Does the buyer get stuck with the seller's debts and liens after buying a short sale? The short answer is; No. The mortgages, liens and judgements do not stay with house.
Buyers and sometimes their Realtors get concerned that a house in foreclosure may have debts attached to it that will survive the closing of the short sale. Buyers are concerned that they will “inherit” the seller’s debt.
Here are the safeguards against that happening:
- Title search
- Negotiation with lienholders to release the liens from the property
- Closing attorneys confirm clear title before they administer the transfer
- Title insurance in case of errors in the title clearing process
IMPORTANT NOTE: I am not an attorney. I am a Realtor. This article is based on my experience as a short sale Realtor practitioner and may have legal inaccuracies. Please consult an attorney to confirm your rights and obligations.
Let’s review each one of the safeguards in more detail
- A professional and responsible short sale Realtor will order a title search for the property early in the short sale process.
- A title search will uncover any liens on the property that need to be paid off before the property can transfer to the buyer.
- Running a title search enables the short sale Realtor ample time to negotiate the release of the liens off the property, if the lienholders are willing.
Negotiation with lienholders to release the liens from the property
- Armed with an early title search, the short sale Realtor can contact all the lienholders. The goal is to have the lienholders release their lien off the property. There are variations to the release terms.
- The lienholder may settle for less, forgive the difference and release the lien.
- The lienholder may demand full payoff and release the lien.
- The lienholder may accept a partial payment, release the lien from the property but keep the borrower obligated on some or all of the shortage in the form of promissory note that is not secured by the property being sold.
- There are other variations, but they key point is the release of the lien off the property so it can be transferred to the NEW BUYER free of encumbrances and free of the previous owner's debts.
Closing attorneys confirm clear title before they administer the transfer
- The short sale Realtor provides “acceptance letters” or “letters of intent” or “settlement agreements” from the lienholders to the closing attorney.
- The closing attorney reviews all the settlement agreements and incorporates them into the HUD-1 settlement statement if relevant.
- The attorney will also run a title search update.
- The closing attorney will not close the transaction until every lien is identified and has a corresponding settlement or payoff document. The attorney confirms all the arrangements, after all, they are attorneys, the Realtor isn’t.
- Sometimes a last minute lien gets filed by a creditor that the Realtor, the attorney and the seller did not know of until days or even hours before the closing. That could delay the closing until the new lien is settled.
- The settlement amounts get paid to the lienholders prior to closing or through the HUD-1 settlement statement at closing.
- To the best of the attorney’s knowledge, the property is transferred to the new buyer free of all encumbrances.
- Buyer’s should buy title insurance, especially in a short sale purchase.
- In a pre-foreclosure short sale, there indeed is more likelihood the seller has other debt issues other than their mortgage. This could include but not limited to Homeowner Association dues, back property taxes, credit card judgments, business debt judgments, repossession judgments and more. All of these should be identified and resolved prior to the closing and transfer to the new owner.
- However, this process is still a human endeavor and could be prone to errors. Title insurance is a policy with a one-time insurance premium the buyer pays to cover future claims in case something slips through the cracks during the closing process.
- The closing attorney administers the purchase of the title insurance.
Again, please consult an attorney to confirm accuracy of the legal aspects of this topic.
All additions or dissenting opinions are welcome from anyone who chooses to comment on this blog post!