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Short Sales: Seldom Easy and Often Not What You Expected

A short sale of your home is sometimes your best alternative. But short sales often do not successfully close, and even when they do you must be vigilant to avoid problems later.

In a short sale, a house is sold by “shorting”—underpaying—one or more of the lenders (or “lienholders”), because the value of the house, and thus the purchase price offered by the reasonable buyer, is not enough to pay everyone in full. The liens can include not just voluntary ones such as the first and second mortgage, but also judgments, income taxes, support obligations, unpaid utilities, and property taxes. All lienholders must consent and release their liens, or the sale cannot occur, because the title needs to be clear for the new buyer to be in full ownership.

The important thing to know is that unless you get a full settlement or satisfaction in writing you may face continuing liability to any creditor who was not paid in full, even after the sale!  This is why it is important to work with competent and knowledgeable professionals in dealing with any short sale situation.

The primary benefit of a short sale is that it avoids a foreclosure on the homeowner’s credit record—that is, it does so IF the short sale is successful. Generally, the most common current underwriting criteria will prevent a borrower from qualifying for a new home loan for up to 7 years after a foreclosure, but only 2-4 years after a short sale.  (However, given the present economic climate, in the future there may be less credit record difference between a short sale and a foreclosure.)  This credit record difference is often the primary reason borrowers will try to do a short sale, instead of just letting a property go to foreclosure.

Short sales can have problems, however.

First, they can be much harder to pull off than expected, and can take much longer than expected. It is also possible they fail to close, typically due to servicer/lender rejection of reasonable purchase offers, which can be very frustrating to all parties involved.  Short sales may also fail due to:

  • Lack of incentive of the Servicer:  Many mortgage companies are not well organized or staffed to handle short sale negotiations.  Borrowers and agents generally must work through a servicing company, whose financial incentives may well not encourage short sales. So they may drag their heels, and can even sabotage your efforts, even after months of submitting documents and reasonable offers.  This causes many would-be buyers to get frustrated and walk away from the deal rather than keep trying in the face of such adversity and frustration.  LAck of responsiveness of servicers is a major cause of short sale failures.
  • Since all lienholders must agree, any one of them can kill the deal: To accomplish a short sale, usually the first mortgage holder has to give up some money to a junior lienholder or two. The benefit to the first mortgage holder is that getting a little less out of the sale is better than incurring the substantial costs and delay of foreclosure.  However, they may not be willing to allow enough money to a junior to entice all parties to allow the short sale to be completed.  Everybody wants their “fair share” of a pie that is too small to make everybody happy.  So just when you think you have a deal among the main players , someone else crawls out of the woodwork demanding a payment and jeopardizing the closing. They all have a legal claim against the property, and can delay or undo the whole deal.
  • Closing and other costs can be too high: Sometimes after adding up all the closing costs and realtor fees, there may not be a high enough “net proceed” number to entice the lender to do the deal.  Of course, the realtors and their negotiating agents are doing a lion’s share of the work in any short sale process, and must be adequately compensated by the lender at closing.  This is how a short sale can be done with little or no out-of-pocket cost to the borrower.  Sometimes the banks have a hard time with this concept and will lead to a sale failure by their rejection of reasonable market offers.  This just means they will actually lose more money in the long run, and it is frustrating for everyone involved, particularly the realtors and others who put substantial time and efforts into the process only to have it fail due to a recalcitrant or incompetent servicing agent.

Short sales can be dangerous if you are not well-informed:

  • Potential liability from unpaid balances on the junior mortgages and liens: Although you may be told that you will not be liable, you need to be sure that the acceptance and/or settlement documents and the applicable law in fact cut off any financial liability to you following the sale. Also be aware that sometimes in the midst of the negotiations, especially if a junior lienholder is playing tough, and the closing has been delayed for a long time, you may be feel forced to accept some liability in order for the closing to occur.  This may or may not be in your best interest, and you may wish to consult with an attorney to discuss all the factors and options – be sure to consult with someone who is unbiased and who will advise as to your interests alone (unlike realtor or others who may only get paid upon sale).
  • Potential tax consequences: This issue deserves a whole blog by itself. The key principle is that debt forgiveness can be treated as income subject to taxation unless you fit within one of the exceptions. Make sure you talk with an appropriate tax specialist or attorney about this before investing any time or expectations in the short sale option.  Most residential borrowers will have an exception, but not always!
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Final Reasons to Get Legal Advice Before Deciding to Sell Your Home

Bankruptcy gives you a wide range of tools that can help you keep your home or sell it on your own schedule. Many of these tools provide surprising advantages for you. Especially when it comes to your home, know your options before you make decisions.

This is the last of a series of three blogs covering ten reasons why you should get advice from a bankruptcy attorney before selling your home. Here are the final four of those reasons.

1.  Want to Pay off Ex-Spouse: After going through a divorce, you are often required to sell the marital home to pay off your ex-spouse. In most circumstances, debts that you owe from a divorce are not written off by a bankruptcy. But sometimes they are. And even with debts that are not written off, bankruptcy can affect the timing of payment or favor you in other ways. Divorce is often such a traumatic process. Even if during the divorce you received advice about how a possible future bankruptcy filing would affect the terms of your divorce, understandably you may not remember that advice. And frankly, many divorce attorneys do not understand bankruptcy enough to give thorough advice about it. You do not want to base decisions about your home without advice about your options, or, often worse, with incomplete advice. So now, before you sell your home to pay off your ex-spouse, get that advice, from a competent bankruptcy attorney.

2.  Need to Pay off Property Taxes, Homeowners’ Association Dues: Creditors with the strongest rights against you and your home include your county or similar governmental entity which collects your property taxes, and your homeowners’ association. So you may feel powerless in dealing with them if you fall behind on paying them, especially if they are threatening to foreclose on your home. Bankruptcy can give you a leg up on fighting them, and so find out about this before you are pushed into selling your home to pay them off.

3.  Selling to Avoid a Foreclosure: You’ve likely heard that the filing of a bankruptcy stops a foreclosure. And you probably know that Chapter 7 and Chapter 13 each deal with foreclosures differently. The truth is that every homeowner who is facing a foreclosure has a unique set of circumstances, and requires and deserves an individual analysis. Bankruptcy gives you many different combinations for addressing the issues you’re facing. Only by being informed about and thoroughly understanding those options can you make the right choices about whether and when to sell your home, and how all these fit into your whole financial picture.

4.  Can’t Afford an Attorney: If you’re selling your home because you believe it’s the best way to deal with your debts, and you can’t afford to pay an attorney to get legal advice about that decision, consider the following. A decision about your home is likely about your biggest asset and your biggest debts. I assume you agree that if you could get solid, practical advice about that, you would do so. Since I do not charge for my initial consultation, I can give you that advice. Let me help you create the best possible game plan for dealing with your home.

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Another Five Ways to Save Your Home through Chapter 13

In my last blog I gave you the first five of ten big ways that Chapter 13 allows you to keep your home.  Here are the other five.

 

6. If you need to sell your home, Chapter 13 usually gives you much more time to do so than a Chapter 7 case. More time means more market exposure, which usually means selling at a better price. That’s especially true if you are otherwise forced to sell during a slower time of the year, or are trying to sell on a short sale (where the house is worth less than the debt against it). If you are behind on your mortgage payments and in danger of a foreclosure, a Chapter 7 case will usually only buy you an extra three months, and sometimes even less if the creditor is aggressive. Often the only way to stop the foreclosure is by paying the entire arrearage of payments, interest, late charges, foreclosure fees and attorney fees in a lump sum, often totaling tens of thousands of dollars. In contrast, in a Chapter 13 case you can usually maintain the status quo and stay in the house by resuming regular monthly mortgage payments and making meaningful progress towards paying the arrearage. If there is sufficient equity in the property, most or even all the arrearage can often be paid from the proceeds of the anticipated sale, reducing what needs to be paid monthly before then.

7. If you are behind on your child or spousal support obligations, Chapter 7 does nothing to stop collection efforts against you on those obligations, including against your home. Support obligations in most cases turn into liens against the real estate you own, including your home, often giving your ex-spouse the ability to force the sale of your home to pay the support arrearage. On the other hand, Chapter 13 does stop most collection efforts during your case as to any support arrearage which existed as of the time your bankruptcy is filed.  Your Plan must show how you are going to pay that arrearage before your case is completed, and you must stay current on those Plan obligations. But as long as you do, any support lien cannot be enforced against your home. At the end of your Chapter 13 case, you will have paid off the support arrearages, so the lien will be released, with no further risk to your home. (Important: Chapter 13 does NOT stop collection against any new support that you fail to pay after the filing date, so you must stay current on any such new obligations.)

8. In our last blog, I showed how Chapter 13 is usually the better option when dealing with an income tax lien against your home. There I used the situation in which the lien is on a tax debt that cannot be discharged—written off—in bankruptcy. But if the tax upon which the tax lien has been recorded can be discharged—because it is old enough and meets the other conditions for a dischargeable tax debt—dealing with the lien against your home in this situation is also better under Chapter 13. Depending on the amount of equity you have in your home and other possible factors, the IRS or other taxing authority may well not release the tax lien even after the underlying tax debt is discharged in a Chapter 7 case. In a Chapter 13 case, in contrast, there is an established mechanism for determining the value of that lien, and for paying it, so that at the completion of your case the tax debt is discharged and its lien is satisfied.

9. If you have fallen behind on property taxes, Chapter 13 is often the better way to deal with them. Usually, being current on property taxes is a condition of your mortgage, giving your mortgage lender an additional independent reason to foreclose if you are not. (This assumes you are not set up to pay the taxes through the “escrow” portion of your mortgage payment, but rather directly to the property tax authority.)  By showing in your Chapter 13 Plan how you are curing your property tax arrearage—even if it takes years to do so—your mortgage lender is no longer able to say you are in breach of your mortgage and justify foreclosing on that basis.

10. Saving the most obvious for last, people often file Chapter 13 to prevent a Chapter 7 trustee from taking assets that are worth more than the applicable exemptions. And that applies to your home as much as anything. If you have more equity in your home than the homestead exemption allows, you risk losing your home in a Chapter 7 case. That risk is aggravated these days because the highly irregular housing market makes property appraisals difficult to predict accurately. Chapter 7 trustees have a great deal of discretion, and predicting how aggressive yours will be is made even more difficult because in most places there is no way of knowing which trustee will be assigned to your case. In contrast, usually all Chapter 13s in a region are assigned to the single local “standing trustee.” So we are familiar with his or her inclinations. Even more important, Chapter 13 provides a much more predictable procedure for determining the value of a home, and a mechanism to protect the value of the home in excess of the homestead, if any.

In a nutshell, Chapter 13 provides quite a number of tools to help you keep your home. Simply said, it gives you more control over the situation. It is definitely not the automatic answer just because you have a home in distress, because Chapter 13 certainly has its limitations. But it is often a powerful option that you should discuss carefully with your attorney.  

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