Is there any differene between a promissory note executed by a borrower at the time of a short sale versus the original promissory executed at the time of the purchase?
I ask this because many short sale clients will file bankruptcy if the lender chooses to obtain a judgement for the deficiency. I feel that if the lender, typically 2nd position lienholder, intends to pursue the deficiency, then why not execute a prom note for a lesser amount and obtain full satisfaction on the original loan. Then default on the new prom note after the sale is completed.
The prom note for a short sale is unsecured, typically non interest bearing.
That's basically why the ratio for full settlement is 2:1 or 3:1, prom to cash.
Generally, the borrower can extinguish the debt by filing BK, unless there is some affidavit signed whereby the creditor can dispute.
Also, some notes have a clause where if default, then the full deficiency is owed.
For my clients, the note is because they do not want to file BK, but do not have the cash needed to settle.
Paul - The default rate on post-short sale promissory notes is why many lenders seek cash instead.
Do you know what the percentage for default is on promissoy notes? Flagstar is asking my sellers to sign promissory note for the full $67,000 HELOC 2nd.(purchase money HELOC which is non-recourse in Arizona) Recent case law supports this.
I want to use percentage for prom defaults to move them to accept $6000 or $7000 cash at close. Negotiator has remained silent when it comes to moving off the full promissory note. Want to take it to higher up's now but want statistics to reach numbers guy higher up. It is their loan...no investor.
Thanks ahead of time to all you Short Sale Superstars!
Be careful. While we all know that agents negotiating short sales is allowed, negotiating promissory notes IS considered the practice of law, and opens you up to all kinds of liability. Always have an attorney involved, even if you do the heavy lifting.
To answer your question, prom notes are falling out of favor because no one pays them. I have even had attorneys advise clients to go ahead and sign, then renegotiate the note later because then, the lender has no leverage. They cannot hold the sale hostage. Most prom notes are a condition of a HELOC or MI. Since they know the notes are worthless, and they will most likely be sold for pennies on the dollar to a collection agency, offer a fraction of their value in cash. If a prom note of $25,000 is demanded, I know I can settle it with $1,500-$2,500 in cash.
Where to get the cash? This is something that should be thought out ahead of time. If you see a HELOC, you should assume that they will want more than the first will give them. What I do is look for a buyer who is willing to bring extra cash to close to settle this deficiency. It's easy if you offer an incentive. What I do is once I find the buyers highest and best, I allow them to lower their offer a little bit more than I think we will need, thus giving the buyer incentive.
If set up properly, this is very successful. Short sales are a strategy. Set up your deal structure to anticipate these scenarios ahead of time, not react to them when they happen.
Thank you for your comments, Joseph. I approach all my short sales with HELOC 2nd's that way as well. Betting they will want more money,I have buyer and even seller ready to contribute if necessary.Problem is Fannie Mae will not allow contribution by buyer, seller, or agents to go on the HUD-1. Have pushed but they will still not allow more than $6,000 to Flagstar HELOC. At first would only go 6%, or, about $4020. 1st suggested seller could make contribution to Flagstar Heloc and not have to put on HUD. Timing would be hard on that...don't want sellers paying down principal and then still have Flagstar refuse approval for the additional $6000. But, thank you again for input!
Really? I have never had an issue. I put it in the 400 section on buyer side as "Buyer contribution to.." This is not added to the Second lien line in 500 section. This is where having a good Title company helps. Freddie's approvals sometimes specifically say that buyer may not contribute. Then, having the buyer deposit money into a title or attorney escrow can be done. Let the attorney/title company handle that one t stay RESPA compliant.
NationStar/ Fannie has been adamant on this one about buyer not contributing to 2nd lien. I did put buyer contributions on the first HUD's and negotiator kept having me remove saying Fannie would not allow more than 6% of balance due. I am sure buyer credits were put in second lien 500 section....May be too late to try to add now even if on buyer side in 200' section as negotiator may be looking for it now...
Buyer side on our HUD's are 100's-300's. 400's are on seller side of Hud.
Thank you...will b sure to put on buyer side in the future...
you are correct, It's hard to remember what number lines are what...Did you originally try to put total to second on Line 505? You cannot do that. Only the allowed by first can go on line 505. The contribution stays on buyer side.
I just checked and on 1st HUD I had buyer credit on buyer side but then title put offsetting figure on seller side as credit. Buyer contribution Flagstar 2n 2,000.00 Ln.110(on buyer side). Buyer contribution Flagstar 2n 2,000.Ln.411 on seller side.
So, showed on buyer and seller side. Because of the credit/debit required to balance...You don't show the offsetting credit and debit?