In a short sale how do you deal with a second mortgage?

There are people that state that you should send out two different offers. One to the first and one to the second mortgage holder. Others believe you should send out the full price offer to the first and then let them decide how much they want to contribute to the second. The problem with this second way of doign this is that sometimes the second mortgage holder wants far more then what the second wants to offer.  What do you think?
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February 02 2011 - Brickell
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Answers (7)

If it is with the same bank as the first mortgage that can get resolved much more easily.  The problem is when you have two different banks that has the first and second. They each want their maximum and can be a longer process.
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April 15 2011
I do it in various ways.  Especially if there are 2 different banks.  I send the first an initial HUD with the package where they are paying the full amount owed to the second.

Then I send the package to the 2nd with a HUD saying they will only get $3,000 (which is what BoA loves to give the 2nd always).

You will find that the 2nd and the 1st will most of the time end up meeting half way.  That shortens the gap and allows you to easier negotiate.  

Its sad that we have to be creative.  But the 1st is the primary and at the end of the day they will have the final say - but the 2nd doesnt have to agree.
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February 03 2011

Here is nnother option for those who don't have the cash to buy out their second mortgage. You may suggest a deal to your second mortgage holder wherein, you would ask them to release the second mortgage in order to allow the short sale to go through and in return, you will sign a note for a percentage of that loan. Such a note is a personal loan, an unsecured loan, and would be dischargeable in bankruptcy. But if you can manage the payments, a good outcome is assured rather than tarnishing your credit report.

These options are worth considering if you want to do a short sale and avoid foreclosure with two mortgages to deal.

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February 03 2011
You can initially throw out two verbal (electronic, if they use an e-system such as Equator) offers/suggestions to fish to see what the first and second will take/offer, but definitely do NOT give out two different Estimated Settlement Statements (HUD1's). That could be considered fraudulent. You may have to negotiate between the two lenders (hence, you are a short sale negotiator). If neither the first nor the second lien holder will budge, the money will have to come from a third party (NOT usually allowed to be the seller per the first's rules - since they want that money given to them, not the second lien-holder). Third party could be you, the buyer's agent, or the buyer. In a recent short sale I closed, the buyer came in with $38K to satisfy the second lien, that was not considered part of the sales price on the HUD1.
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February 03 2011

I say first talk to the second lien holder first and get a feel for what amount they would need to release the lien. Every transaction is different . Best of luck

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February 03 2011
I agree with Ronald,  two separate offers sounds like fraud.  One of my associates handled it swiftly by having the Seller negotiate before closing with the 2nd mortgage so they were released early.  At closing the first was the only one left.
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February 03 2011
As a legal and ethical concern you should always disclose everything to every stake-holder...

They are both going to request the HUD1 closing statement.... I do not see how an escrow company would be giving you two different HUD1 closing statements for the same transaction... can you say f.r.a.u.d?



That said, sometimes a buyer would be willing to pay the 2nd mortgage extra money out of their own pocket and maybe outside of an escrow... but that is an entirely different story than the one you posted...


best of luck, and when in doubt, don't do it...



Ron Escobar, MBA
Broker
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February 02 2011
 
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