Monthly Archives: April 2013

Why your BofA Short Sale to an LLC may be DOA

foreclosures-shortsales

If you are trying to short sell your home and have a mortgage with Bank of America (BofA) there is a pretty good chance that you will get an offer from an investor doing business as a Limited Liability Company (LLC).  Large, well-funded LLCs are everywhere now and they are buying up properties quickly and paying cash.

A couple of LLCs that buy a lot of properties in Illinois are Waypoint LLC and IH2 Property Illinois.

If you are doing a short sale with BofA, I would not suggest accepting an offer from one of these LLCs because you will not be able to close. BofA will reject the LLC as a buyer and spike your short sale. Why would BofA do this? I was told that it’s …. cough, cough … “company policy” which means someone just made it up, and there really is no reason for this restriction.

BofA’s short sale rules are as follows:

1. LLC Buyer. If you have an LLC buyer you have to submit the articles of organization for the LLC and the operating agreement for the LLC. Most of the LLCs will give you this.

2. Members of LLC must be individuals. BofA will allow an LLC as a Buyer,  but only if the operating agreement of the LLC shows that an individual or individuals, and no entities, as members of the LLC– they will not approve a short sale where a trust, corporation or another LLC is the member of the LLC. The problem is that with large LLCs like those named above, there are no individual members. The members of the main LLC are always other LLCs or corporations. BofA will kill your short sale when they see an entity buyer within the LLC.

This only applies to BofA short sales, not to short sales in general. So don’t panic if you have a short sale lender other than BofA. Wisely, none of the other lenders look inside the Buyer’s LLC.

Illinois Deficiency Judgment: Still rare, but it can happen

foreclosures-shortsales, Strategic Default

I had a phone conference with a client whose house in the northwest suburbs was nearing the end of a strategic default. He stopped paying the mortgage about 1 year ago due to a divorce and the fact that the property was $100k+ underwater.

The sheriff’s sale was already done and he wanted me to review the order entered in court that confirmed the sheriff’s sale.

I almost spit out my morning coffee as I read this part of it:

“That there be entered an in personam  deficiency judgment in the amount of $136,000 against the Defendants _____________,  with interest as provided in Section 1508 (e) of the Mortgage Foreclosure Act.”

This meant that the lender, Harris Bank, went through the cumbersome, seldom used process of obtaining a deficiency judgment against the owners. The chances of this happening very slim, but it is allowed by law.

Usually the order confirming the sheriff’s sale says that a deficiency judgment is entered in rem against the property. Seeing this freaks out the client, but the words in rem  are nothing to be concerned about it.  The key words in this order that make it white hot are in personam, because when you see that, it means you have been hit with a personal deficiency judgment.

The client only had a few options:

  1. Pay  the lender.
  2. File a chapter 13 bankruptcy (he didn’t qualify for a chapter 7).
  3. File a motion to vacate the judgment and try to work something out with Harris.

I’ve written before about deficiency judgments and how they are extremely rare except when the bank is a small local lender or if the loan was a commercial loan (used to by an investment property).

This does not mean that the world is ending and everyone will now have a deficiency judgment entered against them. Anyone who has a mortgage with Chase, Bank of America, Wells Fargo, US Bank, Nationstar and the rest of the herd of residential lenders has a slim chance of having a deficiency entered against them. If you have a first mortgage with Harris Bank, I would be very cautious.

To me, this reinforces a couple of things:

  1.  It is almost always a good idea to try a short sale first before moving to a strategic default. Why? Because if the short sale closes, we can usually get a full release of deficiency from the lender, cutting off all liability to the lender.
  2. Deficiency judgments can’t be entered unless the defendant is personally served with the summons at the start of the case. If you are served by publication, no deficiency judgment can be entered. Clients have to be aware of the implication of being personally served with the summons and proceed accordingly.
  3. Filing bankruptcy is your final line of defense. If you have a high income, it is likely that you will have to pay the lender back some or all of the judgment, but if you qualify for a chapter 7, you will not have to pay anything to the lender.

Deficiency judgments in Illinois are still very rare, but they are allowed by law and lightning can  strike.