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Two Loans on a Sacramento Short Sale
One of the reasons I write a daily blog is to educate and share my real estate knowledge with other people, and I hope it’s entertaining along the way. My secret to being so successful at blogging is that I write about what I know; I don’t write about what I don’t know. I might not know how to keep a souffle from falling or a yogurt from curdling so I don’t write about cooking, but I do know how to negotiate and close a Sacramento short sale.
As such, I recognize those who do not. It’s like a secret club in Sacramento. Nobody wants to admit that they don’t really know much about short sales, but most agents rarely deal with a short sale. I wish they would just tell me they need help, and I’d gladly help them, but some of them don’t want anybody to know. It’s like a badge of shame or something, which is ridiculous. While I can understand that reluctance, they’re not doing anybody any favors.
For example, an agent who doesn’t know much about short sales might tell their buyer that the buyer should not write an offer on a short sale with two loans. The agent might erroneously believe that it won’t close or the odds are it will be more difficult, which isn’t necessarily true. Two loans on a short sale provide less excitement than, say, a Bank of America FHA short sale or certain lender’s HAFA short sales or even a Fannie Mae short sale. Sometimes the two loans are held by the same institution, in which case even if the second loan was hard money that loan is probably exempt from recourse in California, so the lenders are more likely to cooperate.
I just closed a short sale recently that had a loan for almost $500,000 and that bank accepted a $6,000 pay off from the first lender. Don’t let the fact that there are two loans on a short sale frighten you away. Of course, there is one exception that could cause difficulty, although I haven’t yet encountered it, but I see it out there on the horizon. That is when the first lender refuses to issue an approval until the second lender issues its approval, and the second lender refuses to issue its approval until the first lender issues its approval. Yeah, it’s a Catch 22, and I did not much care for the book, either. One bank eventually caves in.
The reason a first lender might not want to issue an approval letter is because of the new law that went into effect on January 1 of this year which says after an approval letter is issued, the lender must stop foreclosure: The Homeowner Bill of Rights. It’s the only way to stop dual tracking. But I have ways to work around it, so if you’re looking for an experienced Sacramento short sale agent, make sure you call an agent like me who has closed hundreds of short sales. Don’t draw the short straw when it comes to your very own short sale agent.
A guy told me yesterday he had been talking with his property management company about doing a short sale. The property management company admitted that it does not sell real estate, it only manages rentals, but offered to do the short sale for him. What? How insane is that? It’s bad enough to give your listing to an agent who doesn’t sell real estate, but give it to an agent who doesn’t do short sales? Why don’t you just cut off your head now and leave it rolling in the street?
Two Loans on a Short Sale for Luxury Homes
Having to deal with two loans on a short sale is always a bit tricky. I’ve yet to encounter a dual loan short sale slam dunk, and I’ve closed hundreds of short sales over the years. Over the last 12 months alone, not counting my regular equity sales, this Sacramento short sale agent has closed 138 short sales. Not one involved an easy second loan to negotiate. They are all a pain in the butt. But I do them because they come with the territory. I’m not about to decline a listing just because it involves a little bit of extra work. After all, I sell short sales. By the very nature of the transaction, a short sale is a lot of extra work over a regular sale.
I can share with you one such solution to the two loans on a short sale problem involving a luxury home sale. Upper-end short sale homes are handled differently than entry-level short sales. I just closed a short sale home in Roseville with a $1,000,000 first mortgage and a $300,000 second mortgage. Both were held by the same lender. This is important only to the extent that two loans on a short sale, held by the same lender, does not necessarily mean the investors for each loan are the same. The investors can be different. Plus, the junior loan can be managed through another department in a different state.
The second loan was hard money. Lenders aren’t always flexible with a demand for a hard-money second. That’s because these loans carry recourse in California. A lender could just wait for foreclosure, get wiped out and then pursue the seller for the deficiency. This is why it’s important to consider a short sale for hard-money loans because the rules governing short sales are different. When a short sale is approved, under California state law, the lender must forgive the deficiency and waive the right to pursue the seller.
In this particular instance, since both lenders were the same, the second lender might not have had a legal right to pursue the seller in the event of foreclosure because there’s a little known law that excepts those instances. You can’t have your cake and eat it, too. But that’s neither here nor there, and I am not here to give legal advice. If you want legal advice, you must ask a lawyer.
In this luxury home short sale in Roseville, the second lender wanted a lot more money than the amount the first lender would approve. Most first lenders will authorize payment from proceeds somewhere from 6% of the unpaid principal balance up to $8,500 maximum. There are a few exceptions, and I’ve seen banks authorize a payment of 10%, but in this instance, the second lender demanded a big chunk of change. Peanuts as compared to the deficiency balance, but it amounted to a lot of money. The seller can’t pay it. California Civil Code 580e prevents a seller contribution. But the buyer can pay it providing, and this is the tricky part that you can’t overlook, the first lender approves. We negotiated the payment and reduced it but it was still almost $20,000. Since the first lender was the same lender as the second, the first lender approved the payment.
This was a good deal for the buyer because the buyer really wanted the house and was picking up the home for about 50 cents on each dollar of debt. We suspected a buyer contribution was a distinct possibility when we chose the buyer for this short sale. We asked the buyer: If push came to shove would the buyer step forward? Because you never know exactly what a short sale bank will do. When you think you know, that’s when you get into trouble. But this buyer agreed to discuss if the issue came up. It did, they paid it and we closed.
