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Short sale negotiations, second lien holders, and ping-pong

Dealing with the Second Lien Holder

At my speaking engagement last week in San Marcos, California, one of the Realtors® asked me to share my experiences negotiating with second lien holders. If you like ping-pong or tennis where you are the ball, then you probably will not mind negotiating with second lien holders in short sales.

When the first lien on the subject property is not being paid in full, the short sale negotiations can sometimes be a little bit tricky. Remember that in a short sale transaction, the first lien holder generally makes an offer to the second lien holder of a certain amount of money.

Here’s an example: Bank of America is the first lien holder on the property. Bank of America offers three thousand dollars to the second lien holder in exchange for lien release.

What happens next? It is the short sale negotiator’s responsibility to then contact that second lien holder and see whether they will accept the three thousand dollars. Maybe they will, and maybe they won’t. It is entirely possible that the second lien holder will want more than three thousand dollars in order to release the lien.

If the second lien holder wants more than offered, what do you do?

You still need more money. And, so begins a game of ping-pong that rivals any of Forrest Gump’s matches. You call the first lien holder. You ask for more money. Maybe you even convince the first lien holder to offer the second $4000 instead of $3000. But, what if four thousand is not enough?

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Sources of Additional Funds

It’s possible that the additional funds could come from the buyer, the seller, or the agent commission. That being said, there are rules and stipulations about the cash contribution to the second lien holder when the first lien holder is not being paid in full.

The cash contribution must appear on the HUD-1 (estimated settlement statement) and must be pre-approved by the first lien holder. So, if the seller agrees to pay the cash, this fact would need to be documented on the settlement statement and approved by the first lien holder.

Once in a blue moon, first lien holders will not allow additional cash contributions on the HUD-1. Remember that any attempt to circumvent the HUD-1 could be perceived as an attempt to defraud the first lien holder. Second lien holders, when they hear that the first has not approved the contribution, may suggest that the seller send a payment prior to closing. Be wary of creative solutions to settling the debt with the second lien holder.

Frequently, buyers may agree to contribute that extra bit of cash to the seller’s second lien holder. In circumstances such as these, if the buyer is obtaining a loan, then the contribution must be disclosed to and approved by the buyer’s lender.

When working short sales with cash contributions, it’s always good to have a lot of negotiation strategies up your sleeve. As you can see, there are many factors involved in getting short sales approved and successfully closed. Managing the second lien holder is just one of those areas that needs to be mastered in order to successfully close multiple short sale transactions.

Photo: flickr creative commons by zimpenfish

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Written By

Melissa Zavala is the Broker/Owner of Broadpoint Properties and Head Honcho of Short Sale Expeditor®, and Chief Executive Officer of Transaction 911. Before landing in real estate, she had careers in education and publishing. Most recently, she has been able to use her teaching and organizational skills while traveling the world over—dispelling myths about the distressed property market, engaging and motivating real estate agents, and sharing her passion for real estate. When she isn’t speaking or writing, Melissa enjoys practicing yoga, walking the dog, and vacationing at beach resorts.



  1. Vicki Moore

    April 26, 2011 at 6:48 pm

    My neck hurts.

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