How Can I Represent Pre-Foreclosure Clients With  No Equity?  

  And Still Get Paid?

 "Just give it back to the bank" is common advice to pre-foreclosure clients when they have no equity to protect. There is an alternative but some lawyers believe it won't benefit their firm financially.

 Let's face it. Pre-foreclosure usually means the client has no money to pay an attorney to stop the auction. Only a bankruptcy can free up money. No equity typically means a bankruptcy can’t be filed. There has to be another way to create billable work and improve the client’s position. If you rearrange the incentives and workload there is a solution. A Short Sale!  

A short sale is required when a property is overleveraged by mortgages, liens or other encumbrances.  Once you factor in closing costs, attorney fees, broker commissions, holding costs, late fees, unpaid taxes and interest arrears even a small amount of perceived equity evaporates. Creditors will often accept discounted payoffs so the home can be sold "short". The bank does not want to own the house.  

So, who is going to process all the paperwork and navigate the loss mitigation department's procedures?  How about someone with an incentive to see it close? An investor trained to negotiate debt settlements fits the bill. They work for free since they WANT to own the property.  

Where does the attorney profit? Were you going to send them away without a plan and without getting their business? Instead of giving your client advice which will damage their credit, tell them to enter into the investor's short sale program and then act as their closing attorney. An investor has the incentive to do all the heavy lifting of short sale negotiating with NO cost to the client.

Short sales have a reputation for high workloads and lengthy closing periods. Very true, so make the investor do the work since they want to own the property. The bank’s discounted payoff covers closing costs and your fees.  

When the smoke clears at the closing, your client will have you at their side, no deficiency judgments, no auction, and the dignity of selling as opposed to a forced evacuation. The bank wins, the investor wins, the client wins, and the attorney gets paid by the bank discount and investor. Doesn't it feel better to get paid while giving better advice? 

Donavan Pieterse is a New York State licensed real estate associate broker with RE/MAX Realty Plus.