Residential Real Estate Agent · Costa Mesa, CA · Member since 2008 · 1k+ posts · 380 votes
I've stayed away from short sales as long as I possibly could, but now a family friend is in the unfortunate position of having to short sale or face foreclosure...and all of a sudden I am now forced to be a short sale expert. Wondering if I could get any help from all you BP experts out there.
I have one main question- the same one my client does:
Can the lender, post acceptance of a short sale offer and closed transaction, go after her for the difference. I know this doesn't often happen in practice, but I like to deal in absolutes. So, in the following scenario, she owes $470K, an offer is accepted at $410K, after closing costs the lender nets $385K, are they allowed to go after her car, 401K and such for the remaining 85K? Any portion of it? Expert opinions would be very much appreciated, along with documentation of legislation I can show to my client.
You should get an agreement from the lender that the proceeds from the short sale are full and final payment for the loan, and that they will not pursue a deficiency judgment. IRS rules were modified a while back so there is no longer a 1099 for the forgiven income, so that's no longer an issue on primary residences.
IRS rules were modified a while back so there is no longer a 1099 for the forgiven income, so that's no longer an issue on primary residences.
Assuming that the property was never refinanced...otherwise, all bets are off.
There is no legislation pertaining to what the lender may or may not do regarding the difference. Like Jon said, you will need to read the short sale approval letter carefully.
I you want, I can email you copies of approval letters so that you can see what the language looks like for both complete release of obligation and for no release of obligation.
If you don't know what to look for, it can slip right by you.
As an investor, I have done several short sale transactions this year. Given the large spreads (amount of loan outstanding - net proceeds received at closing) lenders are asking for unsecured promissory notes for the loan balance. I have seen lenders require them to be signed prior to agreeing to do a short sale.
I have run into this scenario when there is a second mortgage or when the home was not a primary residence. Additionally, it seems, from discussions with other investors, that this occurs more often when Bank of America is the lender.
Jon's suggestion to have the lender waive their rights to file a deficiency waiver is right on. In fact, I have it as a contingency in the purchase contract in order for me to maximze the discount while protecting the homeowner from my greed.
With regard to the promissory note, I would make sure your cient submits a personal financial statement showing he/she is insolvent and include verbage in their hardship letter that if the lender pursues a note, that he or she will be forced to file bankruptcy.
Lenders hate bankruptcy as it can drag out the foreclosure process out for six months or more.
Despite legislation for the 1099 and not being required to pay taxes on the forgiven debt, lenders may still pursue deficiency judgments or promissory notes, Although it will cost lenders legal fees or added collection costs, they are still required to perform due diligence on bank losses. This due diligence varies from lender to lender and state to state, so unless your an expert in your states banking laws, I would always assume the worst and move to protect your client.