In October, 2008 I wrote a blog post called “Are ‘Short Sales’ they worth the hassle?” My answer was a resounding and unequivocal “No!” (In fact my view was so lopsided that I think it could be said that it was really “Hell No!) Have things changed? Well, I have received some boots-on-the-ground intel that suggests that there may be some circumstances where the effort may pay off. I’m not ready to do a 180, but there may be circumstances where it’s worth a look. (The italics and bold of all those “mays” and “suggests” is intentional.)
First, let’s go back to the basis premise, which is that most people who bother with short sales do so out of a desire to “do the right thing.” An admirable motive in nearly any business endeavor. But it may not always be in one’s best interests. My objections to short sales is that they (1) Trigger too much effort and frustration, (2) Are prone to falling apart at the last minute, (3) Don’t do much to really salvage one’s credit rating and (4) Require the homeowner to do all the work for the bank. But the part that concerns me most is that in order to get a short sale approved, the homeowner has to open his financial books and records to the bank which may then turn around and use that very same information against the homeowner in a later lawsuit to recover a deficiency. Importantly, in California, a litigant cannot get financial information about the other party during the litigation. This protects litigants from allowing their financial condition to be the tail that wags the dog of the lawsuit: If someone can find out that the defendant is wealthy, they may press a frivolous lawsuit harder in the hopes that the wealthy target will cough up some money to make the problem go away. By giving a bank this information in the process of trying to get a short sales approved, you have now given them a possible road map to an easier recovery. For example, letting a property go in foreclosure forces the lender to consider a bankruptcy risk in their negotiating strategy; if you’ve told them that you have $100k in the bank or a stock portfolio, you have now minimized at least some part of that risk to the bank, and they’ll feel emboldened by knowing that you actually have something to lose. (For a related post on deficiencies after short sales, see my recent blog post about the new California statute CCP §580e which precludes a lender on a first deed of trust from pursuing a deficiency after approving and getting paid off in a short sale. This is a helpful development, but it doesn’t cover all situations.) Of course, the borrower’s ultimate financial exposure is never any greater than what the bank could get in a Chapter 7 or Chapter 13 payout, but making that determination is part of the analysis.
So what has changed? Well, I have been told that, anecdotally, letting a home go by short sale may enable a borrower to re-qualify to buy a new home sooner than would likely be the case in the event of a bankruptcy or foreclosure. In other words, a short seller takes a smaller hit on their credit profile than one who lets the property go by straight foreclosure. Again, this is only anecdotal and I have no proof or verification from any lenders or credit agency that this is true. But I have been told this by enough reputable real estate and loan brokers to believe that there might be something to it.
But don’t make this decision on your own: You need to know your risk of being sued before you make the decision. Get legal help. You should do a complete financial analysis so you know just how tempting a target you make to a bank. A $500 legal check-up may save you tens thousands of dollars–tens of thousands in some places–in later exposure.
Of course, you should never let a short sale go to close of escrow unless the bank gives you a complete waiver of a deficiency, but in the fog of war and after months of exhausting haggling with a bank, these things sometimes go unnoticed.
Call a lawyer before you close a short sale. Seriously. Do it.
Like everyone else, when I’m reading the various ads in the real estate section, I see quite a few ads for properties being sold “as is.” The suggestion behind this phrase seems to be that this little two-word phrase absolves the seller (and the listing broker) from any responsibility or liability for existing physical defects with the property, or for the need to tell the buyer that certain things that might go awry somewhere down the line. As though it’s a legally sanctioned form of the old “caveat emptor,” or “buyer beware,” which basically puts all of the due diligence job on the buyer. While there is a (very) small grain of truth to this, it is by no means a blanket absolution for a seller regarding known defects.
So then what does this “as is” designation really mean? Resisting, of course, the flippant philosophical observation that almost everything in this world is sold “as is,” as opposed to “as it is not” or “as it might be if all our dreams and fantasies came true.”
California law requires that a seller of real property disclose in writing all conditions and problems that the seller knows or should know to exist. The means by which this is customarily accomplished is through a document called a Real Estate Transfer Disclosure Statement. As far as a seller’s disclosure duties, this is where the rubber hits the road. For those readers who like to read the actual statutes, the language and scope of this disclosure requirement is set forth in California Civil Code section 1102.1. This is a written disclosure, the format of which is specified by law, which requires a seller to go through an exhaustive list of attributes and characteristics and state whether there are any known problems, past, present or reasonably likely to occur in the future.
An “as is” clause does NOT exonerate the seller from the obligation to provide the Civil Code 1102 written disclosures to the prospective buyer, nor from the obligation to disclose known conditions that would affect the purchasing decision of the reasonable purchaser. Also covered are problems that a seller “should” know to exist. What does this mean? It means that even though the seller may not have set foot on the property for 15 years and thus have no idea that the floor boards are rotting to the core, if he or she “should know” that such problems exist, they must be disclosed. Intentionally blind eyes are no excuse.
From the buyer’s side, legally, all an “as is” clause does is put the buyer on notice that the sale is made without warranty, and that the property is accepted in the condition as it appears to a reasonably diligent inspection. As a matter of sound business practice, however, an “as is” clause should alert a prospective purchaser to the possibility of problems and the realization that your inspections should be extra diligent.
So, an “as is” clause is not an “anything goes” pass that allows a seller to dodge disclosure requirements. It is, however, a flag for the buyer that she should look extra carefully because there may be problems of neglect or inattention that a “reasonable inspection” will discover.
One of the best options for people facing foreclosure is the “deed in lieu of foreclosure,” or as it’s more frequently referred to, “deed in lieu.”
Essentially, this is the fancy legal term for what most folks would describe as “mailing the keys to the lender,” or as it’s being called lately, “jingle mail.” Giving the the house back to the bank instead of waiting for it to foreclose. There are some good reasons for doing this if you have the option.
The best reason for doing it is that you avoid any risk of the lender seeking a deficiency judgment for the amount by which the loan balance exceeds the property value. (That’s assuming the lender has that right, which, in most cases in California at least, they probably don’t. But that’s a whole different issue and beyond the scope of this post.) The reason is that the deed in lieu documentation will include a release…That’s the quid pro quo that you get from the lender in exchange for saving themthe cost, legal expenses, time and procedural brain damage of having to go through the foreclosure process. This is critical: Do NOT do a deed in lieu if you don’t get the release!!!
The other good reason is that it expedites what is a painful and stressful process that most people would rather avoid. You can be in and out fairly quick.
However, generally, it won’t work if you have more than one loan. The reason is that, by taking the property by deed, rather than by foreclosure, the lender accepting the deed takes subject to the continuing obligation to pay any other existing encumbrances. This is true whether the lender is in first, second or third position; if you get deeded a property, you take subject to the continuing obligation to pay other existing loans which are still of record. In this current environment, most people have two or more loans, making the deed in lieu an impossibility. The foreclosure process actually wipes out junior deeds of trusts, or loans.
So if you’re considering a deed in lieu, or if some cocktail party lawyer has suggested it, before getting too excited about it, the two big questions to answer are whether you need it, or whether it is even possible.