Short Sale Question - Need Help!
I have an agreement from the sellers of a house to short sell their property to me. I've contacted the 1st mortgage holder, but they tell me that they won't even discuss a short sale unless the 2nd mortgage holder gets nothing. Why would the 2nd mortgage holder even consider this? Is there a way to do a short sale with a 2nd mortgage holder involved?
When short selling, you have to meet the lender's requirements for them to consider the short sale. If they want the 2nd to get nothing, then you have to abide by their rules for them to all you to short sale the property. If the property goes to the auction, then the 2nd mortgage will be wiped out if the bid isn't high enough to cover both the 1st and 2nd. Depending on the amount owed and the FMV of the property, the 1st leinholder may request that the 2nd get nothing.
For example, if the home is worth $100K, the 1st is $75K, the 2nd is $20K, repairs = $0, then why not short sale the 2nd to say $5K and leave the 1st in place. Then you bought a home for $80K and it doesn't need any repairs, so you can quickly turn around and sell it for $100K. But, if the home is worth $100K, the 1st lein is $85K, 2nd lein is $10K, then the 1st may not want the 2nd to get anything before they allow you a short sale. The 1st leinholder may wonder, why give the 2nd $5K, then they can collect the $5K instead and the 2nd gets nothing. I hope this makes sense.
Tanya
What would happen if I bought the 2nd mortgage at a steep discount and then approached the first about doing a short sale? The loan is FHA insured so I believe that they would accept no less than 82% of the balance due.
Would this scenario work?
It could work as long as you show FHA that the 2nd noteholder is getting no money from the deal. But, then you should weigh your options concerning the profit potential of this deal.
For example:
FMV (Fair Market Value) = $100K
1st lein = $80K
2nd lein = $15K
Repairs = $5K
You buy the 2nd leinholders note for $5K. Convince FHA that the home is worth $93K, so that 82% of the "as-is" value is $76,260. Then your net profits will be:
Sell for: $100,000
1st lein: $ 76,260
2nd lein: $ 5,000
Repairs: $ 5,000
------------------------------
Total profits: $ 13,740
Is it worth it to you to do this deal? Only you can decide if this is worth your time to pursue. What do you do if it takes a little longer to sell than you thought? Your holding costs while you repairs and to sell it can cut into your profits. So you have to weigh your options on whether to go for it or not. To you it may look like a great deal, but to another investor they may want more out of a deal and leave it alone. So once you do all your calculations and everything looks good to you, then go for it. It doesn't hurt to try...
Tanya