LOTUS REALTY GROUP

Does a short sale mean you are released from all further liability?

Some homeowners are finding when they sell their home as a short sale (less than the outstanding balance of the loan) their mortgage companies are going after them for some or all of the shortfall. In certain situations, mortgage companies are even taking legal action to recover unpaid amounts after a foreclosure is completed.

We are also seeing more and more mortgage companies asking for a cash contribution or a new promissory note which is usually somewhere between $10-$40k payable over 10-15 years with no interest.  Other banks require a written promissory note to repay a loan or debt.  Bank of America is one of the lenders using the promissory note methodology to recoup more from the seller.

In the future I expect to see a lot more mortgage companies pursuing deficiencies.   In order to protect their own solvency and restore the market to normal, banks need to repair their balance sheets.  Furthermore they are being mandated by congress to help the homeowner as much as possible.  For these reasons lenders are working with homeowners however it is well within their legal rights to pursue for deficiency judgment.

How do I help my client avoid a deficiency judgment? 

Most mortgage companies will look closely to see if there is a TRUE HARDHIP . If the hardship is not strong enough or the homeowner has a strong financial position and therefore the ability to contribute, the mortgage company may ask for either a cash contribution or a new promissory note and in certain cases may pursue for a deficiency judgment.

Take the deals that make sense

For there to be a true hardship the seller must prove:

a)     A severe change in income; or,

b)     Insolvency

At the listing appointment if you discover that the homeowner can afford to make their mortgage payments but are choosing not to due to a large negative equity position in the home or because they just want out you have a choice.  You can either set the expectation upfront that they will most likely need to make a contribution to close the deal or risk wasting your time with a client that is hoping to game the system.  Ask them how much they can and will contribute to close the deal.  If they are not willing to contribute I would reconsider taking the listing as it has a high probability of not closing and will waste your time.

Give the homeowners a dose of reality

One of the biggest mistakes I see REALTORS make is giving false information to a potential client who is considering a short sale.  They will tell the homeowner that a pursuance of deficiency judgment is not common and most likely will not happen.  Months after the short sale is complete, the homeowner receives a letter in the mail for the deficiency amount. This is not good. This opens you up to a huge liability.  I like to tell clients that whether they short sale or foreclose they are facing the same possibility however there are benefits to a short sale over a foreclosure.  A short sale:

c)      will not impact your credit as harshly as a foreclosure and your credit can be repaired far quicker than if the home is foreclosed; and,

d)    provides the homeowner the ability to negotiate with the potential of receiving the magic verbiage "Released from full liability of the note".

In all cases the sellers should consult with a Real Estate attorney.  Go a step further to protect yourself as well and have the homeowner sign an acknowledgement stating that they understand the risks and still want to proceed.  Performing this due diligence up front will save you time in the long run.

As REALTORS we have no control over what a mortgage company will decide however, we do have control over taking the right deals, making sure our clients are fully aware of the short sale process and how a short sale can benefit them and in setting proper expectations.  By setting the proper expectations upfront and by educating your client you will increase your rate of success.

(Quote) A leader takes people where they want to go. A great leader takes people where they don't necessarily want to go, but ought to be. 

Rosalynn Carter

LOTUS REALTY GROUP

PROFESSIONAL SHORT SALE NEGOTIATORS 

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