Perhaps indirectly.
A short sale is worked out between you, your lender(s), and the buyer(s). Therefore, everything is open to negotiation. The lender can request a contribution from you as a condition of okaying the deal–but you can say no. Of course the lender will want as much as it can get from you and the buyer. Just as the buyer wants the best deal possible and you would like to avoid being skinned alive.
The lender may request cash from you at closing or demand that you sign a note for part or all of the shortage. But that doesn’t mean you have to just fork it over. I recommend having a real estate attorney or bankruptcy lawyer experienced with short sales, foreclosures, etc. help you with the negotiations.
If all parties have dug in and can’t be moved, the short sale can’t be concluded. This would then probably cost you some money–you’d have to keep making payments to avoid foreclosure, or you may have to cough it up when the lender forecloses. In most states, if the lender can’t recover the balance owed by selling the property, it can take you to court and sue to recover the funds. And if you have the money, well, you may have to part with it–this is called a deficiency judgment.
But the lender does NOT hold all the cards. First, if you don’t have the money it’s pointless for anyone to incur the expense of taking you to court. And agreeing to a short sale saves the lender the trouble of foreclosing, rehabilitating the property, and carrying it on its books month after month. Convince the lender that it will get the most money from a bad situation by accepting your offer. If you are insolvent you could offer the lender a deed-in-lieu of foreclosure. You could also avoid a deficiency judgment by filing bankruptcy–which would protect certain retirement accounts and other assets. Again, a lawyer may be your best guide in this situation.
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My lender wants me to sign a note for $75,000 or they won’t let me do the short sale. So I’d still be $75k in the hole after losing my home, wouldn’t I?
Well, Mike, if you’re in California you’re in luck. The lender can’t touch your assets after all. Because Cali and Oregon are states that don’t allow deficiency judgments, at least not on primary residences. So tell them to work with you or foreclose and pound sand!
In my state (Illinois) it appears that a lender can (and will) consider personal savings, including retirement accounts, in deciding whether or not to approve a short sale. Unless a homeowner a a clear and compelling reason to preserve their savings (e.g a terminal illness or care for a disabled child), why in the world would a lender approve someone for a short sale? If we all decided to just to give up our houses becasue we bit off too much, but we want to walk with money, our entire financial system would collapse. A lender can legitimately ask: “How is it that you have savings but have somehow not been able to pay your mortgage….and you want us to take the hit”? As a practising realtor, it’s a little hard to stay calm when a seller wants you to manufacture a short sale but “we really need to keep that Hummer and did we show you pictures of our trip to Cancun?”. I’m happy to work myself 18 hours a day for the true hardship situations (and I have several), but a regular person facing a short sale should expend all his resources before asking the rest of us to pay for his situation. Finally, as a homeowner, a short sale any where near my home lowers property values and reduces my ability to sell my home if things get too tough (did I mention I’m a realtor?) If I have to go through my savings to keep my home, well, that’s what savings are for!
In the first place, I did qualify my response with the phrase “perhaps indirectly.” So you’re preaching to the choir in that respect. And the reason for accepting a short sale or deed in lieu is because moral high road or not, the company still has to make the best of a bad situation and if it’s cheaper for the bank to cut it’s losses and not carry property for years before finally taking a bath on it anyway it makes sense to unload it now. It owes that to its shareholders (having already cost them enough with careless lending practices).
And most short sellers are not the Gordon Geckos you paint them to be. I’m not thrilled as a homeowner to watch my value drop by over a $million either but that’s life.
And as a Realtor you probably noticed the same thing I did as I observed the bubble building and prices get silly–I never heard a single Realtor say anything but “NOW is the PERFECT time to buy!” In 2006, in 2007, in 2008, and NOW it’s apparently EVEN better! None of them ever said until they got the glimpse in the rear-view that buying might not always make sense for their clients.
Please see my later entry which discusses the results of a study that shows the number one reason for financial problems is not “Hummers” (although I hate those things too) but medical tragedies. And that is still followed by the big number two and three reasons, unemployment and divorce. Same ol’ classics. I have no sympathy for greedy-gut walkaways either but most people aren’t in that situation. And just as any economic prof will tell you that when the money supply increases (as it would when lenders get very free with the mortgage credit), prices rise (as they indeed did). History shows that bubbles from tulip crazes in Holland to West Indies Trade Company fiascos to well-dressed venture capitalists and tech-dreaming insanity repeats itself not because we are too stupid to understand history but because we are too greedy to imagine that its principles apply to us and not just the “other guy.”
When I advise people who are already in trouble it’s not my job to berate them. I merely try to help families prevent these problems, and advise them when they are between a rock and a hard place to take the “sauve qui peut” advice of the French, run for their lives, save their families, and try to start over a little wiser next time.
The creditors aren’t exactly taking a moral high road themselves– but they have no doubt effected policies to protect their own shareholders (corporate versions of families–some take better care of their dependents than others).
I just want to know whether a non recource lender cna pursue a deficiency judgment after agreeing to a short sale. does short sale change the character of the non recource money? Thank you.
In non-recourse states, like California, the lender cannot pursue a deficiency judgment. In other states they can. In Nevada, for example, lenders have been known to approve short sales and then require the borrower to sign a note stating that the deficiency is a collectable debt. Never do this unless you want the lender to be able to obtain a judgment, then take your bank accounts and garnish your wages. The threat of bankruptcy can make the lender be a bit more reasonable–have an attorney contact the lender if the workout department is being unreasonable.
Gina,
I like your responses in this blog!! You are direct in your answer, it seems that you know what you are doing and more knowledgable in short sale also. Thanks for giving accurate answers. Keep up the good work!!!
Blaison
Thank you. That made my morning
Gina, great blog. My question is “where or whom says 401k or pension plan assets cannot be seized by lenders?” My wife has a 401k worth $200,000 and we are concerned that will be seized. So again, what government agency or what ruling, if any, has there been to set precedence the lender won’t seize the only asset we have left?
In bankruptcy, creditors cannot get your retirement accounts (except amounts exceeding $1 million).