Negotiating Two Mortgages in a Short Sale

How To Deal With Two Mortgages in Short Sales

By Deb McMillan © 2008

Often houses in pre-foreclosure have not one but two mortgages to deal with. So what is the proper procedure for negotiating a short sale with two mortgages?

On homes under around $130,000, the first mortgage is typically higher than the second mortgage, and usually about the total value of the home. So the best place to start is with the first mortgage. The second often won’t negotiate until they see that the first mortgagor has taken a discount first.

Prepare all the reasons why the bank should take a discount: repairs, pictures, crime in the area, long days on market when it is time to resell, commercial or industrial buildings in the area, environmental problems, leaking septic, etc. and any other reason why the bank won’t get the amount of money loaned back at the sheriff sale or when it gets listed and sold by a realtor.

Once it looks like the first mortgagor is going to accept a discount, start negotiating with the second mortgagor. If the first is taking much of a loss on the mortgage, the second mortgagor won’t get anything from the sale and they know that.

When the amount owed on the second mortgage is anywhere from $10,000 to $30,000, start by offering $500 or $1000 as a full payoff. Then negotiate from there. A 10% final payoff on the second mortgage is a great place to end up. Remember to provide as much data as possible regarding repairs that need to be done on the house to prove that it is worth less than the amount owed.

On a higher end home, keep in mind that the first mortgager is likely to receive close to 90%-100% of the money owed them. So focus on the deep discount with the second mortgage to help cover the costs of the first. ALWAYS ask for a discount on the first. The worse they can tell you is no.

On occasion, the first and second mortgages could equal approximately the same amount. Simply follow the strategy explained above. But know that the first mortgagor will get some money at the sheriff sale. You can get some discount here, but the bigger discount lies with the second mortgagor.

The more information you have which shows the value of the property is less than what is owed, the better–especially if extensive repairs need to be done. Also, make sure the second mortgager does a complete home inspection rather than just driving by the property to assess the face value. This is especially true with the first mortgagor too. They must go inside to see the house, primarily when the house is in bad shape.

You already know the first mortgager will get most of the money owed them, so negotiate with the second mortgager for 90% off the amount owed. And since 90% is your target, start at a simple $500 or $1,000 to give yourself some room for negotiation.

As part of your negotiation tactics, remind the second mortgager that no one will want to buy the house at the sheriff’s sale because the amount of the repairs will be too extensive to make the purchase profitable. Offering them $500 or $1,000 just may be more than they will get if it goes to sheriff sale. So by allowing you a short sale discount, you actually save the bank money.

And everybody wins.

Deb McMillan, OPHP, CMI, is a real estate investor and writer living in Hamilton, Ohio. She has written a home study course on Short Sale Success Systems, which teaches investors how to get deep discounts from the bank when buying pre-foreclosures. You will also learn about bankruptcy and what you can and can't do once a homeowner files. That, and so much more knowledge that will help close your deals awaits you!

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