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Short Selling Second Mortgages
Written by D.C. Fowler -
www.ShortSaleDeals
The
following is excerpted from proprietary material created by D.C.
Fowler.
Copyright © 2003-2008, not to be reprinted or reproduced
without the consent of Short Sale
Deals and LeGrier Associates, LLC.
Many of the properties that you come across will have two mortgages
with two separate banks. If you are just getting started, I strongly
recommend that you target properties with single mortgages.
Negotiating one mortgage is always easier because a second mortgage
means that you are now responsible for negotiating two short sales
instead of one. However, if finding homeowners who only have a
single mortgage is not a realistic option, you must be prepared to
successfully discount two properties.
Here’s how to negotiate a short sale on a second mortgage
The first thing you will need to know is that in the event of a
foreclosure, the bank who holds the 1st mortgage is
considered the primary lien holder and will always receive
the proceeds from the sale. If there is a second or third mortgage
on the property these banks are considered secondary lien holders
and will not receive anything from the sale.
With that being said, your negotiating power is much greater when
attempting a short sale on a second mortgage. If the secondary lien
holder is made aware of an upcoming foreclosure and you make it
clear to them that the primary lien holder has already accepted a
short sale the ball is now in their court to decide whether they are
willing to accept a discounted payoff to salvage something from the
mortgage instead of possibly receiving nothing. The reason I say
“possibly receiving nothing” is because it is also possible that
once the secondary lien holder realizes that the primary lien holder
has accepted a short sale they may attempt to go behind your back
and negotiate their own deal with the primary and cut you out of the
transaction. To help avoid any unethical business practices do not
reveal who the other mortgage company is, just provide the necessary
proof that a short sale has been accepted by the primary lien holder
and begin your negotiating from that point.
The second thing you need to do is compile a list of all of the
reasons why the lender may consider your discounted offer. You will
want to particularly make a note of any repairs, decrease in
property value, other foreclosures in the area, crime and vandalism,
and slow or no market activity. At this time you can also prepare a
hardship letter for the homeowner to help justify the short sale.
Next make copies of the homeowners W-2, tax returns, bank
statements, and pay stubs. There is a chance that the lender will
not ask for these documents since they are the secondary lien
holder. However, they may ask for a copy of your acceptance letter
that you received from the 1st lien holder along with a
sales agreement and net sheet. If you have an acceptance letter from
the 1st lien holder you can fax it to the 2nd
lien holder as proof but be sure to white out the name of the
lender, the discount amount, and any other information throughout
the document that may disclose who the 1st mortgage
holder is and how much was accepted. Although the 2nd
lien holder will request and often demand to know the exact payoff,
do your best to keep this information confidential. Let the lien
holder know that you respect the homeowner and the 1st
lien holder and it would be unethical to disclose personal
information. The lender often will understand and appreciate your
business ethics and not push the issue. Other times they will be
very firm on their requests and it will be your job to be creative
enough to give them what they want and still not put yourself in a
compromising position by sharing the wrong information.
If you have not received your acceptance letter from the 1st
lien holder, prepare an alternate letter stating that you have
verbally received acceptance of the short sale along with the
estimated date that the deal will be closed. Sometimes a letter like
this will be sufficient but if it doesn’t you may be forced to come
up with an actual acceptance letter.
Even if you have an acceptance letter it is still a good idea to
send a personalized offer letter along with you proposal.
Lastly, you will
now need to prepare your sales contract and net sheet. You will
write up the contract the same way you did for the first mortgage
the only difference is that the total percentage of your discount
will be significantly higher. With the first mortgage you will want
to discount the mortgage 30-50%. However, with the second mortgage
you will only want to offer a small percentage of what is owed. For
example, if the second mortgage has a total balance of $35,000 you
will only want to offer $1,000. As a rule I start my offer around 3%
of the total balance and work my way up from there if necessary. A
large percentage of my deals with second mortgages are accepted on
the first offer. If the bank rejects my offer I counter by
increasing my original offer by 1-2%.
Example: $40,000 (second mortgage balance) X 3% = $1,200
initial offer
$40,000 (second mortgage balance)
X 5% = $2,000 counteroffer offer
It is possible that both the 1st and 2nd
mortgage can have similar balances. If this is the case the same
strategy will apply. The only difference will be the amount that
each lien holder receives from the short sale.
At first it may be hard to grasp the concept that the 2nd
lien holder would accept such a small amount to release their
mortgage. The reason they are typically open to making a deal is
because being in a secondary lien holder position is always risky.
Since a foreclosure basically assures that they will get nothing,
the lender is usually motivated to try and salvage something out of
their investment and will strongly consider accepting a short sale.
(What you just read was taken directly from Module 10 of the Making
Money with Short Sales Advanced Training Course)
To your success,
D.C. Fowler
Short Sale Specialist
www.shortsaledeals.com
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