Establishing the Right Price
You'll encounter at-risk sellers who have honestly tried to price the property at market value, but a more common encounter will be with owners who have overpriced the property because the total amount they owe on the property
Remember the information about liens, and what happens to them after a foreclosure auction? Most liens are wiped clean. Holders of second mortgages and other junior liens know this, and are usually willing to negotiate a reduction of the debt. If the property is headed for foreclosure, they know they won't get anything at closing, and they must pursue the seller later if they expect to collect funds. Most will agree to take less rather than risk getting nothing.
That's where you step in. The sellers might be ready to disclose details to you once they feel you are serious about helping them solve their financial problems. Make a list of every lien on the property, and find out how much is owed. A title search will uncover recorded liens if you'd like to make sure the sellers have disclosed all necessary information. Here's an example:
Owner's property taxes |
$350 |
Owner's first mortgage |
$40,000 |
Owner's second mortgage |
$15,000 |
Owner's judgments |
$8,000 |
Owner's mechanics liens |
$4,000 |
Total |
$67,350 |
Now, let's say you're willing to pay $65,000, including closing expenses. This would mean that the amount owed by the seller exceeds the sales price by $2,350 dollars, and that figure doesn't include the seller's closing costs. You can see why the seller feels he's in a real bind.
The holder of the first mortgage is less likely to negotiate a reduction in debt, since it is in a better position to protect its interests during foreclosure. The junior liens are the ones you'll usually want to focus on.
Get It in Writing
Sign a purchase contract before you begin negotiating for lien reduction. You don't want to spend time and money negotiating with lien-holders and then lose the property to another buyer who enters the picture while you are doing the work. Make sure to insert a contingency that the sale will not take place unless all liens are paid at closing. That statement is probably covered by the standard contingency that deals with delivery of clear title, but making it a separate contingency reinforces your position with the seller.
Ask the seller to call all lienholders and give them permission to talk with you about the debts. Explain to junior lienholders that a foreclosure is imminent, and you wish to negotiate a debt reduction for the seller. Real-estate agents do this all the time. It isn't unusual for a lienholder to reduce the amounts owed to juniors by fifty percent or more. Get all reduction agreements in writing.
The owner might want a contingency too, one that states he is not obligated to sell if payoff reductions cannot be negotiated. If you plan to work in the area for the long term, think of your reputation and protect the seller, too.
In some cases, even the first mortgage holder will agree to reduce the debt required to release a lien. When you step in, they are assured of a quick sale. If that's more attractive to them than the time and expense required to force a foreclosure, they may negotiate with you.
You must remember that a reduction in the amounts that are required to release a lien does not usually erase the debt. The creditors can still pursue the sellers for the amounts owed unless they agree to accept the payment to satisfy the entire debt. You should make the sellers aware that their credit reports will contain negative remarks due to the reductions, but that the impact of those remarks will not be as negative as it would be after a foreclosure.
