Disclaimer: The following are not intended to give legal advise, but are general summaries of the law and procedure for information purposes only and are subject to revision without notice. Each and every situation is unique and you should not rely on the following, but seek a legal counsel regarding your individual situation.
What is a short sale?
A short sale is a process in which the secured lenders on a real property agree to accept less than the full balance that is owed to them. In most short sales, the lender pays for all of the closing costs, but may ask the Seller (borrower) to contribute a certain amount.
What are the steps of a short sale?
In a short sale, the lender is contacted, and the forms that are requested by the lender are forwarded to them. First, there is an intake person who gathers the requested information. Second, the file is forwarded to a negotiator. This process can take anywhere from one month to three month. Third, the Negotiator negotiates the terms of a short sale, and then the file is forwarded to the Closer, or a demand letter is forwarded to Escrow. Depending on the lender, this entire process usually takes approximately three to six months.
Do all properties qualify for short sales?
Depending on your individual circumstances, a short sale may be beneficial to you, or it may significantly increase your liability to your creditor. Prior to considering a short sale, the following items must be evaluated: 1) Your last 1-2 year tax return(s) 2) Your current income from all sources 3) Your current liquid funds (Cash, Balance in Bank Accounts) 4) Your overall assets (Other properties, cars, stocks, etc) In a short sale, all of the above, plus the current loans that are secured against your property will all play an important role in whether a short sale is a feasible option for you. In about 70 percent of the cases, I recommend short sale as the option. However, there are many instances when I recommend to the client to let the property foreclose, rather than attempt a foreclosure. A failed short sale on a recourse loan (where borrower has personal liability) with the lender possessing all of your recent financial documents can be damaging and a scary situation. Only after evaluating your individual circumstances, with all relevant documents at hand, can I make this determination. Since 1992, I have vast experience in successfully completing short sales in just about every circumstance imaginable. Prior to considering a short sale, call my office for a free face to face consultation on your individual circumstance.
Question: Can a lender take legal title away from property without going to court?
Answer: Yes, but only after complying with the provisions as contained in the California Statute, as described above.
Question: I owe more on my property than the current market value of the property, and I cannot pay the defaulted loans. What can I do?
Answer: Depending on your circumstances, you may have five options.
1) You may call us for a consultation to see if your property is a candidate for a short payoff. If it is, then you may list your property with us, and have us contact your lender for a possible short pay off. A short pay off is when the lender reduces the principal balance owed to him to accommodate the sale of your property at today’s current market value. The lender usually pays for all the closing costs, including real estate commission, so there is usually no cost to you.
2) You may seek a legal counsel for a possible bankruptcy, in which you may be able to extinguish your non-secured loans, reducing the payments, which you can use to pay your secured loans.
3) You may wait until the lender forecloses the property or takes other action against you and/or your property.
4) You may seek a Loan Modification. This is when the lender reduces the monthly payments on your loan for a fixed period of time. Do not be misled by the many unwarranted promises by loan modification companies.
5) You may issue a deed in lieu to the lender. This is when the lender and the borrower enters into an agreement to transfer title to the real property to the lender.
Question: Are there any tax consequences associated with a short pay off?
Answer: This is an area of great confusion because different advisors are saying different things and you should seek counsel for your specific situation. With that being said, usually, the lender can issue a 1099 for the difference of the principal that was forgiven (“debt discharge”). In practice, I’ve seen this done not that often, but more lenders are starting to do this. A person who receives a “debt discharge” is responsible as ordinary income tax for the difference the debt discharge realized the person’s net worth to be in the positive net worth category. There are recently passed legislation in which tax liability associated with debt discharge is waived by the IRS for owner occupied (primary residence) single family residences.
Question: Is it true that there is a one year right of redemption after a foreclosure sale?
Answer: In a non-judicial foreclosure sale, there is NO statutory right to redemption. Do not be confused with a judicial foreclosure sale. This is an entirely different process.
Question: Once the lender completes the non-judicial foreclosure process and a foreclosure sale, can a property owner redeem the property back from the lender?
Answer: A previous title owner who was foreclosed out may seek to rescind the foreclosure sale by filing a court action. There must be justifiable grounds, such as fraud or other actions by the lender/trustee usually coupled with some abnormality in the non-judicial foreclosure process, which were prejudicial. Rescinding a foreclosure sale is very difficult and expensive. Each and every case is different, so the foreclosed party should seek an attorney with experience in this field.
Question: On what type of secured home loans am I still liable to the lender?
Answer: For a single family residence, there is no right of recourse (liability) for purchase money loans. Purchase money loans are loans that were originated when the homeowner first bought their property. On subsequent refinances, or second mortgages which were acquired after the date of purchase, the borrower is liable to the lender for the loss. However, California also has the one action rule, in which event for a non-purchase money loan, the foreclosing lender that elects to non-judicially foreclose is estopped from seeking for additional damages for loss acquired after the foreclosure sale. If there is a non-purchase money second or other junior lender on the property that is wiped out after the foreclosure sale, they retain the right to sue for all of their losses.
Question: Is my credit affected after a successful short sale?
Answer: After a short sale, in almost all instances, the borrower's credit will be adversely affected. The lender will usually record "accepted for less than full amount", "settled" or the like. This is usually better than a foreclosure, but will still negatively affect your credit.