Short Sale question - lender is asking seller to participate in the loss?

Question

I submitted a $500,000 all cash offer to Countrywide. They are taking a $110,000 loss when all fees are paid and they are asking the seller to pay $10,000 to proceed with the short sale. This is not the seller's principal residence; in fact, he owns three houses and this has been a income (rental) for him. He is saying his attorney and financial person are saying they've never heard of this before and that he's being treated unfairly. This is my first short sale - so I don't know if that's true or not - is it - or do banks often ask the seller to participate in the loss?

Answer 1

He can always so no. They have a right to recover as much as they can. You know, these mortgage holders aren't just companies. They are people who work there and invested their money to allow the guy to buy the houses. He's getting a gift. If he doesn't want to pay it, he shouldn't.  

Answer 2

In a short sale, the negotiations that occur between the lender, seller, and all lienholders can come out where x-amount of money from the proceeds of the sale go to each of the cognizant parties. And, that can include a requirement that the seller pay some cash into escrow to close the deal. This is all outlined in the escrow instructions, which both buyer and seller must sign and acknowledge.

I just closed on a short sale a couple weeks ago. The owner owed the same lender on his first and second mortgages, and had not paid property taxes in a year (about $4000). As part of the escrow instructions, all monies paid into and out of escrow were detailed: The sale price was $202K. I had put down a $2,000 good faith deposit, and I would submit a down payment of $51K plus pay an estimate of closing costs of about $3,000. My lender would come in with $151K (my mortgage). The seller would pay the $4,000 in back taxes. And, the lender would get something like $187K once the sale closed.

Remember, a lender does not have to agree to a short sale. And an owner has to show some kind of hardship (and submit a written package describing that hardship) for a bank to accept the short sale. If an owner has other significant assets, that doesn't sound like much of a hardship (and "I owe more on the property than it's worth" is not a hardship).

Since the seller has other significant assets (two other houses), it makes perfect sense that the lender would require some cash input from the seller to approve the short sale.

Answer 3

why should the bank absorb all the loss? they've done enough of that the past 2 yrs - that's what has caused all the bank stocks to go in the tank-  the owner's the one who bought it when he probably should not of have - they are only asking for 9% of the loss to be covered by him. If you're so concerned about the 10k - offer the bank 510

Answer 4

it is as you say investment property and the seller has additional asset so why should CW expect the seller to be in on the loss

Answer 5

This dimwit thinks he is being unfairly treated, when CW is swallowing $110,000 and only asking him to cough up $10,000 ????  What planet is this moron from ?  It is certainly NOT unheard of for a lender to ask a seller to participate, if the seller has other available assets (which it appears this seller does have).  In fact, in most cases, if you have other available assets, the lender will simply expect that you divest of those other assets and pay the deficiency IN FULL.

Answer 6

The seller’s side is full of it, before a lender will approve a short sale it’s very common for the lender to require the seller to reveal all assets and if they have assets then the bank will require them to contribute to the sale, why should the lender take the fall alone

It maybe the seller trying to get a little bite more out of you, but this being a investment property the seller is really in a hard spot, default on an investment property is totally different animal then default on personal residency, huge potential liability to the seller on a default investment property, at this point the seller is open to a 1099 tax on the 110K written off on the investment

Stick to your guns don’t give in, the seller will have to find the monies the lender believes the seller has it

Answer 7

The other comments are correct. Frankly, lenders very seldom do short sales on investment properties. The fact that Countrywide is, is an interesting development. So, while I haven't heard of a lender asking for seller participation, maybe that's just because short sales on investment properties are so seldom done. Usually, the lender just lets them go into foreclosure.

As the other comments note, Countrywide doesn't have to do a short sale at all. It's in the driver's seat. And it doesn't seem unfair that someone who owns three houses might be asked to pay a small percentage (9%) of the hit that the lender is taking.

Hope that helps.

Answer 8

Right now the ball is in the lenders court. Because this is an investment, it is handled differently than a residential sale.   This is a business transaction, there is no emotion.