A Familiar Story...
John and Susan were ecstatic about the news. After a year of stress and harassing phone calls related to their delinquent home loan debt, they thought their worries were finally over.

John had lost his job the year before and the couple couldn’t make ends meet on Susan’s salary alone. This caused John and Susan to fall behind on their home loan payments and they received a notice of default from their lender. John and Susan had stretched to buy their dream home three years ago when it seemed like values would never go anywhere but up and lenders were willing to loan them whatever it took to make the purchase work. Now, with their loan payments adjusting upward, and their home value plunging downward to the point where their home was worth far less than what they owed, their dream home had turned into a nightmare.

Given their rather bleak options, John and Susan saw a newspaper article about short sales and decided to try and prevent the impact of a foreclosure on their credit rating by doing a “short sale” of their home before it was foreclosed upon. Bob, a real estate broker, had attended a weekend seminar on how to do short sales and began advertising himself as a “Short Sale Specialist.” John and Susan hired Bob after seeing his ad believing he would solve their problem.

After many months of negotiating the short sale with their lender, Bob finally obtained written approval to sell John and Susan’s home for a sale price that was $200,000 less than what they owed on their home loan. Bob was very proud when he told John and Susan the short sale had been approved and their financial troubles were finally over!

Unfortunately, Bob didn’t understand the fine print in the short sale approval letter issued by the lender and didn’t advise John and Susan to have a real estate attorney review the document before accepting it. Bob thought as long as the lender approved the short sale that was all that really mattered. However, had John and Susan sought competent legal counsel, they would have quickly discovered their lender had actually put in a provision holding them personally liable for the $200,000 deficiency balance as a condition of short sale approval, a condition which their lender would not have been entitled to had their home gone to foreclosure.

Although they were happy at the time, John and Susan’s relief from the stress and financial problems related to their home were short lived. After the short sale closed escrow, their lender came after them for the $200,000 deficiency amount they had unknowingly agreed to accept by signing the short sale approval letter. The collection calls began once again. Of course, all of this could have been avoided.

The Reality for Your Real Life Story…
Although the above scenario is a dramatization, I see situations such as this on a regular basis in my real estate law practice where I currently represent close to one hundred short sale clients. During the past two years of negotiating short sales for clients, my law firm has routinely battled with lenders and held them accountable by making them remove detrimental terms in short sale approval letters that the client would otherwise have avoided under California foreclosure laws that were designed to protect homeowners. As a result, we have helped numerous clients end their housing nightmare so they could move on with their lives knowing the result was better than foreclosure.

As long as it is properly structured, a short sale is superior to foreclosure because it has less of an impact on a borrower’s long-term credit rating than a foreclosure and it often allows the homeowner to stay several more months in the home while waiting for a decision from the lender. If you want to consider a short sale in California, it is important for you to know the following before completing the short sale or letting your home go to foreclosure:

California is an anti-deficiency state, meaning that if your residential property is sold at a trustee’s sale and the proceeds do not satisfy the loan balance, the foreclosing lender may not pursue the borrower for the balance owed, i.e., the “deficiency” (see Code of Civil Procedure Sections 580a-580d).

When a property is sold for less than the amount owed on the loans against the property, it is considered a “short sale.” The lenders must agree to accept less than owed in order to complete a short sale. Approval of a short sale must be agreed in writing between the borrowers and their lenders and is memorialized in an “approval letter” issued by their lenders. The approval letter is a legally binding agreement settling the existing debt between the borrowers and their lenders.

We are here to help - all at no cost to the seller.

As more and more property owners face foreclosure on their property and look to a permanent solution like a short sale, it is absolutely critical they have a real estate attorney involved in the transaction to make sure the end result is not worse than just letting the property go to foreclosure. Fortunately, I’m able to deliver such legal services without charging my clients. Just like real estate broker commissions, my legal fees are contingent on a successful sale and built into the transaction costs and paid by the client’s lender or the buyer of the property.

Often, lenders will include detrimental terms in the short sale approval letters. For example, the lender may demand a deficiency right, cash contribution, or a promissory note as a condition of accepting a short sale. Borrowers should be aware these detrimental terms are negotiable. These detrimental terms may result in a worse outcome for the borrowers compared to a foreclosure. It is therefore critical that all approval letters be reviewed by a real estate attorney well versed in short sale transactions as well as California law in order to determine the legal implications to the borrowers if they complete the short sale.

Borrowers must also be aware there are potential tax implications for both short sales and foreclosures. It is therefore recommended that borrowers also consult with their tax professional before completing a short sale or letting their property go to foreclosure.

LEGAL DISCLAIMER: This testimonial or endorsement does not constitute a guarantee, warranty, or prediction regarding the outcome of your legal matter.