Lotus Realty Group
Reservation of right to recover from seller after the short sale
In a large number of transactions, the lender may not require cash or a note from the seller; but the payoff demand letter “Term Sheet” may:
a) State that the lender will release the deed of trust on the property to allow the close of escrow, but the lender reserves its rights under state law to pursue the borrower for the amount lost by the lender on the short sale; or,
b) The lender can be silent on the issue as to whether the seller will be released from liability.
In these situations, the lender is willing to cancel the deed of trust on the property, but is not willing to cancel any rights the lender may still have on the note itself.
It is clear that if the note is a recourse note, the lender would have a right to attempt to recover from the borrower/seller after the short sale for the amount lost.
As far as non -recourse is concerned, unfortunately California law is not clear on this subject. It is not in the sellers best interest to assume, because there loan is a non-recourse loan, there is no liability to the lender at the close of escrow.
The lender's Term Sheet could change the characterization of the loan and give the lender the right to collect after the close of escrow. The lender will argue that by agreeing to the short sale and releasing the Deed of Trust there was a loan modification. which created a recourse loan instead of a non-recourse loan.
WHAT TO LOOK FOR
1. Make sure you review the Term sheet (Approval Letter) thoroughly.
2. Check to see if the lender is requiring cash to close or a note from the seller. Discuss the situation with your seller and see if they are willing to proceed.
3. Check to see if the Term Sheet clearly states that the seller will have no further obligation, or liability on the NOTE, or whether the lender is reserving it's rights to pursue the seller after the close of escrow for their loss.
4. IN EVERY SHORT SALE, you MUST advise your seller to take the "Term Sheet" to an attorney for review or advice. The seller’s attorney can try to negotiate this term out of the term sheet or possibly negotiate a settlement and full release for the seller. If neither is possible, the attorney can give proper legal advice as to seller’s options and risks before proceeding.
"Protect you and protect your client. "
If you have not already, please RSVP to our short sale seminar ( see attached flyer). Our key note speaker will be Real Estate attorney "David Bright".
LOTUS REALTY GROUP
PROFESSIONAL SHORT SALE NEGOTIATORS
Sunday, March 14, 2010
SHORT SALES-PAYMENTS OUTSIDE OF ECROW
LOTUS REALTY GROUP
Payments Outside of Escrow
Most short sales have a first and a second lien on the property. Both of these lien holders will need to participate in a short sale. Following is a typical scenario of a short sale with two lien holders:
The first lien holder normally allows a short payoff that allows closing costs and a 5% (in some cases 6%) commission to be paid to the agents. The holder of the second lien will usually demand 10% of the unpaid balance (this can be negotiated lower in some instances).
In some cases the offer from the buyer is not high enough to cover all of the demands from the first and the second lien holders and something has to give. In addition, in some cases the holder of the first will approve the payoff with the caveat that the second lien holder receives a maximum of $3,000 for their note. If the second lien holder has demanded $8,000 (10% of $80,000) then there is an impasse of $5,000.
In this scenario the first may also state that no funds from any source either directly or indirectly may be used to pay the second. The only exception to this is as noted in the approval letter, but essentially this eliminates the ability of the agents to “kick in” funds to close the sale.
If the bank negotiator for the second lien holder suggests that the buyer pay the difference outside of escrow and the buyer agrees to this, the buyer has essentially raised their offer by this amount and this should therefore be due to the first lien holder.
If you hear the words, “Outside of Escrow” then, as my respected and humorous real estate attorney David Bright would say, RUN!
This is not legal or ethical and there is a high probability that a law suit will ensue. The first lender is entitled to know the whole transaction and if they were to find out about the payment to the holder of the second outside of escrow, the first could demand that money and the escrow instructions have been violated. Liability can also fall on the realtors as we all have the duty of honesty and fair dealing to the lender. In addition, showing payment to the second on the HUD is not enough either. A conversation to the first is highly recommended and written approval from the first is mandatory to ensure you are protected.
Here are some helpful tips:
1. Lets make sure we are being honest with all parties and disclosing all information.
2. Don't allow yourself to be tempted to make payments outside escrow. It is not worth the alternative.
3. If a negotiator of a second lien tells you its okay and tells you how to make the payment, DON'T DO IT.
4. You just need to work harder to get the lenders to compromise. You have to fight sometimes. I just went through this with two banks and it was the hardest fight I ever had, but I did it.
5. All payments should be disclosed to both lenders. The first lender must approve everything in writing.
6. When you have a doubt, ASK !
Lotus Realty Group is pleased to announce we have moved into our new office. Please make note of our new address and we look forward to seeing you all at our grand opening. Be on the lookout for an invitation coming soon!!!
LOTUS REALTY GROUP
PROFESSIONAL SHORT SALE NEGOTIATORS
Payments Outside of Escrow
Most short sales have a first and a second lien on the property. Both of these lien holders will need to participate in a short sale. Following is a typical scenario of a short sale with two lien holders:
The first lien holder normally allows a short payoff that allows closing costs and a 5% (in some cases 6%) commission to be paid to the agents. The holder of the second lien will usually demand 10% of the unpaid balance (this can be negotiated lower in some instances).
In some cases the offer from the buyer is not high enough to cover all of the demands from the first and the second lien holders and something has to give. In addition, in some cases the holder of the first will approve the payoff with the caveat that the second lien holder receives a maximum of $3,000 for their note. If the second lien holder has demanded $8,000 (10% of $80,000) then there is an impasse of $5,000.
In this scenario the first may also state that no funds from any source either directly or indirectly may be used to pay the second. The only exception to this is as noted in the approval letter, but essentially this eliminates the ability of the agents to “kick in” funds to close the sale.
If the bank negotiator for the second lien holder suggests that the buyer pay the difference outside of escrow and the buyer agrees to this, the buyer has essentially raised their offer by this amount and this should therefore be due to the first lien holder.
If you hear the words, “Outside of Escrow” then, as my respected and humorous real estate attorney David Bright would say, RUN!
This is not legal or ethical and there is a high probability that a law suit will ensue. The first lender is entitled to know the whole transaction and if they were to find out about the payment to the holder of the second outside of escrow, the first could demand that money and the escrow instructions have been violated. Liability can also fall on the realtors as we all have the duty of honesty and fair dealing to the lender. In addition, showing payment to the second on the HUD is not enough either. A conversation to the first is highly recommended and written approval from the first is mandatory to ensure you are protected.
Here are some helpful tips:
1. Lets make sure we are being honest with all parties and disclosing all information.
2. Don't allow yourself to be tempted to make payments outside escrow. It is not worth the alternative.
3. If a negotiator of a second lien tells you its okay and tells you how to make the payment, DON'T DO IT.
4. You just need to work harder to get the lenders to compromise. You have to fight sometimes. I just went through this with two banks and it was the hardest fight I ever had, but I did it.
5. All payments should be disclosed to both lenders. The first lender must approve everything in writing.
6. When you have a doubt, ASK !
Lotus Realty Group is pleased to announce we have moved into our new office. Please make note of our new address and we look forward to seeing you all at our grand opening. Be on the lookout for an invitation coming soon!!!
LOTUS REALTY GROUP
PROFESSIONAL SHORT SALE NEGOTIATORS
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