When to short a second

I am working with a home owner who is being foreclosed on by CitiMortage for $50,000. The bank as asking for a payoff of $75,000 because of fees accumulated. There is a second with BofA (HELOC) for $100,000. Payments have not been made for two years. The MV, after repairs and liens to the village, is $165,000-$185,000, Is there a way to short the second and pay off the first? (Note the first has already filed for Lis Pendens). The owners do not want to stay in the house, but would like to avoid foreclosure.

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Permalink Reply by Jeff Payne on July 13, 2012 at 7:21am

Yes, we do it all of the time, there is only one short sale, the first. You need to know the exact payoff of the first, get them paid in full and negotiate with the second.. be sure that you have any added fees for the first.....

Permalink Reply by Marv Edelstein on July 14, 2012 at 4:39am

Thanks for your comments, Jeff. My understanding is that to get the second to accept a discounted payoff, the property has to be underwater enough that there is no equity for the second. In this case, payoff for first is $75k. Payoff for the second is $100k + fees. The MV is $165-$185k. The owners are in their 70s and not in good health. They want to move to assisted living and need some cash for hte move and setup. I believe the second might settle for $15-20%  of the payoff if they thought the owners will let the house go to Sale (Auction). In your experience, does this make sense?

Permalink Reply by Wendy Rulnick on July 14, 2012 at 5:09am

Marv - The senior lien (first) will always be paid first if there is enough equity. If I am reading your scenario correctly, Cit is owed $75,000.  A sale price of $165,000 will pay them in full. The junior lien (second), Bank of America, will be the only "short sale". The tricky part in these situations is to get a payoff from the first far enough in advance to anticipate the net proceeds to the second.  They normally will only give a payoff for 30-60 days. Your title agent should calculate enough cushion to give time for the short sale approval from Bank of America, say 120 days.  The reason this is critical is that Bank of America will base their approval on that HUD.  Make sense?

Permalink Reply by Marv Edelstein on July 14, 2012 at 6:22am

Wendy - Maybe I am missing something, What is to prevent the second from ordering a BPO and the BPO comps  $185,000 instead of $165,000, We have all had unexpected BPO valuations at one time or another. Then it is not a short sale. And the final HUD needs to be approved by both lenders. Is that not correct?

Permalink Reply by Wendy Rulnick on July 14, 2012 at 7:32am

Marv - The second will order a BPO.  If they come in higher than contract price, do the regular routine with counter-offering, etc.  Even if it ends up at $185,000 purchase price, your closing costs may push it into short sale. If it's that close, see if the seller (or buyer) can pay the small difference and avoid a short sale altogether, or get a concession from the HOA.  The first does not have to approve a HUD if it's not a short sale. They are just paid as in a traditional sale, by the title agent after obtaining a current payoff.

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