You may likely come across dozens of properties in foreclosure with little or no equity, that is, the seller owes at close to or more than what the property is worth. In these situations, lenders are sometimes eager to accept less than the full amount due, usually referred to a "short pay" or "short sale".
Negotiating a short sale with the lender is a hard process, usually because it is an off-putting task finding a bank officer who has the authority to allow a discount. You will have to call around to situate the lender's Loss Mitigation Department. More than likely, each lender you deal with would have a different name for this department, so be patient when calling. Much like getting your phone bill corrected, you could anticipate the process to involve a lot of waiting on hold and being bounced around a complex maze of automated voice mail systems. Once you get in touch with the right person, then the bargain begins.
From the lender's viewpoint, a short sale saves many of the costs related with the foreclosure process - attorney fee's, the eviction process, delays from borrower insolvency, damage to the property, costs related with resale, etc. In a short sale scenario, the lender gets the property back faster, so it is able to cut its losses. Your job as the investor is to persuade the lender that it would fare better by accepting less money now.
The lender would desire some information about the property, the borrower and the deal he has made with you. Particularly, the lender needs to know what the property is worth. The lender would usually hire a local real estate broker or appraiser to evaluate the property (known a broker's price opinion or BPO). You could also submit your own assessment or comparable sales information. In addition you would desire to offer as much precise negative information about the property as possible. Also, contain some relevant information about the neighborhood and the local financial system if things are bad (copies of newspaper articles with bad news can help). A contract's bid for repair estimates must also be submitted, which, of course, must be the highest bid you could obtain!
Don't be surprised if your short sale offer is rejected. Lenders are not emotionally attached to their properties, so they aren't as likely to give you steal. Many short sales fall through if the BPO comes in too high, this is frequently the case. You can't pull the wool over a lender's eyes - if the property isn't is require of serious repair, it is improbable you could convince the lender the property is value a whole lot less than the appraised value.
