In a short sale, all lien holders – those with interest in the property – must agree to release their interest in the property for a negotiated amount. Positions ‘in front’ of them must approve that amount and give a certain amount of time to do so, so it’s a harmonious mix of greed, cooperation, and timing between them all. We’ve closed transactions with as many as four liens/encumbrances, but most short sales only require one or two to deal with. These are typically banks on the first, seconds, and thirds, but can also be HOA liens, mechanics liens (roof or pool repair company who wasn’t paid), child support liens, bankruptcy liens, and more. The group of liens on any home is structured as a hierarchy – first in senior position, and all following in junior positions according to structure, position, and date filed.
Side note: all lien holders can foreclose. When that happens though, senior liens are paid off first (including all late fees and attorney fees), then the next lien in line, then the next, etc. This is worth noting because in a short sale, the firsts are rarely made whole – so any threat of foreclosure from a junior lien is laughable. That would be incurring the legal costs of foreclosure, but not getting a dollar from it.
The senior liens – the firsts – are relatively cooperative in the short sale process. Though I would’ve never said that three years ago, they’ve really come around in their cooperation and timeliness in giving us approvals. The seconds though, well that’s another story…
When we see a deal with the same lender in the first and second position, we know that it is a deal that we can probably close. Though some banks handle them on in the same and others treat them completely separate, on average they tend to cooperate with one another and we get the answers and approvals that we need. On the other hand, a deal with two or three different lenders can get quite hairy. On average, the second lender will want 10% of what is owed to them from proceeds in the short sale (again, the first must approve this). If they do not get whatever it is that they want, they can make a Negotiator’s life quite difficult.
Why is this worth blogging about? These seconds have been a real pain, and continue to be. There are companies who are simply buying the non-performing debt for pennies on the dollar, then turn around and hustling these homeowners for payment, deficiency collection, cash contribution, and more. This is where RE Agents lose their commissions, and sellers are asked to contribute money to the 2nd at the last minute…because the seller is facing a hardship and most-likely cannot contribute. (though I’d really enjoy calling-out those company names here, I don’t want to give them an ounce of attention)
Why is this a problem? At a certain point and depending on how costly the seconds make the SS negotiation process, it may be advantageous for the seller to foreclose. For example I have two deals right now in states with anti-deficiency laws where we have approvals on the first, but the seconds are demanding to include a clause in their acceptance letters similar to “The remaining obligation due under the note shall remain fully due and payable.” In other words, closing this short sale is an agreement that the lender may come after you for the balance in the future. Though I certainly intend to get these clauses removed from the acceptance letters, the seconds would be blocking the short sale entirely if not.
Why would they do this you ask? It’s just a numbers game, and it’s their business model. They might lose 75% of their deals to foreclosure, but make 2x-10x what they have in it on the remaining 25%. If they work with ignorant Negotiators, Agents, and sellers without Attorneys (that don’t know how to protect a seller), it can be quite profitable for them. That, my friends, is what is crazy. On one hand the 2nd wants to squeeze every dollar out of the deal as they can. On the other, they will get nothing if the deal forecloses and it’s in their model to let that happen! It’s up to Negotiators like myself to get all parties involved to agree to the terms, and move forward with closing.
Lastly, the personality type of the Negotiators on these junior liens tends to be crass, impatient, and entitled. This group tends to say things that aren’t always true, so it’s important to know when to call them on it and use it to the deal’s advantage. As an effective Negotiator, it helps to know when then are just being manipulative like this, and to know what makes them tick. This includes how their compensation is structured, what their internal timelines are, how many deals are in their pipelines, and even how their monthly bonuses are paid.
So what’s being done about this ongoing problem in short sales?
State Governments are starting to catch on and passing bills that protect short sellers from deficiencies, but right now most are applicable only to first liens. We are hopeful that second liens are next, but only time will tell. In the meantime, junior collection efforts are still the Wild West, so make sure you have a gun-slinging Negotiator on your team!
– Jeff Grant, President, ShhortSale.com