Short Sale Question - Second deed of Trust

I need some advice on how to handle this situation. I have a client who was referred to me. He has a house that he has fallen behind in his payments on. He has moved out and is now renting an apartment.

The property in question is a townhouse. It has 199k left on the 1st mortgage. The mortgage is an ARM that is currently at 9% and about to reset again. The owner is coming up on 4 months behind and the account is about to go to loss mitigation. The delinquencies have already been reported to collections, so a refi is out. It's not practical for me to set up any kind of seller financing because of the ARM.

The house might be worth 230k on a good day.

Now, the other problem is the previous owners have a 50k Second deed of trust against the property. The owner has already fallen behind on their payments to them, and the note is about to balloon. They are about to try to pre-empt the bank by initiating foreclosure before the bank does.

This would be my first short sale if I was to go that route.

Anyone have any suggestions on how I can help this guy out and make some money? The only thing I can think of is some kind of short sale, but I'm open to to other ideas.

Thanks,
Josh

Edited: 06/26/2010 at 04:37AM

Mitch Freed

Property Manager · Portland, Oregon

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Jan 31 '08, 07:11 AM

Josh,

It looks like a short sale negotiation may be your best option. I would recommend presenting a solid case to the previous homeowners and definitely threaten bankruptcy. Is the house on the market? If not, short sale negotiations are tougher. Lenders like to see a solid attempt to sell the home and when it doesn't sell and sits on the market for a long time...negotations become easier.

What about any renovations that need to be done to get the home to saleable quality...you can always get bids from contractors, inspectors etc..your goal is to make the home look like a bad deal for anybody, especially for the previous homeowners who will lose money in the long run if they foreclose on the home (or at least you want them to think so)

If they ask you why you want the home so bad...just tell them that it fits your criteria...size, bed/bad etc...

Hope that helps.

Edited: 06/26/2010 at 04:37AM

Elise Jimenez

Real Estate Investor · Chicago, IL

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Feb 10 '08, 10:27 PM

Josh,

The best bet with the second lien holder is to neg. a short Sale. Even though the second lien holder is going pre-empt the bank by initiating foreclosure before the bank does, doesn't mean that they will get priority when it goes to Foreclosure. They are still considered the second lien holder regardless who filed the foreclosure process first. So it is in there benefit to negotiate a short sale with you. If it does go to foreclosure the second lien holder gets wiped out.

Edited: 06/26/2010 at 04:41AM

Jonathan Katz

Real Estate Consultant · Calabasas, California

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Feb 13 '08, 01:21 PM

Originally posted by "reach4it"

If it does go to foreclosure the second lien holder gets wiped out.

That is definitely correct. BUT, with that said the junior lien is able to protect itself by (1) advancing funds to bring the senior loan payments current, then foreclosing for the sums advanced; (2) bidding at the foreclosure sale so the price will be sufficient to pay off the senor and the junior liens; or (3) acquire the property by bidding at the foreclosure. All the proceeds from the sale first go to the Sr. Lien, then Jr. Liens in order of recording or subordination and so on and if it makes it, which does not happen often, to the debtor.

The second will progressively fall further upside down as additional payments, fees, etc. continue to build and take away from it's profitable equity position.

Edited: 06/26/2010 at 04:42AM