Beware If You’re Considering a Short Sale
by Tim Manni
Even just a few years ago short sales were a widely unused practice; the state of the marketplace didn’t call for it. However, as falling home prices, massive waves of foreclosures, and unemployment cripple today’s real estate market, short sales have jumped to the front of the line. But since the practice has become so popular, lenders are beginning to change the rules in their favor:
The rising tide of “short sales” by troubled home owners facing foreclosure is prompting lenders to become more aggressive in their attempts to pursue former homeowners for their loan losses in a short sale. In a short sale, a house is sold, with a lender’s approval, for an amount that won’t pay off the mortgage on the property.
Often, the troubled home owner assumes the loss will be eaten by the lender. But Bank of America and Chase have quietly added language in their short-sale agreements that require the borrower to sign a promissory note for the shortfall [or portions of the shortfall].
The advantage of a short sale is that a homeowner can avoid, what has been described as, “a credit-killing foreclosure.” Granted, homeowners may be able to avoid a foreclosure, but as California’s North County Times reported back in late April, they may be opening the door to lawyers, collection agencies and mountains of debt:
Lenders appear to be inserting language into short sale contracts that allow them to sue for any “deficiency,” or the amount lost by a bank by selling a home for less than the mortgage —- opening the door to collection agencies and court judgments that can run into the hundreds of thousands of dollars for some North County homeowners.
What’s more, the nation’s premier credit scoring firm says that short sales and foreclosures are equally damaging to credit scores.
The new language has become so widespread that one California real estate agent said 50% of his short sale contracts had the language included. However, once the agent noticed the new language, he did have some success in getting it removed just by asking. The general consensus seems to be that lenders will remove the language if asked, but there are no guarantees. Calculated Risk suggests “having a lawyer review the contract, and make sure ‘all loans are extinguished and debts forgiven’.”
