Bank of America announced this week it will accept back-up offers on short sales and will allow the back-up offer to take over if the first buyer does not complete the transaction, without requiring the process to start again.
Under this new guidance, agents will no longer have to initiate a new short sale in Equator if the original buyer walks away from the transaction. Instead, the agent can continue with the original transaction in Equator and work with the same short sale specialist. The file will remain open and the paperwork that has been submitted will remain active. However, the buyer’s qualification and the offer price will need to be reviewed again if a back-up offer is used.
This new process applies only if there’s an available back-up offer when the original buyer does not follow through with the transaction. If a back-up offer is not ready to be submitted, the short sale will be declined. In that case, agents should return to marketing the property and initiate a new short sale in Equator once another offer is received.
Lenders Who Hold Both 1st & 2nd Trust Deeds May Not Sue For Deficiency If They Foreclose Non-Judicially on First
In the days of easy money, many people purchased homes with little or nothing down. During the golden years of appreciation, many banks were offering “piggy back” loans, which included an 80% Loan to Value Loan representing the First Deed of Trust, and a 20% Loan, secured by a Home Equity Line of Credit (HELOC), or Second Trust Deed. Many of these properties are under water now and have no equity.
If the Bank who holds the first trust deed and the bank who holds the second trust deed are the same, if the lender decides to foreclose on California property, non-judicially, the foreclosure on the First Deed of Trust, would normally wipe out the second deed of trust, making the second deed of trust a “sold out junior lienholder”. Under California Law, a sold out junior lienholder is normally able to to sue the borrower directly on the note, because the security has become worthless. (Unless the loan was a purchase money loan). However, in 1992, the Appellate Court in California, in Simon vs. Superior Court 4 Cal.App.4th 63, held that where the lender is the same, who holds the first and second deeds of trust, by foreclosing the first deed of trust non-judicially, this precludes the lender from then seeking a deficiency judgment against the borrower on the second deed of trust. The rational is that under the one-action rule, once the bank makes an election to take the property to satisfy the debt, it is precluded from suing the borrower for a deficiency. If the lender wants to recover a deficiency, it must bring a judicial foreclosure
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action. This case can be successfuly used negotiating short sales by short sale negotiators to get the bank to release the second deed of trust for a nominal payment.
Brokers Have Duty To Disclose Short Sales
The Court of Appeal in Orange County recently held that Real Estate Brokers have a duty to disclose to buyers that a listing is a short sale if the encumbrances exceed the value of the property. In HOLMES v. SUMMER, 188 Cal.App.4th 1510 (2010), the broker had a listing on a home which was over-encumbered. A buyer made an offer and during escrow, spent money investigating the property, and made arrangements to move into it. However, the transaction fell apart because the lenders did not approve the short sale, resulting in the buyer not completing the sale. The buyers sued the Broker who had the listing. The Appellate Court in Orange County held that the Broker had a duty to disclose to the buyer that this was a “short sale”, meaning that the deal could not be done without approval of the lenders.