Not all short sales are completely "free". While closing costs are generally covered by the lender, sometimes and lately more often, the lender will in fact ask the seller to contribute to the short sale in the form of cash or a promissory note in order to approve the short sale.
You may in fact agree to just pay the cash or sign up for the note to move things along, but there are a few ways that are often successful in minimizing or eliminating the request altogether:
- Just say no - but write a letter to the investor, describing your hardship and inability to pay the note or cash. You would be surprised how often this simply strategy will completely eliminate the request altogether. This is usually my first recommended line of defense against a cash or note request.
- Counter the request with a lesser amount. ALMOST EVERYTHING IS NEGOTIABLE. For example, if asked for $10,000 offer $500 and see what happens. More often than not, the lender will accept, or at least come down. Be prepared for another counter.
- Counter the request with an alternate payment method. If cash is tight, you may offer a note instead cash, but be prepared that notes are less favorable to investors than cash and therefore you will likely end up paying more this way. Cash is king. You may significantly reduce the face value of the contribution by offering a lesser cash amount if asked for a note.
There are also several things you want to avoid doing during your short sale in order to minimize these requests. I always cover these with my clients, based on their individual circumstances.
Once in a blue moon, a lender will not budge at all on a contribution. In these cases it is best to consider your settlement options. All in all, requests for contributions are generally pennies on the dollar versus the amount of the whole debt and are sometimes your best option going forward, especially in a deficiency state like CT.
Last Updated on October 24, 2018 by Minna Reid
Bill: As always, great article. As someone who exclusively negotiates short sales, I agree that the trend in short sale negotiation is shifting towards lenders demanding a cash contribution or promissory note at closing. On a positive note, however, most lenders have negotiated blanket settlements with a majority of the Mortgage Insurance (MI) companies so we no longer have to obtain independent third party approval. In consideration, however, lenders are asking qualified homeowners to share in the loss. As you correctly pointed out, qualified homeowners are defined as those who have funds in the bank or are yet to miss a mortgage payment. In the case of Bank of America, they now have a policy in all recourse states, such as Massachusetts, requiring a cash contribution in consideration of waiving the deficiency. I have been successful in getting this requirement waived, but this is one more thing we negotiators need to fight for. A good short sale negotiator should be able to provide the homeowner with an estimate of what their lender(s) are going to demand as payoff amounts, including contributions, at the beginning of the short sale transaction. This way, you don t have any surprises 60-90 days into the short sale approval process. I enjoy short sales because the industry is changing everyday. Just when you think you understand the process, the lenders change their policies and procedures. The cash contribution is certainly one of the emerging trends, especially in recourse states.
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