Short sales are types of real estate transactions. When the homeowner has defaulted on one or more of their mortgage payments, they may be able to avoid foreclosure on their home through a short sale.
In short sales, homeowners sell their property for a lower price than they owe on their mortgage. A short sale may be favorable for a borrower because it can help them avoid various fees associated with foreclosure.
However, the borrower may have a negative credit report if this occurs. If the home is sold and there is an unpaid balance on the homeowner’s mortgage, it is referred to as a deficiency.
A lender may recover this amount in certain states by obtaining a deficiency judgment. Some states have anti-deficiency laws that prevent lenders from collecting more than what was put up as security for the home.
What Are Some Legal Issues to Consider with Short Sales?
A short sale can end up being a high-pressure transaction involving numerous legal issues that arise quickly. There are several legal issues to consider with short sales, including, but not limited to:
- Approval: The lender needs to obtain a best-price offer analysis (BPO) before a sale can be approved. This is to ensure that the home is being sold at the best market price;
- This approval process may, in some cases, cause delays in the short sale;
- Taxes: A short sale can have various tax implications for both the seller and the buyer;
- These implications, in turn, may affect other areas, for example, credit and the title to the home; and
- Fraud: Short-sale fraud has become common in recent years. There are various spins on short sale fraud, including:
- The use of false documents;
- Fake certification IDs; and
- Dishonest appraisals of home values.
When an individual is involved in a short sale, it is important to review all legal documents and forms carefully before signing them and any other documents. This can help an individual better understand what agreements must be formalized in writing.
When Does a Short Sale Take Place?
Short sales are often referred to as pre-foreclosure sales. This is because short sales typically occur between the time a lender begins the foreclosure process and the end of the foreclosure process.
The foreclosure process ends when the lender sells the foreclosed property.
How Does a Short Sale Work?
If a borrower has exhausted all their other options, they may consider a short sale. Other options the homeowner may try before a short sale include:
- Forbearance;
- Loan modification; or
- Bringing their account current.
For the short sale to go through, the lender has to agree to it. In other words, the lender must approve the buyer.
Once the lender agrees to the short sale, the funds the seller receives from the buyer are applied to their mortgage debt when the transaction goes through. Before the sale, Most lenders will agree that the money received through the sale will satisfy the borrower’s debt in full.
This means that the lender absorbs the costs left from a sale that does not fully satisfy the mortgage debt. For example, suppose an individual owes $400,000 in mortgage debt.
If the short sale proceeds for $350,000, the lender may not go after the seller for the $50,000 needed to satisfy the mortgage debt. In addition, the lender may not go after the buyer.
As noted above, a lender may also hold the seller legally responsible for any deficiency needed to pay off their entire mortgage debt. A lender who does so may attempt to recover the remaining $50,000 from the buyer by suing them in court.
In certain states, the decision of whether or not to seek the entire unpaid debt is not up to the lender to make. As noted above, some states have anti-deficiency laws that limit the amount of money the lender may recoup through the short sale.
Anti-deficiency laws typically only allow a lender to recoup the amount of money that is yielded by the sale and not more than that. Other states allow a lender to sue for the entire value of the debt.
In those states, the lender will file a deficiency judgment action. In this type of action, the lender seeks recovery of the remaining mortgage debt in court.
What Are the Implications of a Short Sale?
Once a short sale is complete, the seller will no longer have ownership rights to that property. Instead, that house will be owned by the buyer.
Because the seller no longer owns their home, they must find a new residence. While this may seem obvious, it may be difficult for the seller to find a new residence because their credit score may have decreased due to missed mortgage payments.
A lower credit score is typically not viewed favorably by landlords and banks that provide mortgages. Additionally, a seller will face tax implications from a short sale.
The Internal Revenue Code provides that forgiven or canceled debt is generally considered income. An individual is required to include this income as part of their overall income when they file their taxes.
This means that if a lender does not pursue the amount needed to satisfy the entire mortgage debt, that amount can count as income for the seller. One way to avoid this issue would be if the individual is deemed insolvent.
This means that their liabilities exceed their assets. A successful filing of a Chapter 7 bankruptcy would eliminate the deficiency judgment.
Can Issues Arise with a Short Sale?
Some issues may arise that might delay or prevent the short sale from going through. A short sale, similar to any other home sale, requires the seller to deliver a clear title, which means that the property is not burdened by:
- Prior mortgages;
- Outstanding tax debt;
- Property taxes; or
- Unpaid utility bills.
If these burdens are discovered during the short sale, the seller must clear the title and pay off any expenses. Clearing titles can be time-consuming and may delay the short sale.
Additionally, one or both parties to a short sale may become victims of fraud. One example of fraud may occur when the seller, who is in a rush to sell, enlists the services of an individual who represents themselves as a short-sale services negotiator.
This individual will claim that they can sell the property promptly. The individual will request a percentage of the purchase price as their fee.
The seller, anxious to complete the sale, will pay this fee before the sale occurs. The negotiator will be an individual who has nothing to do with the transaction and disappears, taking the money and not providing any services.
Can a Lawyer Help Me With a Short Sale?
If you are in a position where you need to sell your home quickly using a short sale, it is important to consult with a real estate attorney. Your lawyer can advise you of the short sale laws in your state, explain the short sale process, the risks, and benefits, and help you complete your sale.
