We all know that the passage of California’s SB458 on July 15th changed how we process short sales. It’s most important aspect is barring junior lenders from having recourse against the borrower/seller or asking them for a monetary contribution or promissory note. Although the decline of short sale approvals has not occurred as severely as expected, real estate agents have been struggling to get junior lenders to cooperate in needed negotiations to successfully complete the short sale transaction. Instead a number of “work-arounds” have been created to get the junior lender’s full participation in final negotiations.
I define a “work-around” as an alternate method used to achieve a task or goal when the typical method does not work. In the case of short sales, junior lenders who aren’t satisfied with what they may get from the first lender’s sale proceeds and barred by SB458 from receiving any funds from the borrower may refuse to do the short sale and hope they can do better if they sue the borrower after the first lender forecloses. Here are a few of the ways that creative and successful real estate agents are using “work-arounds” to save their clients from foreclosure:
1. Get Money from Someone Else - SB458 simply says that no lender can request a contribution from the Seller/Borrower as part of a short sale. It does not say that a lender cannot get contribution from others. First Lender: Typically the only money offered to junior lenders comes from the First Lender who gets the lion’s share of the sale proceeds. Generally, first lenders make more money from a short sale than they could from a foreclosure but they regularly refuse to give the juniors any more than $6,000. But if a foreclosure action should bring much less to the first lender than a short sale would, they could be convinced to share more with the junior to gain their cooperation and close the deal. Buyer: It is the Buyer who is bringing the money to the table. If the Buyer really wants the property, they may be willing to contribute money to the junior lender to make the deal happen. The Buyer’s lender may allow this contribution to be paid through escrow as a closing cost. Real Estate Agents: Although agents don’t deserve this, it is not unusual for lenders to look to the agents to cut their commissions to satisfy the demands of the junior lender. This is a “Hail Mary” approach that unfortunately penalizes those parties who put the deal together in the first place.
2. Voluntary Seller Contribution - SB458 states that a lender cannot “require” the seller/debtor to make any contribution. But nothing says that the seller cannot “volunteer” a contribution. While in reality, no one would imagine voluntarily providing money to a lender that is not demanded for, the drafters of SB458 allowed that a seller may do just that if they have the funds and they want to get the deal done. Typically this would be performed to satisfy a junior lender’s request that they receive “x” dollars more in order to proceed. While SB458 does not state who must pay this, the language of the request is that any other party in the short sale can do so, including the seller.
3. Re-write the Buyer’s Offer - If the junior lender holds out for more money than what is agreeable, the deal could die. If so, then some agents have gone back to the buyer and written a new short sale offer for a lower purchase price than the original deal… lower by the additional amount the junior lender wants to receive. The new offer is submitted and, if the first lender accepts the offer terms, the junior lender counters at the original offer price with the increased money going only to the junior lender. This has been proven to work although it can cause added delays in closing due to the processing of a brand new purchase contract.
4. Discount the Junior Loan - If the first lender refuses to allow money to be paid by the seller to the junior lender, then the sale could die and the home would go to foreclosure. Instead, prior to selling the home, the seller could negotiate with the junior lender to accept a discounted payoff of their loan. For example, the seller pays money to the junior lender and the junior lender accepts this as satisfaction of the debt and releases their lien. Then escrow can open without the threat of the junior making any monetary demands. Only the first lender is in the deal and the short sale closes. I’ve seen discounted loan payoffs occur for .10 to .20 cents on the dollar.
5. Discounted payoff before short sale - For some sellers who are upside-down on a property but have substantial other assets, there is a danger in doing a short sale in that the Hardship Application process requires that they disclose their personal assets. This can cause a junior lender to reject a short sale because they believe they can collect from the seller in a post-foreclosure lawsuit. In this scenario, it could also be better to negotiate a discounted payoff with the junior lender before you ever start the short sale. Now it is simply a business transaction: how much will the junior lender accept in exchange for a lien release? Again, 10-20% is common but generally no financial statements are required. If this works and the junior loan is extinguished, then the seller has a much better chance of concluding their short sale transaction as it is always easier to negotiate with just one lender rather than two or more.
All of the foregoing concepts are foreclosure-avoidance, short sale success strategies that real estate agents and their clients are actually using in today’s California real estate market. If you are having success with other creative approaches, please let us know. It is important to note that all agreements made before, during or after a short sale must be disclosed to the principle parties to adhere to the definition of an “arms length transaction”. All funds exchanged must appear on the Final Settlement Statement (HUD-1). No secret “on the side” deals are allowed as they would constitute mortgage fraud which bears severe legal consequences.
The information presented in this Article is not to be taken as legal advice. Every individual’s situation is different. If you are upside-down on your loan(s), especially if you’re facing a lender lawsuit, get competent legal advice in your State immediately so that you can determine your best options.