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.