What to do When There Is Negative Equity (a.k.a. Short Sales)? (2)
It is also known as a cram down (where the lender crams down the outstanding balance of the loan so that it is in conformity with the real market value of the property). Even though the property still legally belongs to the delinquent homeowner until the auction cuts off his or her interests, there is one circumstance where the lender must be included in the sales negotiations.
That situation arises when the delinquent owner agrees to sell the property for an amount less than the outstanding mortgage balance. Because the lender is financially affected by the transaction, it has to be a part of the negotiations and must agree to the short sale.
The lender has a good reason to work with the delinquent owner in this circumstance. Accepting your lower offer may cost the lender a few thousand dollars now, but that initial “investment” will save the lender many thousands of dollars in the long run.
Why? Because if you don’t buy it, the property will be auctioned at the higher upset price (inflated with back taxes, legal fees, interest, etc.), and since that price exceeds market value, it is unlikely that anyone will buy it at the auction.
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