As a follow-up to my last post on difficult short sales (here), it occurs to me that I should mention the small, but persistent complaint of some seller-clients, who are under the mistaken belief that their Realtor® can and will handle the entire transaction for them. “Two liens? No problem! We’ll negotiate everything!” But in fact, if the property is encumbered by two liens with two separate lenders or servicers, it can be a big problem – and if it comes down to a seller/borrower paying a “contribution,” this is something the Realtor® cannot negotiate; it’s up to the seller/borrower to decide if they can afford a contribution, or if they are willing to go on the hook by signing a promissory note.
If the short sale transaction has gotten all the way to closing, and the seller/borrower is having their first discussion with their agent about this, something is wrong. At the first hint that a seller/borrower contribution may be demanded, the real estate agent should immediately discuss with their client what the options are – and they can be somewhat limited.
How is a short sale agent to know, in advance if there may be a problem? Answer: Do the numbers. Will there be enough money from the net sale proceeds to pay off the first lienholder? If not, this means that the first lender has complete control over how much it will contribute to the second. And the first lender will not permit the borrower/seller contribute anything to the second. In most cases, the first lienholder will allocate not more than $3,000 or $6,000 to the second, usually depending upon the net proceeds from the short sale.
The next question is “How much is owed to the second? If it is $100,000 or more, $3,000 or $6,000 may not be sufficient to satisfy the second lender. This means there could be a deadlock, unless the buyer is willing to bridge the gap by paying the shortfall to the second if the first lender will allow it. Will the Realtor® contribute? Remember, these payments must be disclosed on the HUD-1 settlement statement, and it is far better to address a “bridging the gap” solution on an Addendum to the Sale Agreement early on in the transaction. Unfortunately, some real estate agents focus on the obtaining the first lender’s consent before ever contacting the second.
Short sellers are fearful enough. They don’t like surprises. So for those real estate agents offering their services as “short sale experts,” they must first do the numbers, try to foresee the problems in advance, discuss them early on with the client – and never, never, never promise more than you can deliver!