New Jersey Real Estate Attorney

Martin Pankiewicz, Esq. focuses his practice primarily in residential real estate closings, including the purchasing of a home, selling a home and/or refinancing a home, the acquisition of multi family residential projects, condominiums as well as negotiating a short sale transaction. He provides updated weekly real estate articles specifically tailored to New Jersey real estate closings.

Martin Pankiewicz Law Offices in NJ NJ real estate attorney, Linden, NJ

Short Selling Second Mortgages (02/04/2009)

Many of the properties that you come across will have two mortgages with two separate banks. If you are just getting started, I strongly recommend that you target properties with single mortgages. Negotiating one mortgage is always easier because a second mortgage means that you are now responsible for negotiating two short sales instead of one. However, if finding homeowners who only have a single mortgage is not a realistic option, you must be prepared to successfully discount two properties.

The first thing you will need to know is that in the event of a foreclosure, the bank who holds the 1st mortgage is considered the primary lien holder and will always receive the proceeds from the sale. If there is a second or third mortgage on the property these banks are considered secondary lien holders and will not receive anything from the sale.

With that being said, your negotiating power is much greater when attempting a short sale on a second mortgage. If the secondary lien holder is made aware of an upcoming foreclosure and you make it clear to them that the primary lien holder has already accepted a short sale the ball is now in their court to decide whether they are willing to accept a discounted payoff to salvage something from the mortgage instead of possibly receiving nothing. The reason I say “possibly receiving nothing” is because it is also possible that once the secondary lien holder realizes that the primary lien holder has accepted a short sale they may attempt to go behind your back and negotiate their own deal with the primary and cut you out of the transaction. To help avoid any unethical business practices do not reveal who the other mortgage company is, just provide the necessary proof that a short sale has been accepted by the primary lien holder and begin your negotiating from that point.

The second thing you need to do is compile a list of all of the reasons why the lender may consider your discounted offer. You will want to particularly make a note of any repairs, decrease in property value, other foreclosures in the area, crime and vandalism, and slow or no market activity. At this time you can also prepare a hardship letter for the homeowner to help justify the short sale.

Next make copies of the homeowners W-2, tax returns, bank statements, and pay stubs. There is a chance that the lender will not ask for these documents since they are the secondary lien holder. However, they may ask for a copy of your acceptance letter that you received from the 1st lien holder along with a sales agreement and net sheet. If you have an acceptance letter from the 1st lien holder you can fax it to the 2nd lien holder as proof but be sure to white out the name of the lender, the discount amount, and any other information throughout the document that may disclose who the 1st mortgage holder is and how much was accepted. Although the 2nd lien holder will request and often demand to know the exact payoff, do your best to keep this information confidential. Let the lien holder know that you respect the homeowner and the 1st lien holder and it would be unethical to disclose personal information. The lender often will understand and appreciate your business ethics and not push the issue. Other times they will be very firm on their requests and it will be your job to be creative enough to give them what they want and still not put yourself in a compromising position by sharing the wrong information.

If you have not received your acceptance letter from the 1st lien holder, prepare an alternate letter stating that you have verbally received acceptance of the short sale along with the estimated date that the deal will be closed. Sometimes a letter like this will be sufficient but if it doesn’t you may be forced to come up with an actual acceptance letter.

Even if you have an acceptance letter it is still a good idea to send a personalized offer letter along with you proposal.

Lastly, you will now need to prepare your sales contract and net sheet. You will write up the contract the same way you did for the first mortgage the only difference is that the total percentage of your discount will be significantly higher. With the first mortgage you will want to discount the mortgage 30-50%. However, with the second mortgage you will only want to offer a small percentage of what is owed. For example, if the second mortgage has a total balance of $35,000 you will only want to offer $1,000. As a rule I start my offer around 3% of the total balance and work my way up from there if necessary. A large percentage of my deals with second mortgages are accepted on the first offer. If the bank rejects my offer I counter by increasing my original offer by 1-2%.

$40,000 (second mortgage balance) X 3% = $1,200 initial offer
$40,000 (second mortgage balance) X 5% = $2,000 counteroffer offer

It is possible that both the 1st and 2nd mortgage can have similar balances. If this is the case the same strategy will apply. The only difference will be the amount that each lien holder receives from the short sale.

At first it may be hard to grasp the concept that the 2nd lien holder would accept such a small amount to release their mortgage. The reason they are typically open to making a deal is because being in a secondary lien holder position is always risky. Since a foreclosure basically assures that they will get nothing, the lender is usually motivated to try and salvage something out of their investment and will strongly consider accepting a short sale.

Source: D.C. Fowler

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