The following definition (or similar variation) is seen on sites across the web:
"A short sale occurs when the lender agrees to take less than the full amount required to pay off existing loans in full because the outstanding loan balance is greater than the proceeds realized from the sale of the property."
This seems basic enough, however short sales are not a boilerplate procedure. While the term is generic, it should be seen in the same light as the term operation.Some are easy and some are brian surgery. The risks and consequences should be examined on an individual basis.
Even more complicated recently are the changes in the language of the short sale approvals lenders are issuing to sellers. They are frequently boilerplate and used across all 50 state, even though laws from state to stae vary greatly. Even the terms used are not applicable across the board. For example, in California, we use the term mortgage, but it doesn't mean the same here as it does in some other states. In California we typically have a deed of trust, not a mortgage.
So what sounded simple a minute ago just got a tad bit more complicated, and that was just with regrad to the term mortgage. What happens when the average self proclaimed short sale agent gets an approval after months of listening to the lender's elevator music while on hold?
Typically its a jubliant call to all parties crying, "We have an approval!".
OK, so what does that mean?
Generally, the approval means the lien holder has agreed to release the lien that is secured by the property in order to allow the property to close, circumventing the due on sale clause that guarantees the lien holder full payment of the loan upon the transfer of title.
The vital issue here is understanding that the release of the lien doesn't mean the same as the release of the note. On its face it just means that the debt is now unsecured, in exchange fro the lien holder getting whatever proceeds result from the sale. The longterm issue is "what about the balance due that isn't paid off?".
The lender has a few options here.
- call it a day and write of and forgive the unpaid debt
- require a promissory note for the difference
- a combination of 1 and 2
- pursue the unpaid debt as a deficiency where allowed by state law
- a combination of 2 and 4.
At this point we are way past the expertise that most real estate licenses say the agent has, and we have moved into the are of taxation and property law.
If you are considering a short sale in California, you need to know all the options and the potential long term consequences of each option. That is why consulting with an attorney versed in short sales and the foreclosure process is a must. Up to date tax advice is also a requirement as contrary to poular belief, debt forgivenss is seen by the State of Califnia as a taxable event.
Have I muddied the water a bit? Good, because it's crucial that if you are considering a short sale that you have a crystal clear understanding of the process and possible outcomes.
For a confidential Q & A, give me call or drop me an email. I cant give you legal or tax advice, but I'll help you understand the questions you need to ask the proper expert before you even broach the subject of listing the property with an agent.
