We are starting to receive requests from lenders who ask for a seller contribution before a short sale can be approved. This trend is different from the days where a lender would be able to just review the seller’s financial documents to verify that they do not have funds available to contribute.
Is it ever a good idea for the seller to make a contribution?
In one of our short sales, Litton Loans, the junior lienholder proposed that the seller contribute to a promissory note of 5% of the principal balance, which amounted to $7,000. This would be a promissory note for 5 years, monthly payments with no interest. (about $117 per month).
The benefit to the seller would be that the loan would be marked fully satisfied on their credit report. In addition, a new “trade line” would be created for the promissory note, showing up as an on time loan. As discussions went on with the sellers, the amount requested was reduced to $3,000 and the term to 10 years ($25 per month).
This is one example where it was a good idea for a seller who is interested in rebuilding of their credit. In most cases, junior lienholders have the right to a deficiency judgment on the seller’s credit report, even if they have accepted a short sale. This proposal is one of true collaboration, where both sides received something of value. The bank retained the ability to collect up to $3000 in future payments, and the seller received the best treatment of their credit score.
What is your role as an agent, if the seller makes this request?
As a real estate agent, your role is to facilitate the sale of their home, and in this case through a short sale. Keep in mind that a short sale has tax and legal consequences. Given that you are not a CPA or an attorney, your role is to make sure that your seller consults with a tax advisor and a real estate attorney before you take the listing. If in the process of negotiating with the bank, and you receive a request for a seller contribution (in cash or a promissory note), have your client review the proposal with their attorney.
The bank will want to place a call into the seller, in order to negotiate. If your client feels the slightest bit uncomfortable with speaking to their lender, set up a conference call with the bank, the seller, and their attorney. We had a situation where an attorney participated in a conference call, and got a $10,000 seller contribution request waived by illustrating all of the components of the seller’s hardship, which contained employment, medical, and financial reasons.
Article Resource: http://whbsolutions.com/blog/
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