Short Sale
Milton, MA -- Horst and Inger contracted to buy this duplex from
Pete, a local developer. The closing would be handled by David,
an attorney.
The holder of the second mortgage was a local
bank. At Pete's suggestion David called the Senior Vice President
of the bank, who told him the bank would release the mortgage
without payment since Pete was a good "developer"
customer.
With the closing date near David realized this would be a
short sale: After paying off the existing first mortgage,
remaining sale proceeds ($58,000) would be insufficient to
pay the balance due on the second mortgage ($81,000). |
The Good Customer -- A favor to the
seller was fateful for the buyers.
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David closed the transaction without having received the bank's
release. Unfortunately, as he would later explain, this deal closed
at a time when his conveyancing practice was starting to grow, and
he did not yet have in place procedures to follow up and get the
bank's release.
In other words, oops.
Horst and Inger had an owner's policy from First American. When
they later went to refinance, the old second mortgage showed up
as still unreleased; and since it was unreleased it now appeared
as a first mortgage.
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Horst and Inger made a claim and First American
contacted David to get the release.
But it was too late. Things had changed at the bank. Mainly,
the bank had failed and was taken over by the FDIC. So now
we couldn't get a release. Worse yet, Pete filed bankruptcy
and went out of business.
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The Company paid $80,823 for the elusive release, plus legal expenses
of $9,204. Most of this was later reimbursed by David's malpractice
insurance.
MORAL: Title companies are frequently asked by
real estate investors and developers to "write-over" an
existing mortgage with the promise of a payoff to come from some
other transaction.
This is pure risk, and in some states (principally Texas) the practice
is regulated by law.
Since this risk was not authorized by First American, it was David
who ultimately paid for the bank's favor to its "good customer."
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