The $40,000 real estate mistake
December 16th, 2009 Categories: Real Estate News
SAN DIEGO- Sometime ago I signed up for question alerts through the real estate website. I have rarely participated in the discussions as they are generally bone head questions and not at all worth the time to write a response. This morning this question came through, and while I feel sorry for the person, this is prime example of why things are not as easy as they seem and there are reasons to not play real estate mogul.
Now if you have basic understanding on how mortgages work you may already have an appreciation for this persons situation. If not here is a basic explanation.
The first loan is called the first because when a property sales, they are the first in line to get paid. The second, sometimes referred to as a junior loan, gets paid through the monies leftover AFTER the first loan has been satisfied. If there is not enough money, you have a SHORT SALE, because the proceeds are short the amount required to satisfy the loans against the property. In a short sale situation, the second can refuse to release its lien on the property, which is necessary to transfer the home to a new buyer, and is really the only negotiating chip the
second has to play if they will not take less than owed. But, by doing this, the first lender can just foreclose on the property. In doing this, they get the title to the property and the second gets ZERO.
So this person bought a $40,000 second note on a property worth $110-120. Unfortunately for him, the first is owed $125,000 so his $40,000 is worth less than NOTHING. Buying at auction requires an all cash payment, so in response to his question his only real option is to hope his wife doesn’t find out and pray that this property hits $165K in value quickly. If she does find out, hide the golf clubs!!
Why $164? This way his $40,000 is covered and he may then be able to sell the note again with no loss.
How the heck can you spend $40,000 and not know what you are bidding on?
DISCLAIMER: this is a very basic look at short sales, loans and makes a number of assumption based on limited information from the questioning party.
