I am a buyer in a short sale and the sellers are in a pickle where the 1st will not fully satisfy what the 2nd requires for payoff. I really want the house, but am not sure it is customary or wise to pay more out of pocket than the seller is contributing to the 2nd.
Has anyone ever been in this situation and if so, how was it handled?
Thanks so much for your help!
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Wow, you have all been very helpful! Thank you so much!
I also wonder if the buyer's contribution to the seller's loan payoff can be written off on the buyer's taxes...It's just a thought! I'll take anything I can get! :)
It can be done regardless if the 1st approves or not. Before anyone goes crying fraud, keep in mind that the lenders see this as "debt settlement" transaction where it is a real estate transaction. As long as we are truthful to buyer and seller on the HUD and/or in the transaction AND the lenders get what they want based on their numbers, there can be no case of fraud. One example is the buyer's side HUD. Neither the seller nor the seller's lender is privy to the buyer side HUD, however the foreclosing lender demands both sides of the HUD. This info is according to my real estate attorney, seek your own legal advice for your own particular solutions!
Now the real question is if your lender will allow it. I find that some brokers say it is against their lender guidelines as any contributions made to lien holders must be in the purchase price, but they are mistaken. Just have escrow/title/agent educate them or find another lender or broker.
To address the other parts of the question:
"customary" - This is really not the issue. Smart short sale agents use this tactic to close transactions. It would be customary if agents knew what they were doing.
"Wise" - This is an important question. If the price of the home and the contribution to the second lien fall within your guidelines of value, then go for it. However, if you feel that you can do better with another home, then don't do it.
I'm in middle of one now where the 1st will only allow a maximum of 10% contribution toward the 2nd. They will contribute 5%, the other 5% can come from buyer or seller contribution. The 2nd lien won't approve the short sale for any less than 20%. They keep saying they don't care where the 20% comes from, but must be paid at closing (won't allow a note). Back to the 1st, won't allow the short sale if the second gets more than 10%. The 2nd knows they won't get anything, and there's no deficiency judgment if F/C, but still won't accept 10%.
If a buyer wants the home (and it is needed to get the deal done) then many do pay a contribution to get the home, IF the 1st lien holder allows the contribution. Each individual investor has different rules regarding that and it will be up to them if it is allowed or not. Place what you want to do in an addendum to the contract, note it is not a sales price increase...it is a out of pocket cash contribution to the 2nd from buyer to seller's 2nd lien holder, also make sure your lender allows it if obtaining a loan, update the HUD w/ the cash contribution to the 2nd lien holder from the BUYER and submit to 1st and 2nd for review/approval.
Hi Tonia, I am in the same situation here and it appears that your answer best addresses my case. My broker is asking my agent for some sort of documentation breaking down the contributions, basically who is contributing what. The seller agent is saying that it is impossible to add onto the short sale approval doc from the first and second. So, where or what type of document can this be to provide to my lender? Can you specify how this can be done? you mention an addendum to the contract? Do you mean an addendum to the purchase contract? Both huds were already updated and approved. But my lender says the HuD is not good enough because it is presented during closing.
There is no document other than the HUD. The HUD can and should be presented BEFORE closing. tell the buyer's underwriter to get their head out of their...just give them the HUD and tell them to deal with it. This is completely ridiculous.
I was in the same situation with BofA and I know it is sometimes not allowed by the first for you to pay off the second as they expect all money to go to them. But we went ahead and did it but made sure it was reflected on the HUD closing statement and not hidden under the table- see John Bacon's answer below "I just made it clear to all parties how much the 2nd wanted and we got an offer in that stated under "additional provisions" that "x" number of dollars from the offer was to go to the 2nd and it was approved and closed." We were approved and the sale went through. If your only option is to sneak it under the radar I would not do that, as one never wants to live with that uneasy feeling or have it come back and bite you. Good luck
This is accepted and a part of doing business with respect to short sales.
It happens but it's really up to the 1st if they will allow it. I had a listing where I knew the 2nd would not release without a certain amount and knew the lender in 1st probably wasn't contributing that much so I just made it clear to all parties how much the 2nd wanted and we got an offer in that stated under "additional provisions" that "x" number of dollars from the offer was to go to the 2nd and it was approved and closed.
Just place the contribution on your side of the HUD as an expense to you. It should be written as:
Buyer cash contribution to _____on behalf of the seller.
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