Short Sales: What if there are multiple mortgages?

Great question!  Many agents often ask about the necessary steps required for a Short Sale when a second lien is involved.  If there is a second, there is always a first.  Therefore, what do you do with the first if there is a second?  The general rule-of-thumb is to leave the first alone and attempt to do a Short Sale with only the second.  Why?  Because, in most cases, what is owed to the first lien holder is usually less than the market value of the property and, if this is the case, the first has no reason to accept a Short Sale.  The problem that we have seen over and over is when agents attempt a Short Sale with the first lien holder without even making contact with the second lien holder.  The first lien holder, in some cases, doesn't even know there is a second lien and will, unknowingly agree to the Short Sale.  Consequently, the agent finds themselves in a precarious situation when they then have to have the Escrow Officer call the second to notify them that they will be getting paid nothing from the sale.  The second lien holder usually becomes very unhappy and will likely refuse any kind of compromised sale.  The moral of the story is, if you know there is a second lien holder, don't waste your time trying to Short Sale the first if they are in a good equity position.  If they are, they will not accept a Short Sale.  Instead, they will almost always tell you to go short the second.  Complete your hardship package and submit it with an offer to the second lien holder.  While you are negotiating the Short Sale with the second, you will want to inform the first that you are doing so and ensure that they stall any foreclosure proceedings until you get the Short Sale approved by the second.  The first will almost always agree to this because it enables them to avoid the cost and hassle of the foreclosure process, as long as they know that they are going to get paid in full if you successfully short the second. 

Next, let's discuss how you arrive at the MLS list price when there is a second involved?  Since the second lien holder is in a junior position, they are typically  more flexible as to what they will accept in a Short Sale and more willing to take a significant discount.  If the first were to ever foreclose, they would probably give the second lien holder little to nothing since they are in a junior position. In calculating your MLS list price, we recommend using a discount threshold of 30-50% for the second.  The threshold will be a function of what is owed on the second, not the fair market value.  Again, it is important for you to position the property on the market with a list price that is aggressive enough to generate an offer quickly, yet high enough to ensure that the offer will be acceptable to the second lien holder.  The bottom-line is that, in most cases, whether the home goes to foreclosure or the property is sold via a Short Sale, the second lien holder is going to take a hit either way.  Your goal is to procure an offer on the property as quickly as possible!  Remember, time is of the essence! 

Short Sale Solutions: An Instruction Guide for Real Estate Agents

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