Alternatives to Foreclosure: Short Sale Strategies

The strategy on a short sale is to negotiate a discount with the first mortgage and let the first mortgage negotiate the Junior Liens for you.

In a foreclosure, Junior Liens face a different situation. Typically, auctions require all cash buyers. The terms are usually 10% due immediately and the remainder due in a few days (or the 10% down is defaulted on). With so much cash required, usually only sophisticated investors attend auctions. In distressed "buyer" markets, most of these cash buyers seldom buying Junior Lien mortgages, which would require paying off the 2nd and 1st mortgage. Why buy out a 2nd mortgage and 1st mortgage when you can buy simply buy out the 1st mortgage?

In reality, the junior liens can deny the first mortgages demands for small settlements. They have the option to purchase the property at auction. However, in distressed markets, most second lien holders are unwilling to do this unless the property has substanstial equity.

Lenders are more likely to negotiate if 1) your offer is within 80% of the BPO(Broker's Price Opinion), 2) if the property needs a lot of repairs and/or 3) if the selling market is weak.

Scope of Work for Contractors

When dealing with contractors, it is absolutely necessary to define for your contractor exactly what they job duties are. If you do not, they will "change order" you to death. Be sure to include things like clean-up and pulling permits in your scope of work. Over the years, I have developed a Work Breakdown Structure (WBS) that details each type of construction task.

For example, I have a WBS for installing Anderson windows, including removing the current window, window jam prep, level and shim, vycor, brick moulding, flashing, insulation, silicon caulking, hauling the window away, trim, screens, hardware kits, etc.

Other important steps include pre-qualifying subcontractors including reference check and verifying license, bond and insurance, including getting your contractor to fill out an insurance indemnfiication and add you as an "additional insured." Set-up a schedule for payments and never pay 50% down-payment up front. Make sure you get a certificate of occupancy, final inspection and mechanical lien indemnfication before giving the last and largest final payment.