Two Short Sale Mistakes
Real estate values are decreasing again, and inquiries about short sales are increasing. Here are two examples from this week about people who made the wrong decision about short sales. The first client called me today about dealing with the consequences of a short sale contract he had signed.. The client told me he had spoken with two or three mortgage assistance companies about whether he should pursue a short sale of his financially troubled property. He said each of the companies advised him not to do a short sale, but that he should file bankruptcy instead. Other people have told me they had consulting bankruptcy attorneys who likewise had advised them to file bankruptcy in advance of a foreclosure to wipe out the “possibility” of a deficiency judgment.
Bankruptcy is the last resort to deal with real estate problems. I’ve written previously that first mortgage deficiency judgments are uncommon. First mortgage lenders who pursue deficiency judgments usually will settle for a small percentage of the total liability. Your protections and exemptions in bankruptcy are less than they are under state law outside of bankruptcy. And, once you get yourself in bankruptcy you cannot get out without cause. Understand that some bankruptcy attorneys see bankruptcy as the only way to deal with financial problems; it is the only legal tool they know. Bankruptcy should be considered only after a lender sues for a deficiency, gets a deficiency judgment, refuses settlement, and is about to garnish wages or levy upon assets.
Here is another mistake I heard about from this weeks short sale callers. The client agreed to do a short sale. As a condition of the short sale, the lender asked the client to sign a promissory note prior to the sale for the lender’s estimate of the deficiency balance. The borrower signed the note. Soon after the sale the bank has turned the note over to a collection company which is harassing the former homeowner.
Never, never agree to sign a promissory note for a deficiency. This particular client was apparently too unsophisticated to understand the consequences of acquiescing to the bank’s note requirement. If you want to short sale a property and are not sure whether you understand the legal consequences of the papers you are asked to sign, then see an attorney.
