Few months ago I was contacted by Phil (not his real name). Phil owned a condo in Burnaby. He had two mortgages on the property and was not paying both of them. Now the lenders were after Phil and have started foreclosure proceedings in the supreme court of BC. After a short discussion with Phil it was clear his only way out was to sell the condo. The problem was, his total owning on the two mortgages, unpaid utilities, taxes and the strata fees were very close to the market value of the condo. The condo was also not one of those “easy to show” properties.
I put Phil in contact with an excellent Realtor and within a week he had a very good offer.
Still, the funds were about $10,000 short of what was needed to complete the deal (Realtor fees included). This is when the 2nd mortgage lender was contacted by Phil’s lawyer. The lawyer negotiated a short sale with the lender and he has agreed to accept $10,000 less than the amount owned on the 2nd mortgage. The deal has closed this week.
Why did the 2nd mortgage lender agreed to give up $10,000? Whenever a property is sold the funds are distributed according to a list of priorities, first in the line is the strata followed by unpaid taxes and utilities, 1st mortgage lender and only then 2nd mortgage. The longer a foreclosure process takes the more debt accumulates. The funds that will remain for the 2nd mortgage lender go down every day. Also, it was clear that the offered price was very reasonable. It was in the 2nd mortgage lender’s best interest to accept the offer and walk away with some money rather than cause a cancellation of the deal and end up with much less money after the court orders a sale.
This type of sale is called short sale. A short sale is a sale of real estate in which the sale proceeds fall short of the balance owed on the property’s loan. It often occurs when a borrower cannot pay the mortgage loan on their property, but the lender decides that selling the property at a moderate loss is better than pressing the borrower. In recent years short sales became very common in the US. But, in Canada they are still very rare for many reasons which I will not go into here.