Some short sale lenders are demanding unsecured promissory notes as a seller contribution to the short sale. Over the past few months, I've witnessed an uptick in this type of activity, specifically from such lenders as Countrywide and Bank of America. I've also received a lot of email from readers about the increase in this practice.
Three of my Sacramento short sales are in this position at the moment. Lenders are examining sellers' credit and cash flow very closely and, if the seller has good credit coupled with disposable income, the lenders are refusing to let the seller skate.
Fortunately, in California, most of the foreclosures are conducted through a trustee's sale, which means first loans that are purchase money are exempt from a deficiency judgment in a trustee's sale. Sellers who refuse to negotiate the unsecured promissory note may elect to go through foreclosure instead and deal with the fall-out and consequences as long as they won't have to pay the lender back. But this might not be the best choice in all situations.
In 3 of my recent short sales, the promissory notes are typically about $10,000 or less on a $150,000 or so debt forgiveness. They are interest free, payable at such rates as $85 a month for 10 years. If paid on time, we negotiate that they are not to be reported to the credit bureaus. For some sellers, that's a small price to pay to do the short sale, especially if the sellers are current on their payments. Being current may qualify a seller to immediately purchase another home under Fannie Mae guidelines.
Moreover, realize that the banks may sell those unsecured promissory notes to a third party after escrow closes. This third party will pay a discount and not "cash value" for the note. If the note is sold, sellers might want to contact the third party to negotiate a further discounted payoff in cash. I'm hearing that some of these notes are sold for 10 to 50 cents on the dollar. That would mean an investor might pay $1,000 to $5,000 for that $10,000 note and may be willing to take a few grand above that for payment in cash.
Something to consider if you're thinking about doing a short sale. If you're a short sale listing agent, prepare your client for this possibility.
The Short Sale Savior, by Elizabeth Weintraub, coming soon to a bookstore near you.
Photo: Elizabeth Weintraub
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