Seller Participation: cash or promissory note
I got the following email today about seller participation from a bank that shall remain nameless. I’ve gotten similar emails before from other lenders.
-Seller Participation: ***Please Read***
- The investor for this loan requires that we contact the mortgagor to request a participation in the loss on this short sale. They have proposed an affordable option below. As the authorized third party, I will allow you the first opportunity to discuss this with the mortgagor. If the mortgagor declines on the request for participation please be advised an attempt will be made to contact the mortgagor directly to confirm their response.
Participation requested: $3,000 one time cash payment or a $6,000 Promissory note (10 years, zero interest). Please let me know if the Seller: a) Agrees to one of the choices b) Counters
Some points I want to make:
- The above is to get more money out of the seller regardless of hardship.
- Notice how this is presented as a “affordable option”. Sorry, but nothing is affordable when somebody is financially distressed.
- The seed is planted in the agent’s and seller’s mind that they have to contribute money (see option a and b)
- What this shows is that you can invest (in securitized mortgages in this case) and when the investment doesn’t turn out as expected you can go ask somebody to participate in your loss. Good luck buying for example Apple stock and then asking Steve Jobs to participate in your loss when the stock price goes down.
What to do when I get “requests” like this. Well, I push back hard and I go back to the fundamentals of the law.
In this case the loan is of the ‘purchase money’ kind so there is no liability after foreclosure. In fact, because of SB 931 in California there is no deficiency possible with a short sale or foreclosure on a 1st loan.
Because of SB 931 – in California – the lender cannot require seller participation (cash contribution or promissory note) as part of the short sale:
Written consent of the holder of the first deed of trust or first
mortgage to that sale shall obligate that holder to accept the sale proceeds as full payment and to fully discharge the remaining amount
of the indebtedness on the first deed of trust or first mortgage.
That’s right folks: the sales proceeds are full payment. Given the fact that a short sale will net them way more money that letting a property go to foreclosure, guess what the lender will do when you say no to seller participation? They will do the short sale and take the proceeds from the sale.
The thing to remember is that banks will do anything to collect money from the borrower, including lying. They will even try to collect on accounts that already have been settled and released of liability as a client recently found out after a short sale or try to shake money out of people on un-collectable accounts that have been wiped out in foreclosure. Also, they don’t care about state laws too much because if you can talk somebody into giving you money most of the time, then what motivation do they have?
Sellers, work with a short sale agent that knowledgable that has your best interests at heart and that can minimize or eliminate the personal liability after short sale.
When a bank comes and asks for seller participation or seller contribution, have your wits about you because if you don’t it will cost you, literally.
