We recently had a short sale fully approved. It was a tough one, too. The property had a large tax lien as well as two mortgages with very difficult lenders. But, while we got all of that worked out and the short sale approved, we were shocked to learn that the seller had unpaid HOA dues of over $20,000. (That’s no typo… $20,000 in unpaid HOA!)
No bones about it. Any lien that isn’t a mortgage lien can wreak havoc on your short sale transaction. That’s because a short sale closing can only occur if the title is clear. That is, there must be a release or payoff for every demand named on the title report. The short sale lender usually takes care of the other lenders. But, what about the IRS, the bail bond, or that HOA or Mechanic’s Lien?
There are several kinds of liens that can be associated with the property or the borrower.
And, in most cases, all of the liens associated with the property or the borrower need to be released prior to closing.
In order to learn about the liens associated with the property and/or the borrowers, the best course of action is to order a preliminary title report when you take the short sale listing.
The preliminary title report will list many of those liens that will need to be cleared prior to closing. Another recommendation would be to have the local title company run a Statement of Information on the short sale seller. Often liens are associated with the seller, but not attached to a specific property. Only those liens that appear on the title report or the Statement of Information need to be released. Namely, if the seller tells you that he (or she) has trouble with the IRS or a creditor, you can confirm that this is true by reviewing the title report of the Statement of Information.
In a short sale, most short sale lenders in the first position will provide some sort of compensation of other mortgage lenders on the title (such as a home equity line or 2nd mortgage).
However, it is not common for short sale lenders to pay for any of the following: HOA Liens
, child support, abstracts of judgment, federal and state tax liens, or mechanic’s liens. You can. however, negotiate with those other entities to accept cents on the dollar–as in the case of the significant HOA lien noted above.
If you want your short sale transaction to move along swimmingly, work with your short sale seller to assure that any non-institutional liens on the property are released prior to closing.