In our hypothetical scenario, we have two properties. They are identical. They are sitting across the street from each other. Their respective buyers purchased their properties at the same time for the same price and they both financed their properties with an 80/20 first and second mortgage combination.
We will assume that as time passed both of these homeowners went into default and they found themselves in a negative equity position. The homeowner on the right hand side of the street chose to do a short sale with an investor and have the investor be the buyer. The homeowner on the left hand side of the street chose to do a short sale as well, but they preferred to look for a long-term end buyer.
Now these two homeowners have identical houses with the same pricing. They have the same mortgages (80/20 first and second) with the same two lenders. In both deals, the banks had BPOs (Brokers Price Opinion) completed and they come back with their response.
The bank of the first mortgage says that they will allow the second mortgage company to have only $3,000.00 towards their $30K second mortgage. The company for both second mortgages responds by saying that they will not take anything less than $10,000.00. The house on the left hand side of the street that has the ultimate end buyer who persisted through the short sale does not have the other $7k to make up the short fall.
Even if this buyer knew how to strike a deal with the second mortgage holder outside of the short sale closing, they do not have the resources to bring in the short fall and fund the deal. The house on the right hand side of the street with the investor-buyer has an advantage because the investor understands what to do and knows they can pay the other $7K out of closing. Either they have access to the cash or they can pay the other $7k on the buyer’s side of the HUD-1. In either case, it can satisfy both the first and the second mortgage requirements and they are able to get the short sale approved.
The investor goes ahead and re-sells the property making a $20K profit. Unfortunately, for the homeowner on the left hand side of the street, their buyer went away because they did not have the other $7,000.00 to satisfy the second mortgage. They were very frustrated.
They did not know what to do and they gave up the property. The next thing they know, the auction date is 30 days away, and the home ends up going to sale (auction sale) at the end of the 30 days. Realtors need to be aware of these possibilities and they need to be able to explain them to homeowners.