Short Sale Negotiation on a second lien

Short Sale, and foreclosure negotiation on a second mortgage when the second lien will not release the lien without a promissory note from seller.

The second mortgage holder is in a very "weak" position. This is why the first mortgage lender will typically dictate to the second lien holder how much they will get and usually it is a very small figure, sometimes $1000-$2000. They (the second lien holder) stand to gain nothing if the property goes to foreclosure. Typically you can get a second mortgage holder to accept 10% or less of the original note balance. You do not need to start negotiating with the subordinate lien holder until you have approval from the first or if you are close to getting that approval.

The reason why the bank wants a note is because it makes the banks balance sheet look better to Wall Street and its investors. It shows up as an asset. Here is what we would do in a situation where the second lien holder wants the borrower to pay a promissory note after closing for the deficiency. Do your own Comparative Market Analysis (with the lowest comps) and send it to them with pictures of the property (showing it in the worst light, ie. - photos of mold, rotted wood, repairs needed). If they still insist on having the borrower pay the deficiency here is what you are to do. Explain to the seller that they will get a deficiency when the property goes to auction and if it goes to auction, they will have a foreclosure on their credit and this is a much worse situation than having a short sale on their record. It is in the seller’s best interest at this point to sign the deficiency. The unsecured promissory note is just like a credit card they are not paying. You can offer to negotiate the note for them in a year and the lender will take 50% of what is owed. You can explain to them that you have heard of other borrowers in their position file a Chapter 7 later on to have this unsecured note discharged in Chapter 7 bankruptcy. The reason why you would not tell them to file a Chapter 7 directly is because that is practicing law and you need to be a licensed lawyer to practice law.

As far as what is an appropriate price/discount on a short sale when listing a property, there are several factors involved. Keep in mind the bank is trying to get the maximum amount of money. Negotiating the price is where the expertise in short sales of the person handling it comes in. The bank wants as close to market value as possible. Each lender is a different animal so to speak. With that said, this is what we shoot for on a final negotiated price from the lender (obviously the initial offer is much lower). We find the 3 lowest comparable sales in the area - these are usually closed bank owned, short sales and foreclosures. You would take the average price per square foot and times it by the square foot of the subject property. Take that figure and multiply it by 80%. 80% of the value is a "quick sale" price that banks recognize as what it would take to sell the home very quickly (30 days or so). We then have a repair estimate for repair costs of the property and subtract that from the previous number. That is our maximum price we want to buy that property for. Our offer price is much lower than that.

Jim Costello

Investor and Short Sale Specialist

P.S. – Ask me how I can buy your short sale listings, negotiate your short sale listings and pay you 10% commission.