The Short Sale Got’cha – SELLER Beware

June 10, 2009

By John Newcomer;

An All Too Familiar Story:

So you got caught in the double whammy of the recession and the real estate melt down, and are trying figure out how to get out of your mortgage nightmare.  You bought your home for $200,000.  You put 10% down and owe $180,000 on your mortgage.  Your spouse has been laid off, and now you can’t make the mortgage payment.

To make matters worse, the value of your home has plummeted to $160,000.  The harsh reality — you owe more on your home than it is worth.  It’s called being “under water,” and with good reason.  You, no doubt, feel like you’re drowning.

It really stinks, because you have done everything right.  You could just walk away, but you know that is not the right thing to do.  So you are maintaining the home, and actively trying to sell it for the highest price.  You think this should be a win-win situation for both you and the mortgage company.  The bank benefits, because you sell the home for the best price.  You benefit, because you have gotten out from underneath the mortgage.

The Short Sale Trap

Enter the “Short Sale.”  This is when the mortgage company agrees to allow someone to buy your property for less than you owe on your mortgage.  There is just one tiny problem.  Most mortgage companies are only releasing the property from the mortgage lien. They are not releasing you, the borrower, from the remaining debt.

WHAT??!!

Just because the mortgage company has consented to the sale and released the lien on the property, it does not mean the borrower has been released from the debt.  In fact, the release agreement often spells it out, but unfortunately it’s spelled out in “lawyer language.”   Buried in the agreement, you will usually see language like 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 prohibited by law….”

In real people speak, that means they can come after you in the future for the remaining debt. That’s the “Short Sale Got’cha.”

Prominent Tampa attorney, Henry Hicks, who has handled dozens of short sales in the last year, is concerned about short sales where the lender has not provided a forgiveness of debt agreement.  He tells his clients it is likely that in two or three years the lender will sell that debt to some third party debt collector.

Yes, just about the time you are getting back on your feet financially, this nightmare may come back to haunt you again.  Imagine debt collectors hounding you for the difference in what your property sold for and what you actually owed the lender.

What to do?

How can a seller avoid this situation?  Ask the mortgage company to release the underlying debt.    Some companies will do just that.  You just need to ask. 

If the bank is not willing to forgive your debt in a short sale, you may just be setting yourself up to have them come back and sue you for it in the future. Not exactly what you had in mind, I’m sure.