If you are a homeowner in Michigan and you are facing foreclosure, you may want to read this.  I speak with Homeowners all the time who are confused about whether t let their home go to sheriff’ sale or try and do a short sale to avoid it.  Let me share with you something that I found out recently that may be a game changer for Homeowners.

I was a REALTORÒ luncheon recently and the speaker was a local attorney who represented several large banks in the area. During his seminar he told us that a homeowner could not be sued for a deficiency once the home sold at sheriff’s sale… as long as it sold for the full balance of the mortgage even if the bank buys its own note back.  It suddenly occurred to me that if this were true and a real estate agent were to suggest that a homeowner sell their home on a short sale PRIOR to the sheriff’s sale, could possibly create a liability that may not have existed had the homeowner let it go to sheriff’s sale. 

Let me reiterate this… Let’s assume you are a Homeowner who is 2-3 months late on a mortgage and wondering what to do.  Let’s assume that you only have 1 mortgage as well.   What should you do?  Do you try to do a short sale to avoid the embarrassment of the home going to Sheriff’s sale?  Do you let the home go to Sheriff’s sale then try to do a short sale? 

In the past I have heard of real estate agents who have advised their client to list their home and try to find a buyer as soon as possible so they can tell the bank that an offer exists and hopefully delay the sheriff’s sale.  I am now thinking that this is bad advice as long as foreclosure is eminent anyway.

Why?  Simply put, whenever a home is sold for less than the balance owing, the bank automatically has the right to sue the homeowner under the terms of the note for any loss.  So if you do a short sale prior to the sheriff’s sale, and create a liability, you risk being sued.  Let me say that if you are able to negotiate a short sale with a full waiver of any deficiency you are off the hook anyway but let’s assume the bank refuses to waive that deficiency.

My understanding is that the bank has 6 years (in Michigan) to sue for the deficiency judgment and 10 year to collect.  If they fail to collect, they have another 10 years to collect as long as they renew their judgment.  That means a homeowner could face collections for up to 26 years.  So how do you avoid that?

Let’s run 3 scenarios and see what the difference is:

NOTE: Cases above are for illustration purposes only and numbers may not compute exactly

In Case A, the homeowner decides to forgo the embarrassment of the sheriff’s sale and decides to do the short sale in advance.  By doing so the Homeowner may have created a liability that may not have occurred in Case B.

In Case B the bank buys the note back for the full amount and thereby severs their right to sue for a deficiency judgment even if they agree to a short sale during the redemption period.  I know of lenders who insist on reserving the right to pursue a deficiency judgment in this case but are unaware they if they file they will lose the case if it goes to court.  Also not that in the past couple years the majority of homes sell for the full balance.

In Case C which is rare, the homeowner may still face a deficiency but it is may be lower than that of Case A.  I have been told by a negotiator at Huntington Bank that the lenders are getting wise to the fact they if they set the minimum bid at the full balance owing that they risk losing the right to sue later.

This poses an interesting thought though…  do you wait and see what the outcome of the sheriff’s sale is or do you try and negotiate with the lender up front?  The bottom line is each case is unique and any homeowner facing foreclosure should consult with an attorney, their accountant and a local REALTOR familiar with short sales.  Ask lots of questions and don’t jump into it without a lot of thought and consideration.