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Short Sales: What are they and how do they work?

As the economy has taken a tumble over the past several years many people have approached us regarding short sales. The question of whether or not a short sale would be appropriate for a given party generally comes about when that person realizes that the value of their real estate is less than the amount owed on the loan which was used to buy the property. In other words, if the sale was to take place, the proceeds from that sale would fall short of the amount owed. The term “short sale” has, therefore, come to mean the process whereby an owner of real estate seeks the approval of the mortgage holder on the real estate to sell the property. The specific process that is used and the steps that need to be completed vary greatly depending upon the financial institution that holds the mortgage and the difference between the debt owed and equity in the building.

One common misconception regarding the short sale process is that a short sale will resolve all of the issues associated with the debt on that property. In fact, it is becoming increasingly common for the financial institutions to retain their rights to any deficiency that might exist on the property. Some banks have waited several years before pursuing their rights to collect the deficiency against the prior owner of the property. Many times it comes as a complete surprise to a property owner when the bank serves him or her with a complaint trying to collect on the difference between the amount owed and the amount received in the sale. Unfortunately this often happens when the property owner is relying upon advisors that really have no business advising the client regarding the rights of the financial institution and the property owner.

Sometimes property owners will ask if they really need to hire a lawyer to walk through what they have been told is a very simple process. Sometimes they do not have to. Frequently however the documents that are prepared in connection with the short sale and the approval process with the bank are filled with legalize that the property owner and their advisors may not really understand. This is where a lawyer comes into play. I often remind people that although they might dismiss legalize in the contract they just signed, it is unlikely that the bank will do the same. The language contained in a contract is not there to fill up the page. It preserves some right or grants some right to one or the other parties in the contract. It should be read and explained by someone that is trained to understand the contents of the contract.

Finally some property owners simply state that they are sure the mortgage holder will not pursue them after the short sale is finalized. They may very well be right depending on the outstanding deficiency, their collectability and other factors that might be particular to the loan. If the property owner spends a good deal of time in Las Vegas they may be comfortable making a wager that could ultimately be worth thousands and thousands of dollars. Many people are not built for that type of risk. Investing a few hours with an attorney may give the property owner the peace of mind that they are hoping to achieve by going through with the short sale process. For those people the investment is well worth the money that the advice might cost them.

In any case, the short sale process is not for the faint of heart. It is frequently a frustrating and complicated journey through one bureaucracy after another. In the end however it is frequently the only way that problems with upside down real estate can be resolved.