Discounting Banks? Here's how! - Posted by karp

Posted by chris on May 15, 1999 at 04:31:37:

Thanx. … I figured you mighta also be a buyer of reos from any institution than took back properties in your area.

Discounting Banks? Here’s how! - Posted by karp

Posted by karp on May 13, 1999 at 10:27:06:

Okay, here goes:

  1. First you need to have a fax from the borrower. Mine is a standard one that says

“I, _____________________________ hereby grant karp the right to talk with you about my account with _________________________ bank, account number __________________, that is currently in foreclosure. He has the right to intercede and blah blah blah on my behalf”


  1. you do NOT send this fax until you are talking to the decision maker. When you call the banks main line you will have to jump through hoops but what you want is to be talking to the LOSS MITIGATION Depatrtment aka the FORECLOSURE Department aka COllections Department aka LEGAL RECOVERY Department.

  2. How you guys are going to get around this next one I don’t know. When I have the right department, I say:

“Hi this is karp with blah blah mortgage blah blah blah, we have a client by the name of Blah Blah who is currently in foreclosure on his first mortgage. You guys are the ones holding the 2nd. Before I go any further I have a fax I want to send to you signed byt blah so we are in line with privacy laws, can I send that to you as we are speaking?”
(they love that you are on task)

“Anyway, here is what I am up against…The first needs to come way down on their fees and late charges etc as well as take a decent discount in order for me to be able to refi and save theses peoples house and keep them in it, it goes to sale in about a month”

“However, they are being rough on me and beating me up, they say they won’t talk about a discount until I tell them what the 2nd position is going to take.”

(NOTE: If I am talking to the first, I reverse the script and say the 2nd is beating me up…)

At this point we get down to the nitty gritty. They may ask what I am offering, I say “I need the TOTAL PAAYOFF to come in at 117K, I hate even saying this number but it means I can probably only get you $500 bucks for your 10K second. See, right now you have a 130K first in front of you and those numbers just dont work.”

We will talk back and forth but understand one important thing. I am a mortgage company trying to save the foreclosure. He knows I am a good guy. I have a great rapport with all of the ones I have dealt with so far except for one who got mad at me.

Usually they will say to write up the proposal and show what the first is going to get. If you are talking to the first they will be concerned with whhat the 2nd is going to get.

I hope this helps.

Oh, one other thing, always ask yourself this as you talk to them :

“If karp prattles on and on about some obscure real estate technique will he be forced to trade in his pink jammies for a Monogramed Bill Gatten PACTrust tutu?”



Re: Discounting Banks? Here’s how!/Related Article - Posted by Adam

Posted by Adam on May 19, 1999 at 10:52:59:

Selling Over-Financed Properties Through Short
Pay-Offs and Redemptions

by Jonathan A. Goodman, Esq.


Short pay-offs and redemptions are alternatives allowing closings on
sales of over-financed properties. Depending on the circumstances
surrounding a particular property and a particular seller, both
alternatives may be possible. In some circumstances, a short pay-off
will not be viable. In other circumstances, a redemption would not be
a desirable scenario for your client. One of the purposes of this article
is to sensitize owners and REALTORS® to the strategies of choosing
between short pay-offs and redemptions. Part I will discuss short
pay-offs, while Part II will discuss redemptions and compare the two

A “short pay-off” is a transaction in which a lender agrees to accept
less than it is owed on its loan in order to permit a sale of the property
which secures its note. (Throughout these materials, the term "lender"
or “lenders” refers to the collection of institutions more or less aligned
on the “lender’s” side of a short pay-off sale. In most transactions,
there are at least two entities, the holder of the note, and a private
mortgage insurance company. In many transactions, there is the loan
servicer, the note holder or investor, and the mortgage insurance

In a typical short pay-off, the lender agrees to accept the net
proceeds from the closing (the sales price, minus the cost of closing
the transaction, including your commission), together with some
additional consideration from the seller (often a combination of cash
plus a note) in full satisfaction of its loan. Lenders do not agree to
short pay-offs to be generous. In negotiating the short pay-off, the
lender needs to be convinced that it will come out better than it would
by foreclosing on the property and pursuing the seller/borrower for its
losses. Though short pay-off procedures vary somewhat from lender
to lender, most institutions require the following before approving a
compromise sale:

  1. The lender must be convinced that the sales price under the
    proposed contract is equal to or higher than the amount for which the
    lender would be able to sell the property after a foreclosure. The
    lender will require a market analysis from the REALTOR® listing the
    property. The lender will often confirm the market analysis by
    contacting its own sources, usually the real estate agents which handle
    its REO sales.

  2. The lender must be satisfied that the amount of the commission
    under the proposed transaction is equal to or less than the commission
    it would pay its agent for selling the property after foreclosure.
    Lenders seem to look for a 6% listing. Listing the property for less
    than 6% does not seem to increase the likelihood that the lender will
    accept the proposed sale. The lender will want to know as precisely
    as possible the amount of proceeds it can expect to receive from the
    sale. The more precise the estimate, the better.

  3. The lender will want an explanation of the circumstances which
    created the need for the short pay-off transaction. Common
    explanations include divorce, medical problems, death, birth of a child
    taking one wage earner out of the work force, birth of children
    making the existing home too small, loss of a job, or a job transfer
    creating the need for a move.

  4. To verify the financial condition of the seller/borrower, the lender
    will require: financial statements showing the seller’s assets, liabilities,
    income, and expenses; the seller’s tax returns for the previous two
    years; and the seller’s paycheck stubs for the most recent pay
    periods. The most common disputes which arise in short payoff sales
    concern the seller’s financial condition. On the one hand, the lender
    will be reluctant to approve a compromise without having the ability to
    analyze the financial strength of your seller. On the other hand, if this
    information is provided, there are potentially grave consequences for
    your seller if a short pay-off is not approved. The lender will have a
    significantly easier time pursuing your seller for a post-foreclosure
    deficiency. In certain circumstances, providing the financial
    information actually decreases the likelihood of closing on the short

A borrower with minimal assets, little income, and a willingness to file
bankruptcy has little to lose by providing financial information.
However, most candidates for short pay-offs have some assets, a
good job with garnishable wages, or a desire to avoid bankruptcy.
Candidates for short pay-offs need legal advice regarding the
advisability of submitting financial information to the lender. Though a
refusal to submit financial information to a lender greatly decreases the
chances of closing, a refusal to submit financial information does not
necessarily preclude closing on a compromise sale.

Short Pay-Off Traps

When working on short pay-offs, certain issues and problems
frequently arise. It is important to keep them in mind as you proceed.

Your seller is already facing a potential deficiency lawsuit from its
lender; he does not want to be sued by a buyer also. A seller’s ability
to close on a compromise sale is not within his control. It is important
that in any contract which your seller accepts, his obligation to close is
contingent upon successful negotiations with the lender.

Most sellers would like to protect their credit rating as much as
possible. A substantial motivation for a short pay-off as an alternative
to simply allowing the property to go into foreclosure is avoiding the
detrimental credit consequences of a foreclosure. The seller should be
advised to seek legal counsel regarding steps which can be taken to
ameliorate the credit consequences of the work-out.

Your seller will not receive any proceeds from the closing on a
compromise sale. Though a higher sales price will enhance the
likelihood that the lender will accept the compromise sale, and though
a higher sales price may reduce the amount of funds which your seller
needs to bring to closing, the sale price under the proposed contract
is rarely controversial. These transactions often require a patient
buyer. Working through the bureaucracy of the loan servicer, the
investor, and the private mortgage insurance company takes time.
Closing dates may need to be extended. It is important to work with
buyers who have flexible closing needs and flexible dispositions.

As many as three entities may be involved on the lender’s side of a
short pay-off transaction. It is not unusual for the mortgage insurance
company, the investor, and the loan servicer to have several different
departments working on the transaction. Errors may arise simply due
to bureaucratic miscommunication. It is important to get the terms of
the short pay-off transaction (release of liability, no adverse credit
consequences … etc.) in writing.

You may occasionally run into a seller who initially does not care
about the financial or the credit consequences of a short pay-off
transaction because he has filed, or is about to file, bankruptcy. While
this may seem to be a blessing, it should raise concern. Bankruptcy
affects the seller’s ability to convey title and may disrupt a transaction
which you have worked long and hard to put together. A seller filing
bankruptcy will usually already have legal counsel. In these
circumstances, the REALTOR® needs legal advice.

A seller who has little concern for the financial and credit
consequences of a short pay-off has little incentive to avoid these
consequences. Often these sellers seem to be very agreeable until
they realize that they will need to move out of the property sooner
than if the property went into foreclosure. These sellers may decide to
let the foreclosure run its course, rather than close on a compromise

Finally, a short pay-off transaction may involve the forgiveness of debt
which may create detrimental tax consequences to the seller. Sellers
must consult their tax advisors.

Keeping the above factors in mind should increase your chances of
successfully closing on short pay-off transactions.


Part I of this article discussed negotiating “short pay-offs” or
"compromise sales" as a means for selling over-financed properties.
Part II discusses the owner’s ability to redeem properties after a
foreclosure sale and compares this approach to pre-foreclosure
compromise sales.

Redemption Background

In Colorado, a lender can sue the borrower for the difference
between the pay-off on the note and the highest bid at the foreclosure
sale. This difference is called a “deficiency.” In the vast majority of
foreclosure sales, the lender is the successful bidder at its own sale.
As a consequence, a lender has much control over a borrower’s
post-foreclosure liability.

The foreclosure statutes are written to encourage lenders to bid a
property’s fair market value at a foreclosure sale. One of the ways in
which the statutes encourage fair bids is by giving the foreclosed upon
owner redemption rights. The successful bidder at a foreclosure sale
does not obtain title to the property. Instead, it obtains a receipt (the
"certificate of purchase") which entitles it to receive a public trustee’s
deed after the expiration of all applicable redemption periods.

If the owner, during his redemption period, can tender an amount
equal to the highest bid at the foreclosure sale (plus accrued interest
and certain other allowable costs) to the public trustee, the holder of
the certificate of purchase is divested of its interest in the property,
and the borrower acquires the title, free of the lien being foreclosed
upon. (Liens junior to the lien foreclosed upon remain on the property
after an owner’s redemption.) The redemption does not eliminate the
deficiency, but allows the owner to keep title to the property.

Though most people who are foreclosed upon have insufficient sums
to redeem, they can sell their rights in the property and use the
proceeds from the sale to redeem. There can be one closing in which
the funds from a third party purchaser are transferred to the seller,
and the seller, through its closing agent, uses those funds to redeem.
The seller issues a deed to the purchaser, the public trustee issues a
redemption certificate to the owner, and the third party purchaser
acquires title to the property.

If a lender does not create a deficiency at a foreclosure sale, it is
extraordinarily unlikely that there will be an opportunity for a
redemption. (If the property was worth more than the loan balance
owed against it, plus the costs of a foreclosure, the owner would not
have had to let it go into foreclosure.) Until 1989, FHA avoided
instructing its lenders to bid deficiencies at foreclosure sales. Though
conventional lenders and the Veteran’s Administration have been
bidding deficiencies for several years, it seems that now all lenders are
becoming more aggressive about preserving their ability to pursue
larger sums from their debtors after a foreclosure. Since opportunities
for redemption are created by bids that are less than a property’s fair
market value, these changes have enhanced redemption opportunities.

Redemption Nuts and Bolts

First, obtain a copy of the “bid letter” (the written evidence of the
amount bid) from the foreclosure sale. Do not rely on bid information
given to you over the phone by the Public Trustee. Public Trustees
can become quite busy and, like anyone else, give incorrect
information over the phone.

If the successful bid at the foreclosure sale is in an amount which is
greater than the amount for which you can sell the property, then there
is no redemption opportunity. If the successful bid is less than an
amount for which you can sell the property, it creates a redemption
opportunity and an opportunity for a seller to realize proceeds from a

The sale must close during the redemption period which is typically 75
days, or occasionally six months, depending on the type of the
property. Contact the Public Trustee to find out the exact date of the
expiration of the owner’s redemption period.

It is important to deal with a closer who is experienced with
redemptions. The closer will get pay-off numbers from the Public
Trustee rather than from the lender. The pay-off on the seller’s original
loan with the lender is irrelevant for the closing. The amounts
necessary to close are only those sums necessary to redeem (plus
other costs). Though the title insurance commitment will vary
somewhat from a “normal” commitment, the closing will feel very
much like an “ordinary” closing.

Comparing Redemptions and Short Pay-Offs

Redemption Advantages:

In many respects, a redemption is a simpler transaction than a
compromise sale. There is no negotiation with a mortgage insurance
company, an investor, a loan servicer, or anyone else on the lender’s
side. Pay-off numbers are simply obtained from a Public Trustee.

The seller may receive funds from the sale and there is no disclosure
of financial information to a lender. A redemption may avoid the
potential detrimental tax consequences of a short pay-off transaction.

A failed attempt at a short pay-off can actually put a seller in a worse
position than he would have been had a short pay-off not been
pursued at all. The efforts to document the property’s fair market
value (the market analysis and the proposed offer) help the lender
justify bidding its deficiency at the foreclosure sale. In most
circumstances, the seller will have provided financial information to the
lender. This financial information will increase the likelihood of pursuit,
and successful pursuit, of the borrower by his lender.

Short Payoff Advantages:

A redemption does have certain disadvantages over a short payoff. A
redemption does not eliminate the Seller’s liability on a deficiency. A
redemption does not avoid the detrimental credit consequences of a
foreclosure. Also, seventy-five days is a relatively short period of time
in which to sell property. A redemption opportunity may fail because
of lack of time.

Depending on the interplay of a variety of circumstances, it is
sometimes best not to aggressively pursue the short pay-off, and to
instead allow the property to go into foreclosure as quickly as
possible. Of course, this strategy has its dangers. Once the property
goes to foreclosure sale, the seller has lost the short pay-off
alternative. It has put all of its “eggs” in the "redemption basket."
Decisions regarding how aggressively to pursue a short pay-off, when
to give up pursuing a short pay-off, and the likelihood of a redemption
are decisions which should be made after careful consideration
between the REALTOR®, the seller, and the seller’s lawyer.

Jonathan A. Goodman is a shareholder in Frascona, Joiner and Goodman, P.C.,
a Colorado law firm. His practice areas include Real Estate, Brokerage Law,
Contracts, Land Use, Leasing, Real Estate Title, Association Law, Business
Law, and Finance. He can be reached at

Disclaimer – Content is general information only. Information is not
provided as advice for a specific matter, nor does its publication create an
attorney-client relationship. For legal advice on a specific matter, consult an

the importance of appearing earnest - Posted by BankRobber

Posted by BankRobber on May 14, 1999 at 09:57:35:

Pretty slick. Of course it helps a lot that you have the infrastructure (business listing in the phone book, someone to answer the phones, etc…) to support the illusion that you are earnestly trying to broker a loan for the debtor. In other words; don’t try this at home.

Appreciation - Posted by Sean

Posted by Sean on May 13, 1999 at 16:57:22:

Hey, I really appreciate you posting this information for us to read. Maybe you should do a how-to article on it.

Re: Discounting Banks? Here’s how! - Posted by Bill Taylor

Posted by Bill Taylor on May 13, 1999 at 15:52:12:

Hey karp I have a couple that is soon to be foreclosed on the house is worth about 48000 tops. The loan is at least 60000. These people need out are you saying the mort. co. might be int in discounting this in lieu of foreclosing because these people have already started bankruptcy proceedings and it is primarily due to the burdent of this house. What do you think my chances are?

Re: Discounting Banks? Here’s how! - Posted by Mike

Posted by Mike on May 13, 1999 at 12:57:53:

Are you really a mortgage co. or just telling them that? What do you do if there is no 2nd?

Thank You! Thank You! Thank You! - Posted by Bill K. (AZ)

Posted by Bill K. (AZ) on May 13, 1999 at 10:41:36:


What a great reply and tool!

Thank you for providing this detail. You’re a great resource.

I wish you continued success.

Bill K. (AZ)

Re: Discounting Banks? Here’s how! - Posted by ScottE

Posted by ScottE on May 13, 1999 at 10:37:29:

Thanks for the script.
Won’t the people in arrears know what you are getting the loan(s) discounted down to? Won’t they have to be involved in a short sale and why would they comply to save you money?

Thanks again!


OUCH! - Posted by karp

Posted by karp on May 14, 1999 at 11:24:51:

Man, Bankrobber,

I hope you didn’t really miss the whole message of this thread.

But I feel like you just John T. Reeded me “karp uses too much white space in his posts” while missing the whole point.


If you think I would have a hard time coming up with a way to do this without me owning a mortgage company, you are mistaken.

Why in the world would I post something unless I absolutly DO recommend that people “TRY THIS AT HOME”.
What is the worst thing that can happen? They sound like a dork and the bank says “NO!”

So, for the rest of you: Think creatively come up with a reason why you would be calling the bank and absolutley TRY THIS AT HOME!



Your chances? - Posted by karp

Posted by karp on May 13, 1999 at 16:49:35:

Man I couldn’t guess.
I would call the bank and hit them hard.
You need to be able to back up what you say.
I would have comps ready to fax, etc.
I would also be ready to walk away if they won’t play.



Re: Discounting Banks? Here’s how! - Posted by karp

Posted by karp on May 13, 1999 at 15:24:24:

Yes, I own a mortgage company
No, I am not just telling them that
If there is no 2nd then you approach it from a standpoint of what you need the value to be to get the deal done be it refinancing, purchasing or whatever.



Re: OUCH! - Posted by BankRobber

Posted by BankRobber on May 14, 1999 at 23:19:25:

It was not my intent to be critical. I thought you well articulated a creative technique. I may even try it someday if I have some free time. But I must disagree with you, I think this technique is much easier for you than it would be for people that do not have your mortgage company infrastructure.

Re: OUCH! - Posted by ScottE

Posted by ScottE on May 14, 1999 at 21:54:40:

Geez, Karp, I often sound like a dork…the good news is a lot of times it doesn’t matter and I get a “YES” perhaps out of pitty!
As my Dad has told me “I’d rather be lucky than good anyday”!


Re: Discounting Banks? Here’s how! - Posted by chris

Posted by chris on May 14, 1999 at 02:22:01:

Good script , thanx. What kinda thing would you say if you weren’t the owner of a I’m a rookie so please be specific & thanx again. … Also what’s the best script for reos - if you’ll do this I’ll be in your debt. Be well .

“Infrastructure” can be created - Posted by Matthew Chan

Posted by Matthew Chan on May 17, 1999 at 03:44:03:

If you agree Karp provides a good technique to use and you say you need “infrastructure”, I would think we would try to be “creative” and strive to meet both criteria to make it happen.

My little company for the last 3 years has done business on a national level (The continental U.S. is my playground!). During that time, I started with 1 phone, then went to 2, then 3. I incorporated,got a business credit line, got a CPA, travel agent, added web sites, voice mail, toll free number, business cards, brochures, fax machines, printers, etc. WITHOUT any employees.

To this day, I run my little company solo from my messy little office at my apartment.

My point is this: I think in this day and technology age, anyone can create a “corporate presence” if you are creative and can execute reasonably well. I think “creative” goes beyond Creative Real Estate. “Creative” can be used almost anywhere.

BTW, almost everything I listed was done inexpensively.

Here goes… - Posted by karp

Posted by karp on May 14, 1999 at 09:18:18:

If I were doing this on my own not in the capacity of a mortgage company, I would represent myself to be a disinterested professional.

I would not want to represent that I am the buyer looking for them to sell me a house cheap. That just reeks of late nite TV…

If you can’t accomodate this, I would have somebody call on your behalf. Again, much of the script is the same.

“Well, it looks like we have a buyer for this house but with all the late fees and the payoff amount, they won’t qualify…They need to be at X price”


As far as the best script for REOS? I have no idea?
Why would I ever let something get that far?