Solar Panels, HOA Super Liens, and Closing the Gap

Jerad Larkin
43 minutes ago
9 min read

What kills short sales in Colorado right now? Three things: solar panel liens the first mortgage will barely pay toward, HOA arrears beyond the six month super lien, and small last minute gaps between what lien holders will accept. All three are solvable if you plan for them early.

There is a slide near the end of the short sale class I sat in on titled "Houston, we have a problem." That section was worth the whole three hours, because it was the instructor listing the specific things that are blowing up deals right now, with roughly 1,500 closings of pattern recognition behind it.

Two of these did not exist in the last cycle. All three are manageable if you see them coming.

Problem 1: Solar Panels

Her exact framing: solar panels are the number one problem in short sales right now.

That is worth sitting with, because it is a brand new problem. In the 2008 through 2012 wave, essentially nobody had solar panels. Now a lot of people do.

Why it is so hard

Run the numbers she gave. There is a lien on the property for the solar system, call it $60,000.

The first mortgage, which is already taking a large loss, will offer roughly $1,500 toward it.

The solar company wants around $30,000.

That is not a gap you close with creative negotiating. That is a canyon.

And unlike a second mortgage, the solar company has no fear of foreclosure forcing their hand. Second mortgages settle for small amounts because they understand a foreclosure wipes them out completely, so something beats nothing. Solar companies do not behave that way. They will not negotiate meaningfully, and they do not want to come remove the equipment either.

What actually works

Find a buyer who will take over the lease. That is the path. It is the only reliable one.

Which creates a second problem: it shrinks your buyer pool considerably. Assuming a solar lease is not most buyers' favorite thing right now, and you are already asking someone to wait months for a bank approval.

Turn the problem into leverage

Here is the move I would make with that, and it is genuinely useful.

Tell the appraiser about it. When you meet the bank's appraiser at the property, that smaller buyer pool is a legitimate value argument. Not a complaint, an argument:

"The realistic buyer pool for this property is meaningfully smaller than the comps, because a buyer has to be willing to assume this solar lease."

Remember, on a short sale you want the bank's appraisal to come in low, because that number sets the net the bank requires and it has nothing to do with the buyer's financing. A lower value makes the whole deal easier. So a real constraint on marketability is exactly the kind of thing that belongs in that conversation.

That is turning your worst problem into your best appraisal argument.

Should you take a short sale with solar?

You will not have much choice if you work in this space, because a lot of these properties have panels. Take it with your eyes open, get the lease terms early, start looking for a lease assuming buyer from day one, and use it with the appraiser.

I go deeper on the appraisal side in why the bank's appraisal decides your short sale.

Problem 2: HOA Arrears and the Super Lien

How the super lien works in Colorado

Colorado is a super lien state. The HOA holds a position ahead of the first mortgage for six months of dues.

That is why HOAs foreclose here, and they do. The HOA understands that the first mortgage will not risk losing its position over a few thousand dollars. So the HOA forecloses, the first swoops in, pays the super lien amount, and takes the property.

Worth knowing because you may have to explain it. Out of state negotiators do not always know Colorado is a super lien state. Once you say it, most of them know what a super lien is. You just may have to say it first.

What the bank will pay

FHA pays the six month super lien. Nothing else. No late fees, no interest, no HOA attorney fees.

This is creating a real condo problem in Colorado right now. Condos carry higher dues, they are heavily represented in the FHA price bands, and they are showing up disproportionately in short sale files.

The example from the class: a condo selling around $200,000 with $8,000 in past due HOA. After hard negotiation, the bank agreed to about $2,800, roughly a year of dues.

Gap: about $5,000. And the seller cannot bring money to closing.

What to do about it

Prevention, first and most important. Tell distressed sellers early:

If you cannot pay your mortgage, I understand. But if there is any way to keep paying the HOA and the water bill, do it.

This is counterintuitive to a homeowner in crisis, who is going to triage toward the biggest bill. But the mortgage arrears get absorbed in the short sale. The HOA arrears become a gap that can kill the deal.

If they are truly out of money, they are out of money. But a lot of people can keep a few hundred dollars a month going to the HOA if someone tells them why it matters.

Solve it in the offer, if you know about it up front. This is a sharp move. If you already know there is a large HOA balance, put it in the listing instructions:

"Sellers requesting offers include an additional provision for buyer contribution of up to $4,000 toward past due HOA."

You have converted a surprise at closing into a term buyers evaluate up front.

The water escrow quirk

Colorado escrows water rather than issuing a final bill, and lenders do not like the word escrow on a settlement statement. To them a $200 water escrow reads as money that eventually returns to the seller, and the seller is not permitted to receive proceeds. So they may refuse to allow it on the seller side and require someone else to cover it.

Small dollars, usually. But it is one more item to solve at the finish line, and the goal at the finish line is having as few of those as possible.

Problem 3: The Gap

This is the one the instructor sounded most frustrated about, because it is the one that loses deals over trivial amounts.

What a gap is

The gap is the space between what the first lien holder will allow and what a junior lien holder will accept.

Concrete version:

The first says it will allow $3,000 to go to the second
The second says it wants $5,000
You are $2,000 away from closing

The failure mode

Agents come to her at events and say, I was doing a short sale, I got so close, but the first would only give $3,000 and the second wanted $5,000, so it fell apart.

Her reaction, and mine: you lost the entire deal over $2,000?

That is months of work, a seller's outcome, and both commissions, gone over a number that everybody at the table could have covered together.

How to actually solve it

Everybody chips in a little. That is the answer. You do not find $2,000 in one place, you find it in four places.

The buyer. Will they put in $1,000?
The buyer's agent. A few hundred out of commission.
You. A few hundred out of commission.
Concession restructuring. If the buyer has $10,000 in concessions, can they take $7,000 and free up room?

Is it common for agents to contribute a few hundred dollars at the end of a short sale to make it close? Yes. Plan on it.

This is why you do not discount your commission at the start. You need room in your number for exactly this moment. I covered that in the listing agreement and offer terms post.

Prepare the buyer's agent in month one. This is the highest leverage thing you can do, and it costs you one sentence early:

Heads up, at the end of these the bank sometimes declines a few hundred dollars of settlement fees. If that happens I will bring the number to you. I am not expecting it to be large.

An agent who heard that in month one will usually cover $500 without much friction. An agent hearing it for the first time three days before closing will fight you, because it feels like a surprise.

The gap you cannot solve

The solar gap. Nobody has figured out how to conjure $30,000 to satisfy a solar company. If your gap is a few hundred or a few thousand dollars, solve it. If your gap is a solar payoff, the answer is a buyer who assumes the lease, not money.

Two More Problems Worth Knowing

The bank's value came in too high

Difficult, not impossible.

Write a real rebuttal. Go comp by comp on the appraisal and explain what is wrong with each one. Attach better comps, and use sold comps from the date of the appraisal, not today's comps. Agents send current comps and it does not work, because it is not an apples to apples comparison.

The approach with the best track record is using the inspection. If the buyers inspected and found something major, a sewer line, a roof, send the findings with contractor bids and make the ask specific: the buyers will still close, but they need the price reduced by the cost of the repair, and here is the bid.

Banks respond to that. They do not respond to a punch list of small items and a request to shave a thousand dollars off.

The buyer walks after approval

It is common. It is not a failure.

Reassure the seller, which is much easier if you warned them in month one that it usually happens.

Then relist, and put "previously approved at $X" in the MLS. Not "approved at." The distinction matters, because if enough time passes and the appraisal expires, the bank may order a new value and land somewhere different. "Previously" gives you room.

And here is the upside: you now know what the bank will take. You went through the appraisal, the negotiation, and the counters. The next round is dramatically faster, and you can price it correctly on day one.

The Thing That Prevents Most of These

Over communicate. Relentlessly.

The instructor said she touches every file nearly every day, and every time she touches it, the agent hears from her. Even when the update is nothing:

Called, they still do not have me authorized
Called again, still not authorized
Authorized, waiting for a negotiator to be assigned
Appraiser went out, value is not in the system yet

That sounds like noise. It is not. Everyone has been on the buy side of a transaction where two weeks pass in silence and you start wondering whether anyone is doing anything. That silence is what makes buyers walk.

Short, boring updates that prove you are touching the file are how you keep a buyer through a four month process. That is the actual retention tool. Not the addendum, not the deadlines. Just proof that someone is working.

Frequently Asked Questions

How do solar panels affect a short sale?

They are currently the most difficult problem in short sales. A solar lien can run $60,000 while the first mortgage may only allow around $1,500 toward it, and solar companies rarely negotiate meaningfully. The practical solution is finding a buyer willing to assume the solar lease, which also becomes a valid argument to the bank's appraiser that the buyer pool is smaller.

Does the bank pay past due HOA dues in a short sale?

FHA pays only the six month super lien that Colorado law places ahead of the first mortgage, with no late fees, interest, or attorney fees. Larger arrears create a gap the seller cannot cover, since sellers cannot bring money to closing on a short sale.

What is a super lien in Colorado?

A super lien is an HOA's priority position ahead of the first mortgage for six months of assessments. It is why HOAs foreclose in Colorado: the first mortgage will pay the super lien amount rather than lose its position.

What is the gap in a short sale?

The gap is the difference between what the first lien holder will allow to be paid to a junior lien holder and what that lien holder will accept. Gaps are usually small, a few hundred to a few thousand dollars, and are typically solved by small contributions from the buyer, both agents, and adjustments to concessions.

Should you relist a short sale after a buyer walks?

Yes, and it is usually much faster the second time because you already know the bank's required net. Use "previously approved at" in the MLS rather than "approved at," since an expired appraisal can result in a new value.

This post is part of a series I built from a three hour short sale CE class. The full walkthrough is here: Short Sales in Colorado: The Complete Guide for Real Estate Agents.

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