Short Sale Selling Price Exceeds Banks Agreed Price

Any funds resulting from a selling price in excess of the agreed upon pay-off by the senior lien holder will be distributed to the junior lien holders, subject to negotiations & at the approval of the senior lien holder. However, the mortgagor on the underlying senior lien cannot personally receive those funds; they will be required to be distributed to the junior lien holders at the time of close of escrow.

Historically, it can be quite a challenge getting all of the junior lien holders to agree to accept only a pro-rata distribution of the net sales proceeds and write off the balance of their lien, so it usually requires ample negotiating finesse to get multiple junior lien holders to come to agreement on this, as generally speaking, depending on the nature of those liens, virtually any one of them has veto power over the Short Sale transaction as a whole.

Except for non-recourse loans in states that do not allow for a deficiency judgement, it is not uncommon for the junior lien holders to dig their heels in and take their chances at foreclosure. Depending on the facts & circumstances, sometimes the only real point of leverage for the mortgagor is the threat of bankruptcy, which will wipe out all of the junior liens…except the IRS.

In non-recourse states, the junior lien holders automatically become unsecured in the case of foreclosure.

The IRS lien cannot get wiped out in foreclosure or via bankruoptcy, and must be dealt with via some kind of an installment arrangement or offer in compromise, etc., the terms of which can be arranged in order to obtain a release of lien for a Short Sale or subsequent to a foreclosure or bankruptcy, or both.