We all know that when a property is foreclosed upon that more often than not all Jr. Lien holders lose everything. This of course is why most of the time it is possible for us to negotiate the second lien holder’s payoff to $1,000. But what happens when they refuse to accept that much of a loss?
When a negotiator begins negotiating with the lien holders it is becoming increasingly more common for the primary lien holder to require that all Jr. lien holders accept no more than $1,000 as a short sale payoff for their liens. If they do not, then often the primary will not accept a discount on their own lien. This effectively kills your short sale deal with that property.
Unless there is a neutral ground where both primary and Jr. lien holders can agree on their payoff amounts there is little you can do to keep the deal alive. Once solution I have found that works is by making a deal with the primary that essentially cuts out all Jr. lien holders. This method requires documentation from the primary lien holder that indicates their acceptance of the agreement. This document is important because it allows you more control over the situation at the Sheriff sale.
When a lender forecloses the property is auctioned off on the court house steps or in the court house. For the purpose of this writing I will be referring to the Judicial Foreclosure process.
This agreement best works when you have already negotiated a payoff number with the primary lien holder. If you have not, you will need to do so.
Inform the primary lien holder that the Jr. lien holders will not accept a short pay within the acceptable amount in which the primary requires. Because of this a short sale is not possible and you will not be able to purchase the property unless the primary is willing to honor their short sale payoff amount upon the Jr. lien holders claims on the property being void. Other than accepting a payoff and willingly providing a release of the loan the only other way I know of is for the property to be sold at Sheriffs sale.
The agreement with the primary is to honor the negotiated payoff amount of ‘X’. At the auction the primary lender will have a representative present to bid on the property. This is generally someone who works for the lenders attorney filing the foreclosure. The lender will inform the attorney, which should inform their representative at the auction, of the situation. If they fail to do so, this is when you would present that individual with the letter from the lender.
You will be bidding on the property at the auction for the amount you agreed upon with the primary. The lenders bidding representative should not bid against you, or at least not past the specified amount, if you are sure to speak with them prior to bidding.
Upon successfully winning the bid at the auction, all Jr. liens are removed from the property’s deed and the primary get the amount they agreed upon through your negotiations.
The down side to this is that you must follow all auction rules. Also, it doesn’t help the homeowner out much. They still get the foreclosure on their record because it went through the foreclosure process and was bought at auction. Because of this, this method is only for those who are focused on obtaining an investment property, or owner occupied, and NOT for those who are focused on the homeowners best interest.