our lives much easier. We can now crank out offers and determine the exit strategy in seconds.

To Your Success,

Tom & Svein

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