I’m reprinting an email I received today from the law offices of Christopher Hanson talking about Short Sales. We are going to see a lot of them this year and you need to understand that just because you might be offered the opportunity to sell your home “short”, it might not mean it’s going to be an easy process nor that you will be free and clear of obligations. Read on….
Somebody’s Gonna Take it In the Shorts…and It’s NOT the Bank!
Short Sale! Short Sale! Read all about it!
Next to “Location, location, location”, “Short Sale” is the single most often used phrase in real estate today. (Or, at least, it seems so to me.) But, do brokers and agents really know how to advise a Seller about all the risks and liabilities a Short Sale can expose them to? Should the Agent (either know or advise)?
The Short End of the Stick – What is a “Short Sale”?
A Short Sale is a transaction where one or more Banks receive less than the amount owed on a loan in exchange for a release of the Mortgage (or Deed of Trust) which secured the repayment obligation.
Notice what a “Short Sale” isn’t: A Short Sale is NOT a release of the underlying obligation. It is only a release of the Mortgage or Deed of Trust which secured the obligation.
So, while most Sellers think that a Short Sale will leave the Bank holding the bag on the amount of the unpaid mortgage debt, that is not the case. The “obligation” remains. Only the “security” is released.
Many Sellers believe that the Bank has to eat the difference between the payoff amount in escrow and the loan balance, without the ability to go after the Seller/borrower for that difference. Again, not so. At least, not always.
The Long and Short of It
In California, we have several consumer protection laws, several of which apply to this very situation.
One of these is called the “One Action Rule”. This means that the Bank can come after the borrower on only one of any number of possible ways. The two most popular are: 1) a Judicial Foreclosure, and 2) a Non-Judicial Foreclosure. In the first, the Bank can (and often does) get a “Deficiency Judgement”. This is a judgement for more than the property is worth. The Bank discovers just how big that judgement will be after it sells the property at a Sheriff’s auction. Whatever amount is left over to be paid to the Bank is the amount of the Deficiency.
The bad news for a Bank is that to get this deficiency judgement, the Bank has to go through the entire court process (which can take 18 months, and cost upwards of $100,000). AND the borrower has the right to repay the judgment amount for one year afer the court’s ruling and get the property back! (That’s called the redemption right, and prevents the Bank from re-selling that property for the entire year.)
The second option is a non-judicial foreclosure. That’s when the Trustee sells the property to the highest bidder at a public auction. The Trustee is the “3rd party” named in a Deed of Trust (or a person authorized pursuant to a power of sale in a Mortgage) who gives all the required notices of default and sale, and holds the auction.
If there is a deficiency in the amount owed as compared to the amount paid at a foreclosure sale, then the Bank loses the right to go after the borrower for that deficiency. How come? Well, a non-judicial foreclosure is quick (4-6 months, generally) and cheap. A lot cheaper than a court proceeding. Because the Bank can select this faster, cheaper remedy, it loses the benefits of a deficiency.
Unless (there’s always an unless, hun?) it’s a Bank in second position.
Short Man Complex
If the first position Bank forecloses, what about the second holder? It didn’t even get a chance to do a non-judicial foreclosure! (Well, it could have, but why – especially if the property value is so underwater that even the first lender won’t recover all its money?) If the second lienholder chooses to, it can file a lawsuit for breach of contract (after all, the loan was a contract to repay…) against the borrower for the amount the Bank lost on that second loan. And, it can wait as long as four years to do so. Ouch!!
We’re not done yet. Remember, California is a consumer protection state, it has rules that benefit the borrower. If the loans being foreclosed upon were “purchase money” loans (i.e. the loans used to buy the property in the first place), and if the borrower lived in the property at the time of purchase, and it was a 1-4 unit building, the California is at the rescue.
In addition to the “one action rule”, California has a ”security only rule” which requires the Banks to go after the property – and ONLY the property – when it is foreclosed on a purchase money, owner occupied, 1-4 unit property.
And that second position lender? Well, they are just out of luck. There is no “sold out junior creditor” status for them on a residential, owner occupied, purchase money loan.
Life’s Too Short
Adding insult to injury, after having had to sell the property in a Short Sale, many borrower/sellers are given an end of the year surprise: a 1099 from the Bank for the debt “forgiven” or “canceled.” This “COD” (cancellation of debt) is treated as ordinary income by the IRS. so, while a Seller might have gotten out of a deficiency judgment because it didn’t go through foreclosure, it might not get out of a huge tax bill!
And don’t forget, anti-deficiency rules don’t apply in certain circumstances, like waste or intentional fraud. You need to give the financial documents you gave the Bank when you applied for your loan. What if they don’t match?
The seriousness of a Short Sale can’t be minimized. If you think you need to sell “short” you must have a Realtor who is trained in short sales. They need to have a SFR or CDPE certification in order to show you that they are experienced in these sales. You also must be prepared to consult a real estate attorney who understands short sales as well as an accountant to make sure you are doing everything correctly. You shouldn’t enter into a short sale without a team of experts helping you. As you just read, it could cost you dearly years after you thought you had cleared that mine field.
The Wilkas Group is here to help you. We are certified Short Sales Realtors.
You can reach Christopher Hanson, with the Hanson Law Firm, at 510-521-9181. www.HansonLawFirm.com
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If you want to see the fireworks continue in Foster City in 2011 and you work for a major employer calling Foster City home, why don’t you suggest to them that it would be a fabulous public service to sponsor them next year? It might take a grass roots effort to see them continue, so let’s start the ball rolling now. There really is no other place in the Bay Area that allows one to see fireworks on the water from small boats. It’s great fun being out there with others moving around to find the best views and then making sure you aren’t in a collision! I sure hate seeing this go away.
