Episode 8- Short Sale Risks

This Episode of “Use the Law”, Las Vegas lawyer David Rahm discusses the risks and the benefits of a short sale.

Many people are considering a “short sale” on their homes. This is because they cannot afford to continue to make their payments and, in many cases, because they are “upside down” on their houses. If you owe $300,000 on a house that is worth only $150,000, you have a hard decision to make. This is exactly why many people are looking into short sales. So, what is the upside and downside of a short sale?

The upside of a short sale is, if the bank approves the short sale, you sell your house for today’s market value. Then, you would not have to continue to make house payments on such a bad investment. The lender usually pays all of the costs of a short sale, so you do not have to come “out of pocket” at closing. This means that the bank pays the real estate commissions and the title company fees; so you do not have to pay money out of your pocket to sell your house.

What is the downside of a short sale? They can be significant! The biggest problem is that you have to make sure the bank is “waiving the deficiency” on your mortgage loan. This means, on the house mentioned above, if you owe $300,000 on the loan, but the house is only selling for $150,000, the lender DOES NOT COME AFTER YOU FOR THE REMAINING $150,000, plus costs, late fees, attorneys’ fees and related costs! Many homeowners have completed short sales and walked away from the house, thinking they are “free and clear.” Then, they find out they are being SUED by the bank for the remaining $150,000.
Realtors are NOT ATTORNEYS; therefore, they SHOULD NOT BE REVIEWING your short sale documents because they are not trained to protect your legal interests. You need an attorney to negotiate on your behalf to make sure you are not held liable for the remaining loan balance after the close of escrow.

This is especially risky when you have a second mortgage. The second lender usually is getting nothing out of the short sale and would be inclined to sue the ex-homeowner after the short sale is closed for the entire remaining second mortgage! Laws differ from state to state; and in many states, a lender may have several years to sue you for the deficiency.