What is a “Short Sale” ?
When real property is sold for less than the amount owed on the loan(s) against the property it is called a “short sale.” It is called this because the proceeds of the sale are “short” of the full amount needed to pay off the loan(s) which are secured by a lien against the property. Lender approval is therefore essential for a short sale to successfully close escrow because the lender(s) must agree to accept less than the full amount owed to them and release their liens. Legally, a short sale approval letter is essentially a debt settlement agreement between the lender(s) and their borrower(s).
How long does it take for a lender to approve a short sale?
It is our experience that short sale approvals generally take between three to four months from date of submission of all documents to the lender to issuance of an approval letter from the lender. However, the length of time may vary from as little as one month to as much as one year depending upon the specific lenders involved, number and type of liens against the property, and complexity of each homeowner’s particular circumstance.
Why does it take so long to complete a short sale?
Lenders are currently overwhelmed with both loan modification and short sale requests. They simply don’t have the staffing and resources to efficiently handle such a large volume of requests. The short sale process itself consists of brief periods of activity followed by long periods of waiting for a lender to take action or make decisions at each step of the process. Another reason is because the lenders are often not the owners of the loan but simply the loan servicer. As a result, they must obtain final approval of the short sale terms from the investor who actually owns the loan, which can cause additional delays.
What is a “deficiency” ?
A “deficiency” in a short sale refers to the difference between the balance owed on a loan and the pay off amount received by the lender from the proceeds of the sale. This difference is the amount the sale proceeds are “deficient” in paying off the total amount owed on the loan.
Will I be responsible for any “deficiency” amount after the short sale closes escrow?
The answer to this question is complicated and depends upon the particular circumstances of each short sale. Whether a lender can justifiably retain legal rights to collect a deficiency from a short sale depends upon a number of factors, such as the state where the property is located, the priority position of the loan (first or second), the character of the loan (recourse or non-recourse), the nature of the property (residential or non-residential), type of ownership (owner occupied or non-owner occupied), and what method of foreclosure the lender pursues (judicial or non-judicial).
Generally, a lender pursuing non-judicial foreclosure (i.e., a trustee’s sale) on a first loan secured by residential property in California should not be granted a deficiency right in a short sale because the lender would not be entitled to pursue a deficiency judgment in the event of a foreclosure. In other words, a lender should not receive a deficiency right in a short sale under circumstances where the lender would not be entitled to the same deficiency right in a foreclosure. If the lender does make such demands in a short sale, the homeowner is better off to simply walk away and let the property go to trustee’s sale after which they will owe nothing. This is why it is critical to have legal representation in a short sale.
Second loans, however, are a different story. Generally, second loans are recourse loans unless the loan was used strictly to purchase a primary residence, in which case it would be a non-recourse loan. In most cases, a second position lender will receive only a minimal payoff from the proceeds of a short sale. This payoff amount is mainly provided as a financial incentive for the second position lender to release their lien against the property so the short sale can be completed. Thus, second position lenders will typically retain deficiency rights to collect the balance owed on the loan after a short sale closes escrow if the loan is recourse.
What is the difference between a “recourse” and “non-recourse” loan ?
A “recourse” loan means that in the event of a default the lender has recourse against the borrower personally to make good on the balance owed, not just foreclose on the property. If a loan is recourse, the lender will generally retain the right to pursue collection of any deficiency after the short sale is completed. Refinanced loans, equity loans, and lines of credit are typically recourse loans.
A “non-recourse” loan means that in the event of a default, the lender can only foreclose on the property securing the loan. The lender cannot pursue the borrower personally for any deficiency balance. Loans used to initially purchase a residential property in California that are occupied by the purchaser are “non-recourse” loans.
The good news for those with property in California is that if a foreclosing lender uses a trustee’s sale to foreclose on a property (as opposed to a judicial foreclosure), they cannot seek any deficiency on that loan even if the loan is recourse. However, as to any other loans secured by the property, those lenders can pursue a deficiency after foreclosure if it is a recourse loan.
Why happens if my recourse second loan may still offer the lender deficiency rights?
If your lender can seek a deficiency on your recourse second loan after either a foreclosure or short sale, you should still complete a short sale. A short sale is generally a better option than a foreclosure for two primary reasons: (1) a short sale is much less damaging to your credit rating than a foreclosure, and (2) a short sale is going to reduce the balance owed to the second lender by the payoff amount received by the second lender in exchange for approving the short sale and releasing their lien on the property. Therefore, any remaining deficiency balance is going to be less than if the property was sold after a foreclosure.
What if my lender won’t forgive the deficiency amount as a condition of approving a short sale ?
If a non-judicial foreclosing lender is requiring deficiency rights, sizeable cash contributions, or a large promissory note in exchange for short sale approval, then you may be better off letting the property go to foreclosure instead of a short sale because California law will automatically bar the lender from pursuing any deficiency judgment following a trustee’s sale.
However, a non-foreclosing lender retaining deficiency rights on a recourse loan is a different matter. Even if the first position lender forecloses on the property, the second position lender will still have the right to pursue you for any deficiency if the debt was a recourse loan. Once the short sale or foreclosure is completed, any remaining debt which was secured by the property will be converted into unsecured debt. This means the debt will no longer have any collateral as security (e.g., just like credit card debt). Unsecured debt is worthless to a lender unless they try to secure the debt through a lawsuit. A successful lawsuit will give the lender the right to secure the debt against another asset owned by you. Oftentimes, the lender will simply write off unsecured debts as uncollectable if they believe you have no realistic means of paying it off rather than suing you for a deficiency judgment. Alternatively, they will just harass you with threatening letters and phone calls to get you to pay them. In many instances, unsecured debt can be eliminated through Chapter 7 bankruptcy or settled for a fraction of the amount owed through negotiations with the lender. Our law firm can assist you with resolving unsecured debt.
What are the tax consequences of completing a short sale ?
The answer to this question can be complicated and we recommend that you consult with a tax professional regarding the tax implications for your particular circumstances. As a general rule, any time secured debt over $600 is forgiven or cancelled after a foreclosure (unless debt is non-recourse) or a short sale, the lender must issue to the borrower and the IRS a Form 1099-C that reports the amount of cancelled debt.
In general, cancelled debt is treated as taxable income to the borrower. However, the federal government has enacted the Mortgage Forgiveness Debt Relief Act of 2007, which exempts from federal tax up to $2 million (married/joint filing) in cancelled debt if it was used to buy, build, or substantially improve a borrower’s principal residence. This law stays in effect through the end of 2012. The State of California has also enacted partially conforming legislation for state income taxes through the end of 2012 as well. The Conformity Act of 2010 limits the qualified principal residence indebtedness to $800,000 (married/joint filing) with an exemption for cancelled debt taxation of up to $500,000.
What is the impact to my credit rating from doing a short sale ?
Generally, a short sale is reported to credit agencies as “debt settled for less than full amount owed.” While this is a negative credit mark, it is not nearly as devastating as a foreclosure. A short sale on your credit could allow you to repurchase a home within two years. It may take at least five years to qualify with a foreclosure. Late payments will also fall off your credit record within two years. If you continue to pay all your other debts on time, your credit score will improve considerably within this same time frame.
How is a Short Sale different than a regular transaction?
The Seller’s signed acceptance is a necessary first step but not the final decision in a short sale. The Seller/Homeowner is only concerned that the transaction is closed as fast as possible. The final price, terms, conditions and approval of a short sale is with the Banks and other lien holders. Incomplete or transactions that otherwise need further attention from the Bank will be put aside. We will structure the original offer and prepare it for immediate negotiation with the Bank. The cooperation and patience of the Seller, Buyer, Agents and the Bank are required for a successful close of escrow.
What can I expect from the Banks?
The Banks will reduce their loan pay-off, substantially in order for the short sale to close. The Holder of the 1st TD will evaluates the offer against current fair market value. The Holder of the 2nd TD generally demands 10% of the outstanding loan amount to provide the Release of Lien.
What closing costs does the bank generally pay?
The 1st TD will pay real estate sales commission, the Seller side of escrow and title services. The bank may or may not pay the natural hazard disclosure reports, county and/or city transfer taxes.
What closing costs does the bank generally NOT pay?
The Buyer should expect a final counter offer when the banks submit their terms and conditions for approval. The bank may counter on price. The Bank may allow a “reasonable” credit to the Buyer for closing costs. Generally, the bank does NOT pay for termite inspection and repairs, any repairs or upgrading to the property, retrofitting or certifications required by local codes, short sale coordination fees, Home Warranty and HOA past dues, HOA document fee and/or HOA transfer fee and other.
What closing costs, per RPA page 2 that the bank pays depends on the offer and the directives of the investor who owns the loan. Bank terms of approval change from offer to offer.
How about closing costs?
Although the closing costs are generally higher in short sale homes because of the bank usually does not pay all typical seller side closing costs, we help you structure your offer so that most of the extraordinary closing costs are covered without digging into YOUR pocket. Our experience works for you.
What are the disadvantages of buying a Short Sale home?
The time element is unpredictable and uncontrollable. You must have patience to sit out what may be a 2-4 month or more short sale process. Because of the volume of defaults and shortage of Bank Loss Mitigator staff to manage short sale transactions, it may take 90 days or more from submission before a transaction is reviewed. Once approved, close of escrow occurs as soon as the Buyer’s loan can close
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