Ask Paul Wells

Paul, I was at the meeting for SAREIA in San Antonio on May 2, and really enjoyed the information you gave us. I have been buying pre-foreclosure's for about 6 months and have bought 5 properties. I was encouraged to know that most of what I have been doing is right along the lines you talked about. Clearly you’re a foreclosure expert. However, you brought up some interesting ideas that I would like to get further info on.

You talked about how to go about "short selling". I know what Short Sales are but I am confused about the difference between a “short sale” and a “discount”?

Thanks,

Rick Edgerton

Good Question Rick as there is a difference between the Short Sale and a Discount. When a homeowner is going through a foreclosure there is an opportunity for the real estate investor even if the homeowner owes what the house is worth. Lenders will accept less then what is owed(a short sale) on the property if the lender feels that it is in their best financial interest to liquidate the property quickly vs. keeping it, rehabbing it, and reselling it themselves as it sits in their REO(Real Estate Owned) inventory. Generally the only time that lenders accept short sales is when the property is in foreclosure. When a bank accepts a short sale the lender expects to get the proceeds quickly, usually within 30 days, and there will be a change of title into the investors name or entity. The investor then owns that property.

A discount is different then a short sale. When a short sale is completed the title changes and the house is taken over by the investor. When a note is discounted it is generally a 2nd note or note that is junior to the 1st note. An example might be as follows:

House Value: $200,000
1st note $125,000
2nd Note $ 60,000

To understand discounts you need to understand the position of the 2nd lien holder. The only way that the 2nd lender gets all of their money from a house that is in foreclosure is to pay off the 1st completely, take possession of the house, rehab the house, sell the house, and then they will get what is left of the note value. Lenders are in the business of loaning money, not owning single family homes. So instead of having to pay off the 1st and then owning the home the lender that owns the 2nd will sell their interest, the 2nd note, at a DISCOUNT. I have bought 2nd notes for as little as .15 cents on the dollar. The investor then has the 2nd lien on the property of $60,000. This position gives the note holder, the investor, the legal right to protect their position thus giving them the right to buy the first as the foreclosure process proceeds.

Buying discounted notes can be extremely lucrative and is a fantastic strategy to purchase homes that are in foreclosure.