“Short Sales” have become the flavor of choice in recent years, largely through the efforts of gurus who have made a pretty good living encapsulating complex operations into simple sounding slogans. Anyone who has tried to create a Short Sale will attest that there are a lot of moving parts.
First of all, lenders want to see authenticated conveyances, closing documents and HUD statements that confirm that the borrower didn’t profit by their agreeing to settling the debt for a fraction of the loan balance. This means that a defaulting borrower must deed out the property not really knowing whether or not the debt will be extinguished until later. That may require some negotiation.
The problem with negotiating with a delinquent borrower is that it must be done prior to a notice of default being served. Many States now have enacted special consumer protection laws that make it illegal, immoral, and fattening to negotiate with a pre-foreclosed homeowner. In some States such as Nevada, this is a Class C felony. So is lending the homeowner money with which to make up back payments. In Florida, the entire transaction can be reversed long after a house has been bought and sold. In addition, a judge can impose up to $15,000 in fines on the entrepreneur.
Another distinct problem with Short Sales is that the entrepreneur becomes the new owner. He is liable for anything that happens on the property. He may well have signed a personally guaranteed Note to raise the funds with which to pay of the existing lender, so must make payments. If there were any liens on the property, they would either have to be paid off with the loan proceeds, or they will come ahead of his interests and those of his lender in title.
By way of contrast, a person who buys a defaulted loan at discount to the loan balance knows his position from the outset. He’s either in first position, or he knows what liens are ahead of him. In either event, as the holder in due course of a legitimate loan made by an institutional lender, he is exempt from most of the laws that would preclude his dickering with a distressed pre-foreclosure homeowner.
Where “pre-foreclosure” is legally defined as commencing only after a Notice of Default has been served and/or recorded in the Public Records, as the lender, he can negotiate with distressed owners to work out their financial problems or to buy their house; and only serve them with a default notice if negotiations break down.
Unless they exert operational control over property, lenders are never liable for mishaps on property; what’s more, they are in excellent position to negotiate with junior lien holders to buy their positions at discount.
As a lender, an entrepreneur can sit down face to face with a delinquent borrower and re-structure loan terms, or convert a loan into an equity sharing arrangement where the borrower’s payments are reduced in return for giving the lender a share of the equity and all future appreciation.
For all of the foregoing reasons, I would far rather buy an existing defaulted loan at a discount than to go through all the machinations of a Short Sale. What do you think?
