The Daily Ramble: Are Short Sales As We Know Them Doomed?
This surprised me..
Short sales have become extremely popular because they afford a way for a homeowner who is “upside down” in their mortgage (ie owe more than the property is worth) to be able to sell their property at current market and get out of their difficult financial situation with far less hit to their credit than a traditional foreclosure. The central feature of a short sale is the ‘forbearance agreement” which simply means that if, for example, the house sells for $50,000 less than the mortgage balance, that $50k is forgiven as a tax-favorable event.
Sounds pretty good, and it has helped many people as an effective strategy.
Now the blogosphere is abuzz with hints that this is changing. It appears that some banks are testing the waters of trying to get the deficiency back from the seller. Kind of blunts the whole concept of a short sale! How are they doing this? Well, it seems that the banks are getting the seller to sign as part of the short sale approval paperwork a promissory note, which essentially is a personal guarantee that requires that the money be paid back. In many respects this mirrors a “mortgage” on a coop apartment, which is always personally guaranteed by the buyer as the collateral (stock & lease) is less than a fee simple ownership interest. Nonetheless this is a very significant change to the distressed property market if it becomes common. If the seller is really drowning in debt, it will push more people into bankruptcy. I am not an attorney, but perhaps the bankruptcy could address the promissory note; that remains to be seen.
I think (and hope) that this is just a market test for the moment as it is not being rigidly enforced. But if you are considering a short sale, please have a real estate attorney review the documents (you did hire an attorney anyway, didn’t you?)
Let us hope this does not come to fruition on a generalized basis. I am going to do some more investigating with my sources and follow-up.
Verdict: The Short Sale is becoming a “Shorter-Sale” and HIRE A LAWYER!
