But complexity of process can easily ensnare someone in legal disputes with lenders
By Jeffrey H. Lerman, Esq.
Short sales are increasing as a percentage of home sales, according to recent industry statistics. It’s not surprising since a successful short sale enables the distressed homeowner to sell her home for market value — even if it’s less than the loans against it — with lender consent, and move forward without a foreclosure on her record. Better yet, Fannie Mae has stated that you will be able to obtain a home loan five years earlier if your exit strategy is a short sale instead of a foreclosure.
Yet, the California Association of Realtors reports that fewer than three of five short sales close in California, illustrating the complexity and difficulty of navigating lenders’ and servicers’ short sale procedures. These facts, combined with the new California short sale law, require every prudent California homeowner in distress to be familiar with the short sale as a possible solution to their problem, and to consider using a lawyer to maximize their chance of success.
California Senate Bill 458, signed into law on July 15 and effective immediately as an urgency statue, corrects major defects in Code of Civil Procedure Section 580(e). While a detailed discussion of that new law is beyond the scope of this article, it essentially provides that when any lender agrees to a short sale, it cannot go after the borrower for any shortfall or deficiency between the sale proceeds and the loan amount.
The prior law, which went into effect just this past January, already enacted this restriction against lenders in first position. This new law extends this prohibition to all junior lenders as well. This could make all the difference for homeowners who, before this law, were discouraged from considering a short sale because of the lingering post-sale liability they would owe to junior lien holders.
The new law is subject to certain exceptions. Those probably don’t apply to most homeowners, but you should consult an attorney familiar with short sales to make sure they don’t apply to you.
Every homeowner considering a short sale, should get a lawyer involved in addition to a broker. Here’s why:
- You need a lawyer to understand the law. The law governing short sales is set forth in complex statutes subject to frequent change. (As discussed above, a key one changed twice within the last eight months.) Those statutes are then interpreted and applied by the courts. It is almost impossible for a non-lawyer unassisted by legal counsel to understand the law, determine how it applies to his or her situation, and figure out the correct action plan under applicable law.
- Brokers can’t give legal advice. California law prohibits real estate agents from giving legal advice — unless they also happen to be a lawyer — even if the agent knows the answer to your legal question. So, a broker cannot help you with the many legal questions you inevitably need answered to decide if a short sale is right for you.
- You need a lawyer to review all short-sale legal documents. To complete a short sale, you will need to sign no less than four legal documents with four different parties — otherwise known as potential plaintiffs, if you’re not careful:
- The listing agreement with the broker;
- The purchase and sale agreement with the buyer and probably multiple addenda required by your lender(s);
- The short sale agreement with your lender(s), and
- Escrow instructions with the escrow holder.
Only a lawyer can give you legal advice about these legal documents, each of which requires certain legal language in a short sale transaction.
- A lawyer can improve your chances for short-sale success. Persuading one or more lenders to agree to walk away from a portion, or all, of the money you contractually promised to pay is a serious, tough negotiation, as the 40 percent-plus failure rate evidences. A lawyer can increase your chances for success by identifying and asserting appropriate legal arguments to persuade a lender it should approve your short sale.
- A lawyer can make sure you have no personal liability. The new law provides important asset protection benefits for homeowners. But it also contains exceptions that lenders may try to use to get to your assets. You need a lawyer to make sure your short-sale agreement with your lender has the right legal language so that you have no personal liability once the short sale is completed.
For any distressed homeowner going through the ordeal of a short sale, perhaps the biggest reason to hire a lawyer, even if they don’t think they can afford one, is to get the peace of mind that once the sale is over they can get on with their life without worrying that their lenders may still come after their personal assets.
Jeffrey H. Lerman’s Lerman Law Partners LLP is in San Rafael and provides creative solutions in real estate investment law, estate planning and business litigation. He can be reached at 415-454-0455 and firstname.lastname@example.org.
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