Saturday, May 21, 2011

Negotiate Now or Later!

If a homeowner, who is underwater and considering his or her options, has a home encumbered by two loans, exploring a short sale is likely the best option.

To over simplify, I am talking about the homeowner who borrowed money to purchase their house and, then, when times were good, took out a second loan - an equity line. And, unfortunately, whether they used that equity line to improve the house, pay down debt or, like me, buy other property, that homeowner has a problem. The problem the homeowner has is, while the first loan may have protections under Arizona's Anti-Deficiency laws (meaning the bank cannot pursue the homeowner if the homeowner defaults and does not pay the debt owed), the second, the line of credit, does not come with those same protections.

Well, the benefit of attempting a short sale in this situation is that the homeowner will have an opportunity, during the short sale, to negotiate the debt on the second. To explain, the short sale is a traditional sale in one sense - someone will offer to buy that property. The question is whether the lenders will accept that offer, given that it will be less than owed on the property. Well, in a classic two loan short sale, the offer will come in, usually less than what is owed on the first loan. The first lender, in turn, will, if the offer is within reason and fair value, agree to accept that offer to release its rights in the property. But, that does not end it. What about the second?

For the second to cooperate, the first lender will usually offer the second a portion of the purchase offer (usually between $2,000 and $5,000). Typically, the second will accept the $2,000 to $5,000 from the first and agree this amount is sufficient to release its lien rights in the property. Whew, glad that is over! It is not.

Even if the second agrees to waive its lien rights in the property, the homeowner still needs to be released from the debt (the promissory note rights). Every loan has two crucial pieces of paper. The first is a Deed of Trust - the lien agains the property that gives the lender the right to force a sale of the property if there is a default on the loan. The second is a promissory note - the note we all signed telling our lender we would pay them back for the loan.

That is where the short sale negotiation process comes in. During the offer, acceptance, review period, the short sale negotiator will work with the second loan and attempt to have that lender accept the contribution from the first for a complete release of debt and/or if that is not acceptable, negotiate acceptable terms (e.g., the seller/borrower contributes some additional monies - but less than full amount owed - and/or agrees to some other terms). Regardless, the goal of the short sale is to negotiate with the second to resolve any and all debt obligations, ideally for less than is owed.

On the other hand, if the borrower/seller does not go through this process and just allows the house to proceed to foreclosure/trustee sale, that will eliminate any debt obligations to the first lender. It will not, however, extinguish the debt owed to the second. And, now, instead of negotiating with that secnd lender in the context of a short sale, with a contribution from the first lender, the borrower will be negotiating with the second lender after being sued on the promissory note and in Court. That will require lawyers, become more adversarial and create further headaches.

So, when I say negotiate now or later, I mean one can negotiate in the friendly confines of a short sale, or in the unfriendly confines of a lawsuit, but, a negotiation will happen with those seconds!

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