Oct 05

Considering a Short Sale? – (Very) Basic Primer

REAL ESTATE BEAT    

Considering a Short Sale?  – (Very) Basic Primer

Written by Bill Barksdale

Short Sale and Foreclosure in real estate is such a large and still developing area of real estate practice that this article can only just touch on it.  My intent is to provide some basics to begin the process of learning.  It’s very important for me to state from the get-go that I am not an attorney, CPA or accountant.  When you need legal or financial advice, consult a qualified professional!  I am relying, in part, on information furnished by the California Association of Realtors®, one of the greatest resources for California real estate consumers and agents.

First of all, what is a Short Sale?  Put simply, a short sale is when a lender allows a property to be sold for less than the current borrower owes.  Some home purchasers agreed to pay more than they could reasonably afford to pay for a home, their payment may have adjusted to an amount now unaffordable or they may have had a change in their income that prevents them from making the required payment.  In any case, they can’t afford to make the payment anymore and are about to loose the home.  I discussed in a previous article Loan Modification, whereby a borrower works out new loan terms with their lender to make the payment more affordable, so I won’t cover that in this article.

A lender must consent to the short sale and this can be a long process often taking months, and in the end may be denied.  Before a short sale is granted the lender tries to determine if the borrower truly can no longer afford to make the payment.  Once that is determined the lender has to decide if a short sale is the better choice to mitigate its damages.  A short sale may save them the expense & hassle of a foreclosure.

Home owners should be aware that there are potential substantial liabilities in short sales.  One is called a “Deficiency Judgment”.  A deficiency judgment happens when a court allows the lender to pursue the borrower for the unpaid balance of the loan amount that wasn’t covered by the short sale.  The rules are different for a non-judicial (trustee’s sale) foreclosures - in that case a lender cannot get a deficiency judgment.  WOW.  After your short sale is completed your lender might come after you for their unrecovered balance!  Consult a good attorney who specializes in this area of law if you are considering a short sale.

How do you know the lender won’t pursue you after the short sale is granted?  Per CAR the lender’s “approval letter” should contain language that releases you from future debt.  Here is a sample of that verbiage:  “If all of the terms and conditions of this Request are met, upon sale and settlement of the property, we will prepare and send to the settlement agent for recording, a lien release in full satisfaction of the mortgage, foregoing all rights to pursue a deficiency judgment.”

How do you know the lender might come after you for the balance?  Their “approval letter” might contain language like:  “The amount paid to (lender) is for the release of (lender’s) security interest only, and the borrower/seller is still responsible for all deficiency balances remaining on the loan, per the terms of the original loan documents.”  EXAMPLE 2  “(Lender) reserves the right to proceed for a deficiency judgment for any deficiency balance remaining on the loan.”   CAR emphasizes here, and this is very important, “Do not rely on verbal assurances from a lender’s representative that this is just “boilerplate” language and doesn’t mean anything.”  You must read and understand legal documents before you sign them.  Believe me, they mean something.

If you have a second deed of trust or other junior loans, they might also be able to obtain deficiency judgements so do some research to find out how those junior loans will be handled.

There seems to be some confusion about this next point.  A short sale will affect your credit rating.  The lender will report your short sale as being paid “less than full balance”.  It will normally appear on your credit report for 7 years.

By the way, non-purchase money loans secured by your home, sometimes called HELOCS or Home Equity Loans, may not be covered by your short sale agreement.  Talk with your financial advisor or attorney about the liabilities of these financial obligations.  This is a big one for some borrowers who used their home equity for other purchases.

There’s a troubling little secret here that I’ll explain in a subsequent article.  It’s an arrangement between the Federal Deposit Insurance Corporation (FDIC) and certain very large lenders - that often makes it MUCH more profitable for a lender to foreclose on a distressed home owner than to grant a loan modification or short sale.  It’s a legal arrangement between the Federal Government and some private financial institutions called a “Shared Loss Agreement” paid for with your tax dollars. In my opinion this is a loop-hole that verges on criminal conspiracy between the Federal Government and corporations and it needs to be closed.

If you lied about your income on your loan application, stating that you made more than you actually did at the time, it will be detected by the lender when they examine your tax returns and other financial data that must be submit when you apply for short sale consideration.  Since most purchase money loans are guaranteed by the Federal Government, this may be considered loan fraud, a federal crime.  You may have legal and financial liability if you did this.  You may have been advised to do so by the person who helped you arrange the financing.  Talk with your attorney about this.  Bad faith waste (trashing) a property can also trigger a deficiency judgment.

What about taxes?  Once again, you should talk with your tax advisor.  Don’t guess and don’t rely on my article as your legal and tax advice.  These are serious matters that require the council of qualified specialists.  Suffice to say, the tax implications of a short sale can be profound.  Debt relief is sometimes taxed as ordinary income.  Let me repeat, Debt Relief is sometimes taxed as ordinary income!  This can create a huge tax burden for you so you must proceed with great caution.  There are exceptions but don’t assume that it’s no problem.

I suggest that you do some research on the internet before you request a Short Sale.  It’s also advisable to consult qualified legal & tax professionals regarding your options and consequences.   A short sale may not be preferable to foreclosure in every circumstance, and because of the Shared Loss Agreement loop-hole, your lender may not wish to grant you a short sale.  Be a smarty and do your research before proceeding.

By the way, these are stressful times.  I guess you may have noticed.  This can take a toll on your emotional health and on relationships.  Go easy on yourself, your partner and family.  You didn’t have a personal failure just because the national and world economy did.  Take a break from stress.  Go to the coast or drive to someplace you enjoy.  Exercise.  Do some yoga; take a long walk or whatever brings some joy into your life.  Let the people you love know.  And don’t forget to look in the mirror and say “I love you too!”  That’s not as corny as you just told yourself. If you don’t believe it at first, work on it.  Like the old saying goes, “This too shall pass.”  All conditions are temporary.

ABOUT THE AUTHOR, Bill Barksdale: I have been selling real estate in the Willits/Mendocino Co. market for over 18 years. I can be reached at Coldwell Banker Mendo Realty Inc. PH: 707.459.8888 or Email me at This e-mail address is being protected from spambots. You need JavaScript enabled to view it . I hope you will find my site (Bill Barksdale's Real Estate Site) of use to your home buying or selling a home now or in the future.

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