The short sale has always been a tricky transaction. It’s a challenge to obtain the required paperwork from the seller. It’s a challenge to find a qualified buyer who is willing to stick around until the short sale gets approved. It’s a challenge to prepare the paperwork and to get the deal accepted by the mortgage lender(s). The challenge becomes even greater when there is more than one lien holder (more than one mortgage lender) for the property being sold in the short sale transaction.
Traditionally, the first lien holder (the lender who holds the first mortgage) offers the junior lien holder(s) a small amount of money in order to release their lien. The first lien holder makes this offer because all of the liens on the property must be reconveyed at closing in order for the sale to occur. Junior lien holders may accept what is offered by the first lien holder.
You might wonder why a junior lien holder would accept, say $3000, when the loan balance is $100,000. The reason is quite simple: if the property is foreclosed upon by the first lien holder, the second lien may not get any money at all.
When I started working short sales, junior lien holders would take anything offered to them by the first lien holder: $500, $1000 . . . anything at all.
Increasingly junior lien holders have some strategies up their sleeves. If they want more money than is allotted by the first lien holder, they may ask for a cash contribution. Be careful to check with the first lien holder as to whether a cash contribution would be allowed. If it’s not permitted, you might find even more strategies up that lien holder’s sleeve.
Photo: flickr creative commons by minhimalismJunior Lien Holders and Short Sales by Melissa Zavala