This week I spoke with several people that wanted to do a short sale of investment property that is upside down in value. They are sick and tired of the short fall on rental income (if they are lucky to have a renter that actually pays rent) vs the mortgage payment, taxes, insurance and maintenance costs.
The "short sale" phenomenon is giving some upside down investors the belief that they can get out of the mortgage by getting the property sold for less than the mortgage indebtedness and the bank will share in that loss.
I have spoken in the past about the theory of shared appreciation mortgages but I have yet to see anyone bring that type of mortgage to my attention in the short sale process. A shared appreciation mortgage is where the bank shares in upside appreciation of the property in return for some other risk cost reduction on either the cost of the mortgage or even on the downside for downside protection of the borrower. Shared appreciation mortgages are always limited to mortgages on investment commercial property.
The main threshold for unburdening oneself from a burdensome mortgage is the ability of the borrower to weather the current depressed real estate market. The lender looks to the "ability to pay" more carefully than any other aspect of the short sale process. Borrowers that can honestly and fully document the inability to pay are the most likely candidates for a short sale. But the key here is to honestly and fully document the inability to pay the ongoing costs associated with the property.
Ability to pay is very complicated. Ability to pay is not just a decision not to pay. Ability to pay includes the ability to mortgage other owned properties, liquidate currently illiquid assets, shift application of income, and other financial issues. True ability not to pay is an involuntary situation - not a voluntary situation.
Ability to pay is also determined by the lender through the "hardship letter". This is the letter to the lender from the borrower setting forth in sufficient detail (and backed up by documentation) why there is an involuntary inability to pay the costs associated with the property.
Not paying the costs associated with the property is not just a situation where the mortgage payment cannot be made. It does not matter if you can pay the principal and interest but cannot pay the condominium fees, or the real estate taxes or the insurance or for replacement of the roof that leaks and makes the property inhabitable. Look at the borrower's responsibilities in the mortgage document and you will see failure to pay or do all of these things are material grounds for default of the mortgage and its foreclosure.
So now that we have taken this long road to the title of this discussion, what is the answer? What is having too much money (or assets) to do a short sale? Unfortunately there is no real answer. When there is no real answer I like to look to "Economic Logic". I like to think that economic logic is used by the mortgage lenders in making loss mitigation decisions and for the most part, as you get higher up the ladder of decision making with the lenders, economic logic becomes more important and eventually becomes the driving force in decision making.
Economic logic can apply to an illiquid borrower with plenty of assets - all illiquid, and thus no current ability to properly service the mortgage and no ability to pay the shortfall if there were to be a sale under the amount of the mortgage. In such situation the lender should analyze the other borrower properties and position itself with junior liens on so much of that other property that has equity, thus allowing the instant property to be sold and the mortgage released. This is just good business -- but getting to the level at the bank where Economic Logic can be applied is a real problem in and of itself.
Economic logic does not apply to a borrower with liquid assets. That borrower will not get any short sale relief from the lender and trying is a waste of time. Such borrowers should not abandon hope. Modification of a mortgage is a viable option to the lender and borrower and should always be explored.
Economic logic should always be looked at by borrowers seeking relief from bad financial decisions - but being logical when it is your own money can be difficult. Seeking the advice of an experienced attorney or financial advisor is strongly suggested.
Richard Zaretsky, Esq., RICHARD P. ZARETSKY P.A. ATTORNEYS AT LAW, 1655 PALM BEACH LAKES BLVD, SUITE 900, WEST PALM BEACH, FLORIDA 33401, PHONE 561 689 6660 RPZ99@FLORIDA-COUNSEL.COM - FLORIDA BAR BOARD CERTIFIED IN REAL ESTATE LAW - We assist Brokers and Sellers with Short Sales