A Short Sale is not a cure-all

Posted on November 28th, 2010 by Mark Stopa

This article from USA Today addresses a common misconception among homeowners facing foreclosure and the public at large.  Quite simply, even if you sell your home in a short sale, that may not be the end of your problem.  In Florida, like many other states, if you owe $250,000 but your home sells in a short sale for only $150,000, you still owe the remaining balance (called a deficiency) to the bank.  

There are exceptions, of course.  After all, the bank may agree to waive the deficiency and accept the short sale price as payment in full.  However, most short sale contracts are not set up this way.  In fact, most contain language that enable the bank to pursue the deficiency at a later date.

With this in mind, homeowners should think about what they are accomplishing by consenting to a short sale.  If the bank can pursue you for the deficiency, I’d argue you gain nothing at all by consenting to a short sale.  In fact, I believe you hurt yourself, as: you lose any leverage you may have had to negotiate with the bank (ownership of the home).  

I don’t want to pick on realtors, but many realtors either don’t know the full ramifications of a short sale or don’t care.  After all, they get their commission regardless of whether the homeowner remains on the hook for a deficiency.  

This are not hypothetical concerns.  I’ve seen this dynamic at play in my foreclosure defense practice, and USA Today is writing about it.   

Here’s the article…

PHOENIX — Some former homeowners who went through short sales to avoid foreclosure are finding they are still in debt to their lenders.Because the short-sale concept, which allows people to sell their homes for less than they owe, is designed specifically to help homeowners avoid having to pay their lenders more money, some sellers have been careful to negotiate their deals so the lender, by contract, can’t later seek payment. Those who haven’t done so are at risk.

“I know that there is a great deal of confusion and uncertainty about this issue,” said Michelle Lind, general counsel for the Arizona Association of Realtors. In Arizona, many people thought they were covered by a law that bars lenders from seeking payment from a borrower after foreclosure if a bank cannot sell a property for as much as was owed.

“The law is unclear,” she said, “and there are many variables that factor in.”

Tricia Goldblatt sold her Phoenix home through a short sale last year after losing her job as an executive assistant at an engineering firm. A few months ago, she started receiving calls from a collection agency.

“They are telling me I owe $10,000. I did a short sale to get out from under my mortgage,” she said. “I don’t have that money. I had to move in with my mom.”

Goldblatt said she thought the documents for her short sale specifically stated her liability for both her first and second mortgage would be terminated. But the collection agency said it bought the note on her home-equity loan from her lender and wants to be paid.

Home-equity loans, or second mortgages, appear to be the biggest pitfall.

Plunging home values in across the country left many homeowners unable to sell their homes for enough money to cover what they owed on their first mortgages, let alone a second mortgage.

Some can work out deals to close their second mortgages. Often, lenders who issued a home-equity loan will accept $2,000 to $5,000 to let the homeowner walk away from the debt.

Other lenders seek to recoup more of the debt, requiring sellers to sign promissory notes to pay a portion later.

But many sellers think that once the short sale is completed, they are free of liability. That’s when the unwelcome calls can begin.

There usually is a lag between a short sale and when a lender will try to collect on unpaid debt or sell it to a collection agency. It was almost a year after Goldblatt’s short sale when she was contacted by the collection agency.

Many real-estate agents working with homeowners on short sales refer them to lawyers or make sure the deal calls for the dismissal of all the debt related to the house. The sales require more paperwork and negotiations and are still relatively new to many agents. And, with short sales at record levels nationally, lenders are continuously updating their guidelines.

“It’s tough to figure out who owes what to whom in a short sale,” said Margie O’Campo De Castillo, a Phoenix real-estate agent. She said she advises sellers to visit a lawyer before closing their deals.

Real-estate agents and attorneys say some lenders are forgiving all portions of mortgages not covered by the home’s resale. But homeowners shouldn’t count on it.

“But it’s still important to get it in a signed contract,” said Kevin Kauffman of Keller Williams Arizona Realty.

“My warning is that short sales are very dangerous for the seller,” said Diane Drain, a Phoenix real-estate lawyer. “They must get legal and tax advice from someone who does not profit from the short sale.”

Mark Stopa

www.stayinmyhome.com

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