Short Sale How To Do It

What is my liability in a Short Sale...,
can they come after me for deficiencies on 1st, 2nd or 3rd liens? -
By: Kevin Hummel / Loss Mitigation Expert

First of all, let me explain that I am not an attorney, or an accountant. What I can give you is based upon what I have learned and experience in practice. I still recommend that your folks confirm with their accountant on the tax issues.

Washington is an Anti-Deficiency state (see attached). What that means is that if the property were to go through foreclosure, the foreclosing party (usually the 1st) cannot pursue a deficiency. But, any other lien holders can pursue all that is owed them as unsecured debt (like credit card debt). These state laws have no effect on a property sold in a Short Sale. In practice, we find that the first position lender provides a lien release that is ambiguous as to the release of liability, but their law departments tell us that they rarely pursue liability on a first. They just don’t have the time and do not see the benefit at this time.

Second position lenders are usually pretty consistent. They provide a release of lien at closing and there is usually an opportunity to negotiate the residual balance with the seller at that time. Unless there is a severe hardship, they almost never provide a full release of liability, but often provide favorable terms for a discounted pay off. Their terms usually include interest free payments over 10-20 years.

The most common question to us is, “Why bother with a short sale if we are on the hook for the debt anyway?” And the answer is different for different folks, but in general, if there is more than one lien, you are almost always better off with a short sale because you are paying down on a loan that would get nothing in a Trustee Sale. The first position lenders rarely pursue any deficit, and you are also given a chance to mitigate that liability at the end. In a Foreclosure you are left completely at the mercy of the second position lender, unless you file bankruptcy. Any tax ramifications would essentially be the same in both cases. The question I cannot answer is whether they would fall under the extension of the Phantom Tax laws, since it is no longer a primary residence.

Just to be clear, our service provides for the release of lien for our contingent fee. We are not being hired to mitigate the deficiency as that is a function of law. We have attorneys on staff willing to be paid hourly to do so. But, homeowners in these situations are rarely willing to pay for that service. If there is an excess of liability at the end of a short sale, they usually head to bankruptcy to deal with that loss that is usually accompanied by other debts outside the sale of the property.

I hope this information is helpful for you.

Kevin Hummel
Loss Mitigation Group
McFerran Burns & Stovall, P.S.
3906 South 74th Street
Tacoma WA 98409
www.attorneystitlewa.com

253-284-3838
253-284-3841 Fax