Short Sale where Seller has 1st and 2nd mortgage. Buyer's really low offer justification!

Asked by Andre Cilliers, Hilton Head Island, SC Tue Jan 20, 2009

My SC Seller Client has an investment property listed as Short Sale for $525k. Two mortages, 1st for $275k, 2nd for $325k. We received an offer for $275k with buying agent stating that offer is worth $600k because 1st would be paid off and 2nd would be discharged because offer was for no more than the 1st mortgage. Agent states that if offer was for even $1 more than $275k then Seller would face default judgement for 2nd of $325k. Has anyone heard about this type of situation? Is there any truth to this statement? Any advice will be greatly appreciated. Thank You. Andre' Cilliers. RE/MAX Island Realty, Hilton Head Island. SC

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Andre Cillie…, Agent, Hilton Head Island, SC
Mon Mar 1, 2010
Hi Everyone,

This is Andre'. Over a year ago I posed the original question about the tricky situation I was facing with a short sale and two loans, with the second larger than the 1st. Well, we will be closing before the end of this month, March 2010! The story is long and convoluted but the net result is that the property was put under contract in January 2009 for $425,000. The Buyers have hung in all this time, while the Seller's attorney , Jannine Mutterer and Catherine Olivetti at The Catherine Olivetti Law Firm LLC, worked with both lenders to make it work. They have been incredible. The 1st lender will be paid off and the 2nd is accepting the balance, without a default judgement against the seller.
Thank you to the agents who answered my original post.
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Tisha Chafer, , Hilton Head Island, SC
Tue Jan 27, 2009
I asked my contact at Access Loss Mitigation your question, and this was his reply:

" I have not heard of an instance such as that, and it is also quite rare that the balance of the 2nd is greater than the 1st. I will say that the 2nd will want money, regardless of if it is 275 or not and that at a 10% return thats roughly a 32k payoff to the 2nd. It will be quite a difficult deal to get done as the higher the balance on the second, the more reluctant they are to take a loss.

Hope that helps!

Ben Kurland
Access Loss Mitigation

Toll Free: 1-877-256-5450 x514
Fax: 1-800-875-1865
0 votes
Fran Horton, , Oklahoma City, OK
Wed Jan 21, 2009
I just had a seminar on this very thing. If the offer was accepted the 2nd mortgage is just that it has second priority. However, there is so much more to a short sale. My advice is to call your favorite mortgage pro and get the answer that would best pertain to your seller's situation. Is is a FHA or VA or Conventional mortgage. How far into the default is it. And on and on. So, Call your Mortgage pro and tell him the details. That is your very best answer to this uninformed Selling Agent
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John Stewart, Agent, Seattle, WA
Wed Jan 21, 2009
The only thing I can be certain of is that every underwriter is going to have a different answer to being asked to discharge a loan. If the second isn’t discharged your seller may be responsible for making payments on that loan for the next 30 years. Your selling agent may have had an experience in the past that may have no bearing on your current situation.
The underwriter that I'm dealing with required a preliminary HUD with the short sales submittal. The HUD made it very clear what price would discharge the 1st and how the closing costs impacted that payout. They also required that the 2nd net at least a $3,000 fee in order for them to consider the offer.
We are going to have a RE attorney deal with the lender negotiation. A tax attorney can clarify the benefits of a short sale or foreclosure. There are a number of attorneys making this coombination a profit center for their businesses.
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Heidi Everett, Agent, Oklahoma City, OK
Wed Jan 21, 2009
WELL I got you an answer. The statement is not true. You can not close without agreement with both companys as to the terms you can not just pretend the second does not exist. Your other associate is mistaken. By the way a 275 offer would not pay off the first there are closing costs involved. The seller could face default judgement even if the offer were were for full price these companies do not have to accept any terms offered they can take back the house if the payments are behind. If the seller is current on the mortgage you might not get short sale acceptance because they have to prove hardship (a feet not so easily done).
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Dan Mengedoht, Agent, Charleston, SC
Wed Jan 21, 2009
Andre, I am no expert is this area of finance, but I did discuss it with some lender colleagues. The opinion here is that once the 1st is paid off, the 2nd then becomes the 1st. If the scenario above were true, there would be countless people trying to absolve themselves of loan responsibility by arranging artificially low offers from 'strangers'.

Best Regards, Dan Mengedoht, Carolina One Real Estate.
0 votes
Maureen Hous…, Agent,
Wed Jan 21, 2009
Andre good question when you find out let me know sparks my interest also!
thanks Maureen
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Heidi Everett, Agent, Oklahoma City, OK
Wed Jan 21, 2009
Your question sounds like a scheme scare tactic to me but it did peek my interest I have a short sale round table today thought I would pose the question and see if anyone has ever heard of this. It is so seldom that the second is bigger than the first that it makes sense there would be different guidlines but that is so far outside the paramiters of short sale it just does not sound right. Guess I will let you know!!! Thanks for a truly great question !
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