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Will You Be Able to Negotiate a Short Sale?

In some areas, short sales are increasingly hard to get approved while in others they are on the increase (or so I’m told). So even if the short sale option looks good to you, there’s no certainty that you can make it work.

The Crowds

As you might guess, a lot of people are trying to negotiate short sales about now. Many lenders apparently haven’t greatly increased their personnel or streamlined their decision-making processes to keep up with the greatly increased volume of homeowners seeking short sales. And even if they have, short sale negotiations often occur in a rushed setting because many homeowners start thinking about short sales only when they are about to lose their house to foreclosure. And you’ve got to have a bona fide offer from a buyer before you can find out whether or not the lender will go along with it. In a market where sales are hard to come by, this can get frustrating because you won’t know in advance what the lender is willing to settle for.

The Terms

Short sales are also difficult to come by if there are investors in the picture who might not approve of getting less return on their investment than they were counting on.

A short sale will benefit you only if the lenders are willing to accept the amount a buyer is willing to pay and let you off the hook for the rest. For example, if you owe $300,000 and you can sell your house for just $200,000, you are unlikely to be successful in negotiating a short sale. There’s a chance, though—the lender might decide that even a 33% loss on the short sale is better than what could happen in a foreclosure, where houses can sit vacant for months and rapidly depreciate in value before being bought by a new owner.

Clearly, the closer the offer is to the principal balance of the loan, the quicker the lender will sign off on the sale. It would be nice if there were a hard and fast line for how much a lender will forgo. In fact, as foreclosures increase, real estate agents and nonprofit housing counselors will have a pretty good idea of the kind of deals lenders are accepting in your area.

You’ll want to work with a real estate professional anyway when you’re trying to get your house sold at a price that will be acceptable to all the mortgage lenders. A real estate agent’s negotiating help can be critical, because the lender may agree with the proposed offer, or it may make a counteroffer. This may go back and forth until everyone is satisfied or the deal falls through.

EXAMPLE: Toby and Tyler face foreclosure on their first mortgage and decide that a short sale is their best option. They contact a real estate agent, who tells them that they should list their house for at least 75% of their mortgage debt—or $225,000—for the sale to be acceptable to the lender. The 75% figure is based on the agent’s knowledge of the going rate for lender acceptance of short sales.

 

As the foreclosure sale date grows nearer, and the house goes unsold at the 75% figure, Toby and Tyler finally get an offer that would pay 60% of their mortgage; they accept, contingent on approval by the lender. The agent takes the offer to the lender and quickly receives a rejection. The buyer raises his offer to 70%, and the lender agrees.

Convincing Multiple Lienholders

Multiple lenders (or anyone else who has a legal claim, or lien, on your property) can fatally complicate short sales. If you have only one mortgage, you have only one lender to convince. If you have two or more mortgages (or other types of home loans or liens on your property), you must convince all of the lienholders. So the more lienholders there are in your picture, the harder it will be to obtain a short sale.

This is especially true if the property’s value has substantially decreased, and a sale will probably produce little or no money for a second or third mortgage holder (typically, the holder of a tax lien, home equity loan, or line of credit). If these other lenders won’t be getting anything out of the short sale, they won’t have any incentive to release their liens (legal claims on the property) so that a new buyer can have clear title. And more important to you, they won’t absolve you from liability for what you owe them—which defeats a central purpose of the short sale.

EXAMPLE 1: Carlos has a first mortgage on his property of $240,000, a second mortgage of $30,000, and $15,000 out on a home equity line of credit. He can sell the house for only $230,000. All of that money would typically go toward the first mortgage. The second mortgage and line of credit lenders wouldn’t get anything. They would rather let the foreclosure go through and sue Carlos for the deficiency than accept a small percentage of what they are owed and agree to not sue him for the balance. Without their agreement, he won’t be able to sell the house with clear title, because the property would still be subject to the liens of the other mortgage holders.

EXAMPLE 2: Johnny owes $225,000 on his first mortgage, $50,000 on his second mortgage, and $25,000 on a home equity loan. He falls behind on his mortgage payments and decides to put the house up for sale. Johnny receives an offer of $260,000. This amount will more than please the first mortgage owner, because its $225,000 loan will be paid off in full. The second mortgage owner won’t be so happy because it will get only $35,000 of the $50,000 it’s owed. But considering the fact that it wouldn’t get anything if the house went into foreclosure (“junior” liens are wiped out in foreclosures brought by senior lienholders), it agrees to the sale.

 

Unfortunately, when the home equity lender hears that it won’t get anything, it nixes the sale. And without all lienholders agreeing to the sale, it can’t happen. So Johnny goes back and asks the second mortgage holder to take $25,000 (half of what it’s owed) and offers $10,000 to the home equity lender. The second mortgage holder is even unhappier now, since its share is being reduced, but it still wants the sale to go through, so it agrees. Finally, Johnny manages to negotiate a deal where everyone gets something but not as much as they would like.