Your agent should analyze any short sale listing that you consider offering on. Part of that analysis should be whether there is a second lien holder. There are many short sales that fail; however when you analyze why they fail, often the reason is because a second lien holder is making unreasonable, and sometimes inappropriate demands. Given the rapid decrease in property values, second lien holders are often faced with receiving nothing if a home goes to foreclosure. However, in order for a short sale to happen, they must agree and at a minimum release their lien (and for the seller’s sake hopefully offer a release of liability under the note). The first mortgage holder will typically offer the second lien holder between $1,000 – $10,000 to cooperate with the short sale. However, $1,000 is not a lot when there is a $200,000 second mortgage.
So, second mortgage holders often behave as if they have nothing to lose in a short sale situation. Even though (if their note was purchase money) they will collect nothing if the foreclosure is completed. They are willing to take that risk. And often, second lien holders will try to extract more money out of the buyer and seller at any cost. Sometimes, they will try to extract cash side payments that are not reported on the HUD statement. This is an illegal practice and a violation fo RESPA. Monies paid in connection with the sale must be reported on the HUD statement when the buyer is using a loan to make the purchase. (There is some controversy about whether this is permissible on a cash sale where a HUD is not a mandatory form — however, since the 1st mortgage holder can require a HUD to approve the short sale I think you still have the same problem with a cash transaction). Despite it’s illegality, second lien holders engage in the practice routinely. And, they can literally hold a successful short sale hostage to their demands.
You can find part 2 of this blog post here.
*Based on the information from the Central Coast Regional MLS. Neither the Association, the Multiple Listing Service, or Mint Properties guarantees or is in any way responsible for its accuracy. Data maintained by the Association or its MLS may not reflect all real estate activity in the market. This blog does not offer legal or tax advice; buyers and sellers should consult with their own attorney and tax advisor in a short sale situation.