PMI – or - Private Mortgage Insurance , A little background first, Most of us know that if we borrowed more than 80% of the value of our home, we had to take out Private Mortgage Insurance or PMI. Forget about all the fairy tales you were told about how you could cancel it, why - in no time at all, house values would increase so fast, your 100% financing will have enough equity in 2 years to be an 80% loan, and you can just drop it – Reality check – that whole 20% equity in 2 year thing, it just didn’t happen, it’s not going to happen, so what are you really getting for all that money – NOTHING - but a headache.
Fast forward to today, you’re trying to short sale your home and that “PMI thing” is throwing a big wrench in the middle of it all – I can’t believe how many clients thought they were insured against this type of thing – hell - that was the whole idea of why you had to pay that -$200, 300, a month – right? WRONG - all you did was pay for the Banks insurance against a catastrophe like we have today – not yours.
In simpler terms, I actually find that clients see it better if you think of “Auto Insurance”, most of us have had to make an auto claim before and have a basic understanding of what happens, so apply it to a home loan. Basically in the mind of the PMI (insurance guys) you caused the car crash that damaged the bank – and now they are coming after you to recoup their money – now do you get it?
I am going to throw some round numbers out here – which are actually pretty accurate for Hawaii.
$500,000 – cost of your home
$400,000 – your first mortgage
$100,000 – your second mortgage – which required you to get PMI to begin with.
Now -
$250,000 – the offer you currently have on your home.
First lien holder says – sure we will accept the approx $200,000 payout, after commissions, closing cost and $3,000 to the second.
Second says – Sure – we will take the $3,000. And turn in our claim to the PMI and probably get 60-80% of our loss paid back by that PMI (insurance remember)
Ok – just using round numbers to keep it simple.
Let’s say the PMI claim, negotiates that $60,000 claim to your second lien holder – down to $40,000?
Guess what that next call you get is?
Hey, great news, we have short sale approval - but the “investor” (or PMI) wants participation from the Seller – usually in the amount of 50-cents on the dollar – or $20,000 in this case. They may offer it up in an “interest free” loan (my favorite response to that one is – isn’t that how we got here in the first place – you loaned on something you never should have?) , or they may ask for it in cash at closing, or……… They have all kinds of creative ways – bottom line is they want the seller to suffer in the loss, right alongside of themselves.
Here is where you get lucky, you took the time to read this article and now you are ready to negotiate, yes, now it’s time to earn your commission.
Personally - I have negotiated that amount down to ZERO before, but let’s be a little more realistic, in most cases you should jump for joy at 10-20 cents on the dollar, and if you know what you’re doing, you get the buyer to pay for it. YES – get the buyer to pay for it.
First and Foremost – don’t ever commit any type of fraud, if the buyer is paying the sellers “participation” it needs to show up on the HUD as a “Buyer” paid contribution – don’t ever risk your license, your reputation, and in extreme cases, your freedom – if it shows up any other way – its FRAUD, plain and simple, don’t let it happen.
Next Question I get – Well, how can I do that, the first lien holder says if there’s more money coming to the table – WE want it.
If you have kids, you already know the answer – keep asking, keep asking, and keep asking, ask it this way, ask it that way, package it different every time. With my Kid- usually about the 19th time I finally give in and say – OK, OK, OK – you can have it!
The problem with most of us is - we grow up, and learn to accept NO as an option, but when you were a kid, and you really, really, really wanted it – you NEVER accepted NO as the FINAL answer – so why do you do it now? Another way to look at it - The old shell game, just keep moving the shells around until you have the right combination.
I am going to make a pretty bold statement here, but I have NEVER lost a short sale to the “investor wanting participation”, it’s all in figuring out how to structure that “participation”.
This article went way beyond the length I had initially intended, so I am going to cut if off here, maybe I can write more on the “art of negotiating” the PMI in another blog.
Aloha and Mahalo – and just remember – EVERYTHING is negotiable!
Killer sunset in Hawaii last night - thought I should share! (shot with my iPhone 4S)
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