And maybe not

Casey Serin - Flickr
Casey Serin - Flickr

I posted the short sale article from CNBC, then logged into a webinar on short sales and voila! I learned something.

Sellers and their agents need to be wary about deficiency judgments.  I didn’t know this:  lenders have up to 6 years to recover their losses on a property, which is why the situation with the 2nd lien holders seems to be cropping up.  Disclaimer – WA is a “one remedy state,” which means either a judgement or foreclosure is all the lien holder is allowed to recoup.  Check with an attorney for other states’ statutes.

If a lien holder forecloses on a property, they have received their deficiency judgement — either as a judgement or a foreclosure.  If that property had a 2nd (or 3rd….) lien holder, they received at the foreclosure NADA.  No judgement, no foreclosure.  That lien holder still has 6 years in which to recoup their losses.  Your homeowner may be bowled over when the bank holding a HELOC on his foreclosed home comes after him/her for the loan they thought they had left behind.

If in the process of negotiating the short sale the 1st lien holder wants to pass the 2nd nothing, it is quite conceivable the 2nd will ask for money.  It is in the best interest of the seller to figure out how to do that.  Personal opinion — the agent never took out the loan and so should stick to their guns about monies to either lien holder to keep the homeowner out of a judgment situation.

Before you begin a short sale process with a client, you should pre-qualify them.

  1. What is the nature of the homeowner’s hardship? 
  2. Are they committed to doing a short sale/will they give you all the documentation you need to put a short sale package together?  Do they truly understand their home will pass from them and are they OK with that?
  3. Will they cooperate with you?  Will they not only be timely in their responses, but also keep the house maintained and the curb appeal intact?
  4. Do they have the ability to contribute?  If a 2nd lien holder wants money to procure the short sale agreement, how much does the homeowner have at their disposal? 

A lot of frustration is avoided if the answer to any of these questions, particularly the last 3, indicates the homeowner is still in denial or just wants to walk away without being bothered.  These people would be better suited with a bankruptcy in order to obtain a judicial release on all liens, rather than a surprise letter in a few months.

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