Negotiating Junior Liens With A Short Sale
Great Blog by Broker Bryant! Having these types of constructive conversations up front with sellers will help to manage expectations and minimize the fireworks that often times occur when the unexpected happens.
Discuss options with your seller in the event that junior liens AREN'T purchase money loans. Non-purchase money lienholders will negotiate, but sellers need to be aware that these can hold up a short sale in closing. If terms can be arranged and agreed to with these lienholders to the point that the sale closes, then a seller can continue to negotiate after the sale when the lienholder returns wanting more paid toward the unpaid balance.
Same goes for Homeowners Associations. Relay to sellers that they need to continue to pay association dues, regardless of whether they are making mortgage payments. If homeowners association dues aren't paid, the sale won't close.
Junior liens can be tricky. Some will only want to release the lien. Depending on your State's laws this may be an issue the Seller will have to deal with in the future. With a "Release of Lien" the debt now becomes an unsecured debt. Just like a credit card.
Most junior liens will release a lien for $3,000 and allow the transaction to close. Then they want to make arrangements for the borrower to pay later.
At some point after closing:
- They may contact the Borrower and try to make payment arrangements.
- OR they may sell the note to a collection company.
- OR they could go back in front of a judge and get a deficiency judgment. (State laws vary)
The "Deficiency Judgment" is probably the least likely scenario unless the borrower has high income and assets for them to garnish. It cost the investor money to get a judgment and the likelihood of them throwing more money at a non performing asset are probably small. But they can. Some of my sellers have taken this risk and just closed on the deal. Mainly because at a minimum they wanted to get rid of the 1st loan's debt.
I am not aware of any of my past sellers that had a judgment filed against them. Some were able to negotiate deals after the fact. For example I had one guy with a Bank of America 2nd for about $45,000. They contacted him after closing and settled for $2,500. Some have agreed to sign a smaller promissory note and some have never been contacted.
Whatever they chose to do the 2nd debt was still not settled at time of closing and became an unknown. Not a good position to be in if you have choices. It's always best to settle now if at all possible. And usually it is.
The key is to find out what they want now to release the lien AND forgive the debt. You need to know what that figure is. Once you know the figure you can figure out how to get them what they want.For example: Lets say the 2nd lien insist on $10,000 to settle the debt and the 1st has already offered them $3,000. The additional $7,000 could be a combination of:
- Getting the 1st to increase this amount.
- Having the Buyer and/or Seller pay something towards the 2nd.
- Paying part of it on an unsecured note with zero interest.
I guess my point is that there are solutions. But first we have to fully identify the problem. This is where negotiating comes in and it's something that we need to know how to do.Our job is to negotiate the best possible deal we can for our Sellers and then let them decide if it's doable. Now go help some folks avoid foreclosure!!
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