Attorneys and Short Sales

by Chicago Agent

June 16, 2008

By Michael Gunderson

For many real estate professionals, short sales are becoming increasingly common transactions, more so than they have ever been before. The nature of the current real estate market, as well as the alarmingly high number of individuals who find that they owe more on their homes than the value of the property, has led real estate agents, and others in the industry, to divert more attention and focus to the notion of a short sale.

For those versed in the process, the nuts and bolts of the transaction are straightforward. Simply put – though not simply accomplished – a homeowner must convince their current lender to take a loss on the sale of his or her home. In other words, the lender must accept the proceeds from the home sale even though that amount will fall short of what is owed on the mortgage. The bank avoids the expense and residual effects of taking possession of the home through foreclosure, and the homeowner is able to walk away without having a foreclosure on their credit, and often without a judgment against them for the deficiency.

It doesn’t sound complicated, but more often than not the subtle nuances of the transaction can take what looks like an optimal situation and turn it into a giant headache. As discussed in this space, oftentimes real estate professionals and homeowners turn to their real estate attorneys for help and guidance through the process. While the short sale might seem like it requires nothing more than the standard seller closing services provided by an attorney, in reality the lawyer often does quite a bit more to put a client in the best possible position following this transaction.

So you might ask, what can the lawyer do, above and beyond the closing, to help with the short sale? First and foremost, many lawyers do the legwork required to clear the giant hurdle of the transaction, which means convincing the lender to take a loss and allow the homeowner to sell their property short. While many agents take this task upon themselves and do this work, there are lawyers who do this as well, and lawyers can utilize their staff to facilitate negotiations and work toward an agreeable arrangement with the lender.

Does the lawyer have to do this? No, many agents do this themselves. Do many lawyers like to consider themselves master negotiators because we have a JD degree? Of course. The truth of the matter is, however, that negotiating with a lender isn’t really the time to split hairs over ego. The process of getting the bank to approve a short sale often isn’t going to boil down to negotiating skills, it is really just a question of time and persistence. Many times getting through to the proper departments and final decision makers within the lender’s office is an arduous task, taking hours of phone holding time and repeated calls day after day. Depending on who wants to shoulder this burden, it is a question of time invested and keeping up with the demands and requests of the lender.

Regardless of who negotiates the arrangement and gets the sale approved, there are still many steps an attorney can take in the short sale process to protect their clients from the downfalls of selling the property short. The first way lawyers can help is with the tax question. The IRS requires that lenders submit a 1099-C when they forgive debt, which is the crux of a short sale. Since the IRS views debt forgiveness as income, depending on the individual situation, the short seller might be liable to the IRS for taxes on the shorted amount. Again, this is very situation specific, but retained counsel who has experience in short sales should be able to access each individual scenario for the unique tax implications.

Another issue to consider is the credit concerns. More likely than not, the short seller has several late mortgage payments on his/her credit, and one of the advantages of a short sale is considered to be that credit is “rescued” by avoiding a foreclosure. The truth is that credit and credit reporting can be complicated. At a minimum an attorney can request that the lender refrain from reporting derogatory information to the credit bureaus. While this is not required of the lender, an attorney can attempt to negotiate on a client’s behalf, and sometimes lenders are willing to accommodate borrowers.

Lastly, and most importantly, an attorney can be helpful when it comes to the issue of a deficiency judgment. When the bank is being shorted tens of thousands of dollars on these transactions, they are entitled to see a judgment against the borrower for the deficiency amount. If the seller sold the home for $150,000 when the bank is owed $200,000, the owner is deficient $50,000. The attorney working on the short sale can again try to negotiate with the lender and seek to have a complete or partial debt forgiveness, whereupon the lender agrees to not seek a judgement, or only seek a partial judgment for the amount owed. Again, the goal at this point is to protect the seller and try to put them in the best position possible after the sale. Attorneys can be invaluable when they know the ins and outs of the short sale process and know how to put their sellers in the best position as possible to rebound from this transaction.

*This article is meant for informational purposes only and does not constitute legal advice. Any legal questions you may have should be directed to a licensed attorney.

Michael Gunderson is the principal of the Law Offices of Michael Gunderson, a law firm specializing in Real Estate. Gunderson is a graduate of the University of Illinois at Urbana-Champaign and the Chicago-Kent College of Law. He can be reached at 312.399.4089 or Michael@MichaelGundersonLaw.com.