Often, the investor who holds the note on your house, when negotiating a short payoff settlement (short sale) to release the lien on the property and allow transfer of title, will tell you that you are required to pony up a sum of cash in order to close the deal. The key word is required. This is a LIE. There is NO requirement to do this. Remember, you, the owner of the home, hold the key to loss mitigation for the investor on the note.
Collections vs. Loss Mitigation
Banks employ people to collect as much money from you as possible. A successful short sale will be negotiated in terms of loss mitigation. In other words, the goal is to minimize the loss to the bank based on fair market value.
If you’ve presented a fair market value offer to the lender, and they ask for money that benefits them greater than the market can bear, then they are employing a collections tactic, not a loss mitigation tactic.
Think about the math for a second. Let’s say you are selling a house worth $100,000 to which you owe $150,000, and the bank says, “sure, we’ll allow the sale at $100,000, but you have to come up with $5,000 cash at closing. Color me stupid, but they’re asking for more than the house is worth.
How do you combat this? Well, in most cases, the house is headed for foreclosure, and if it’s not, the investor, the lender needs to believe at some point it will. Why? Because your $100,000 sale, which probably gave the lender a net payment at closing (there are closing costs) of about $90,000 or so, will yield a lesser LOSS to the bank than if it goes to foreclosure. Foreclosure will cost the bank WAY more than $5,000 in time and liabilities, remarketing, etc. So, their requirement to pay at closing in order to proceed is often a bluff…in fact, in most cases, it’s a bluff. Call it.