Why On Earth Would I Attempt A Short Sale?

Recently a family purchased a short sale home in San Bernadino, CA and to their surprise when they walked in, the toilets and sinks had been sabotaged.  Over the weekend an unknown trespasser filled the toilets and sinks with concrete and it had “set”. Much to their surprise, on top of the stress of moving, they had a huge problem to deal with and they were stuck with the house and nowhere to relieve themselves.

If you are in the real estate business, I am certain that you may have a story similar to this to share.  Please do so in the comment section.

If I Short Sale, You Can Come After Me… If I Foreclose You Can’t!

What is wrong with this picture?  I have been asked this question a lot lately.  In a non-recourse state, if I go through with a short sale, why does the lender have a right to pursue me for a deficiency judgment?  That is a great question and I certainly thought to myself well, it’s not allowable by law, so the lender won’t be able to come after someone who did a short sale.  I was wrong.  Read below.

Sabrina, A California lawyer in our YouWalkAway.com attorney network says the law prohibits pursuing a deficiency only in a foreclosure, and does not apply to a short sale.   It’s because a short sale is a voluntary action the homeowner chooses.  A foreclosure is where the mortgage lender sells the property.

The law reads:

No judgment shall be rendered for any deficiency upon a note secured by a deed of trust or mortgage upon real property or an estate for years therein hereafter executed in any case in which the real property or estate for years therein has been sold by the mortgagee or trustee under power of sale contained in the mortgage or deed of trust.

Borrowers have protection under the California Civil Code §580d, which bars deficiency judgments from the foreclosing lender (given the foreclosure was non-judicial). In California, a mortgage lender can only take one action against you: A non judicial foreclosure, or a judicial foreclosure. The result of non-judicial foreclosure; a lender can only sell the property and pay the loan. If the sale does not pay the mortgage, the foreclosing lender (the primary mortgage) cannot get the unpaid balance from you. However, the lender can get the balance from you in a judicial foreclosure.

Also in most short sale approval letters, there is a section in the approval that says this:

BAC Home Loans Servicing, LP and/or its investors may pursue a deficiency judgment for the difference in the payment received and the total balance due, unless agreed otherwise or prohibited by law…

Now certainly, if you have a really good short sale negotiator, you may be able to get this language taken out of the approval, but I wouldn’t be surprised if the lender said no.

With that being said, it’s also part of the process of the short sale for a lender to look at your assets and bank accounts.  If you don’t have much in your accounts, chances are that they won’t come after you anyway.

I find it interesting that homeowners trying to do the right thing by doing a short sale would end up exposed to further problems whereas a homeowner who just says, “I’m not even going to try to sell my home and work with the bank” gets protection.  It doesn’t seem right.  However, it’s the law.

There was an article on CNNMoney.com a while back that triggered panic in many of our customers.  This article was titled “You lost your house – but you still have to pay”

It triggered hundreds of calls to our office and people were scared saying, “Is this true? Can the lender really come after me?”  In this article, the important thing to point out is that the person getting a deficiency judgment was someone who did a short sale.

It can even happen to people who got their bank to approve them selling their home for less than it is worth.

Vanessa Corey, for example, short sold her Fredericksburg, Va., home in April 2008. She and her husband built the house in 2004, but setbacks, both personal (divorce) and professional (housing bust), made it impossible for the real estate agent to keep her home. So she negotiated the short sale and thought that was the end of it.

“My understanding was that the deficiency was negotiated away,” she said. “Then, last November, I got a letter from a lawyer telling me I owed my lender $65,000. I had to declare bankruptcy. There was no way I could pay it.”

A Short Sale May Be Worse In Recourse States As Well

Foreclosure tustee sales and short sales each have different lengths of time for which a lender must file suit or lose its right under a statute of limitations law.

NRS 40.455 governs Nevada homes sold at a foreclosure trustee sale:

Deficiency judgment: Award to judgment creditor or beneficiary of deed of trust.

1. Upon application of the judgment creditor or the beneficiary of the deed of trust within 6 months after the date of the foreclosure sale or the trustee’s sale held pursuant to NRS 107.080, respectively, and after the required hearing, the court shall award a deficiency judgment to the judgment creditor or the beneficiary of the deed of trust if it appears from the sheriff’s return or the recital of consideration in the trustee’s deed that there is a deficiency of the proceeds of the sale and a balance remaining due to the judgment creditor or the beneficiary of the deed of trust, respectively.

As such, the lender has six (6) MONTHS after the trustee sale date to file a lawsuit against the homeowner for the deficiency judgment. If six (6) months passes and no lawsuit is filed, the lender loses its right forever and always.

However, if the house is sold through a short sale, the lender has six (6) YEARS to file suit. NRS 1190 governs short sales:

NRS 11.190 Periods of limitation. Except as otherwise provided in NRS 125B.050 and 217.007, actions other than those for the recovery of real property, unless further limited by specific statute, may only be commenced as follows:

Banks Have NO Incentive To Do A Short Sale

Banks right now are trying to unload their REO inventory.  It is in the lenders best financial interest to not approve short sales because these 2 reasons.

1.  If the lenders don’t approve short sales, buyers will have to buy REO’s, thus reducing their inventory.

2.  If the lenders don’t approve short sales, they don’t have to take the losses on their balance sheet for much longer since they are delaying the foreclosure process and postponing the auction date.

I know what you are thinking… why wouldn’t they approve short sales, so they don’t have to get more inventory?  The answer is that most people trying to do a short sale are living in their home and paying their insurance, keeping the lawn green and keeping the home from being vandalized or trashed.  They figure they can keep their expenses down if that homeowner stays in that home all the way till the foreclosure happens.   We hear this all the time.  Many of our clients trying to do a short sale have their home auctioned off during the short sale process and they don’t know why.   They are doing everything they can to work with the bank and their home gets sold, when a vacant home one their street in foreclosure has an auction date that keeps getting postponed.

In any case, it may be in your best financial interest to not attempt a short sale, even if you think it’s the best thing to do, you could be shooting yourself in the foot.  Consult an attorney before doing either, YouWalkAway.com can arrange a consult for you.  The last thing you want is to get a judgment after losing your house and think to yourself, “Why on earth did I do a short sale?”