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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