With the recent economic trend, many of the two-year adjustable rate mortgages (or as they are colorfully referred to in the press, "exploding ARMs") have converted. As a result, many homeowners find themselves in the position that they can no longer afford their monthly mortgage payment.
If these borrowers get too far behind with their lender, a Notice of Default is recorded against their home. Some borrowers attempt to refinance or sell their property.
As a result, we are seeing an increase in the number of short sales. What is a short sale? That is when the property value is less than the debt against the property.
We typically see this when there are multiple loans against the property, for example:
1) Purchase Money Loan from Bank – Deed of Trust
2) Private Money 2nd Deed of Trust from Junior Lienholder or
Home Equity Line of Credit (HELOC) lien.
Many Realtors (TM) who recall the early 90’s remember that the short sale is a difficult sale to navigate. Much of the possibility of closing escrow depends on how many junior liens are against the property.
Often times, it is the junior lienholder who has recorded the Notice of Default and is conducting the Trustee’s Sale. The junior has usually discovered that the borrower is not keeping property taxes and insurance current, or has neglected to pay the senior. Accordingly, the junior lender will advance the funds to bring the loan current and conduct their own foreclosure sale.
The sums advanced accrue interest as well, as allowed by the terms of the Promissory Note and Deed of Trust.
In the Short Sale situation, it is the junior lienholder who is faced with receiving a short payoff. Accordingly, they will rarely agree to a short sale if they feel they could either 1) get more at the Trustee’s Sale or 2) take it back at Trustee’s sale, fix it up and re-sell for more.
How can one increase the odds of a short sale closing? Make sure the purchaser/offeror gets the escrow going, and circulate an executed copy of the purchase contract subject to lender approval. Have the escrow officer get the payoff figures ASAP so that the junior can see the estimated closing statement.