subject: Short Sales and the Risk of Deficiency [print this page] Short Sales and the Risk of Deficiency Short Sales and the Risk of Deficiency
Since my firm continues to handle so many Florida short sales, we naturally receive numerous inquiries from distressed Florida homeowners regarding the possibility of having a deficiency judgment entered against them for the difference between the short sale price of the property and the amount they actually owe on the loan. I will address this in a moment as I have many concerns and want to address those first.
As an experienced Florida foreclosure defense attorney I am quite concerned and find that the majority of these distressed Florida homeowners are contacting a Florida foreclosure defense lawyer after the fact; meaning that in most cases they have already had their real estate agent or other non-attorney negotiate the short sale for them. Just this week alone, I received calls from three distressed Florida homeowners, all of which had real estate agents and were short selling their investment properties.
Distressed Florida Homeowner #1 had closed their (realtor) negotiated short sale a week earlier and was already being pursued by the banks legal department to make arrangements to pay off the difference between the short sale price of the property and the amount they actually owed on the loan. Distressed Florida Homeowner #1 now faces a deficiency in excess of $100,000.00.
Distressed Florida Homeowner #2 was being pressured to close by his real estate agent who had already processed the short sale. Yet, the banks approval was very specific and stated that the bank would be retaining their right to pursue a deficiency. However, Distressed Florida Homeowner #2 was persuaded by his wife to contact an experienced Florida foreclosure defense attorney BEFORE they agreed to close. And what a smart woman she was, Distressed Florida Homeowner #2 could be faced with a potential deficiency in excess of $500,000.00, that's right, $500,000.00!
Distressed Florida Homeowner #3 was also being pressured to close by their real estate agent who had already processed their short sale. Yet again, the banks approval was very specific and stated that the bank would be retaining their right to pursue a deficiency. In this case, as in the case of Distressed Florida Homeowner #2, the wife refused to close until she and her husband sought the advice of an experienced Florida foreclosure defense attorney. The potential deficiency in their case could be in excess of $300,000.00!
Whether you're in foreclosure or not, a mortgage note is a legally binding contract, seek the advice of an experienced Florida foreclosure defense lawyer BEFORE you proceed.
Now back to the short sale approval and the risk of deficiency.
When dealing with the lender directly (prior to defending a foreclosure suit), the lender typically goes with the banks standard short sale approval letter retaining their right to pursue a deficiency. When challenged by the Distressed Florida Homeowner or in the majority of cases, by the Distressed Florida Homeowners real estate agent, they are told by the lender's representatives that the terms are what they are, and they cannot be modified.
If you have already closed a short sale that was negotiated directly with the lender, prior to defending a foreclosure suit, the answer is not easy to provide and many factors need to be examined.
The first step is to look at Florida Law. Florida Statute 702.06 does provide mortgagees the right to seek a deficiency judgment upon foreclosure or short sale of the subject property. While the Florida courts do not inhibit that right, there are certain exceptions. The findings in the case below indicate that in the event the foreclosing party purchased the note at a substantial discount, the court may not allow a deficiency judgment. See Jonas v. Bar-Jam Corp., 170 So. 2d 479, 480 (Fla. 3d DCA 1965). This prohibition is only relevant where the local court upholds this policy.
Another relevant factor to be weighed is that the statute puts the award of deficiency judgments "within the sound discretion of the court." In other words, in a consumer friendly court, the judge could deny or limit any requests for deficiency judgments. My experience and the experience of my colleagues suggest that judges as a whole are sympathetic to your distress as a homeowner.
The paragraphs above pertain to the law. I wanted to review the applicable law before turning to the approval letters.
Outside the scope of an experienced Florida foreclosure defense attorney aggressively defending a foreclosure suit, a lender's short sale approval letter often lacks the specific language clarifying whether or not the lender is going to forgive the debt, cancel the promissory note or otherwise refrain from pursuing a deficiency judgment in association with a short sale.
This is one of many reasons why "Strategic Default" is such a valuable tool when conducted by an experienced Florida foreclosure defense lawyer. There is a HUGE value associated with knowing, with some degree of certainty, that you will not be sued or harassed for a deficiency following a short sale.
When an experienced Florida foreclosure defense attorney aggressively defends a foreclosure suit, settlement agreements negotiated between borrowers and lender's attorneys specifically spell out, or should spell out that the bank will waive the remaining balance due and release the borrower from further obligation, and waive all rights to pursue further judgment or deficiency.
In fact, one of the best reasons to employ a foreclosure defense attorneyis to attempt to avoid a deficiency judgment altogether. If you are served with a foreclosure suit, DEFEND IT, even if you are in the process of a short sale or loan modification. If you DO NOT defend it, and you don't reach an agreement with your lender, the lender could go unopposed and get a deficiency judgment.
Another reason to employ a foreclosure defense attorneyis to put affirmative defenses in place within the foreclosure suit to help avoid the deficiency later if lender attempts to pursue a deficiency judgment following a short sale or foreclosure.
Amazingly, I find that few foreclosure suits are ever defended. In most cases the Distressed Florida Homeowner tells me their real estate agent advised them not to waste their money on a lawyer, that they (the real estate agent) or their lawyer can negotiate the short sale for free. I am not sure about everyone else, but my parents always told me; you get what you pay for! That said a foreclosure suit is likely the largest lawsuit the average person will face their entire life, and yet, the vast majority of foreclosure defendants never consult an attorney.
You need to understand that the lenders are intentionally creating vague short sale approval letters so that they can sell the opportunity to pursue a deficiency balance against you, the borrower, to collection companies. Deficiency balances that remain following a short sale are a golden opportunity for a collection company to make some money" dialing for dollars". Collection Company's often purchase these opportunities for pennies on the dollar and then pursue a deficiency against you. Such collection efforts could occur immediately following a short sale or foreclosure or even years later. If you find yourself being pursued for a deficiency balance following a short sale or foreclosure, you should speak with a competent Florida attorney.
I would like to mention here that a large portion of your leverage is your ownership of the property and your ability to deed the property to a person who is willing to pay the lender something for the property in a short sale transaction. It's your ownership of the property that gives you a standing to defend a foreclosure suit. Following a short sale, this leverage is gone. You should utilize this leverage while it's available, prior to a short sale.
To sum it up, if you choose to close on the sale of your property in a short sale transaction under a vague short sale approval letter, you will likely face collection efforts ranging from "dialing for dollars" to a full-blown suit based on the promissory note. Speak to a Florida foreclosure defense attorneybefore deciding. For that matter, speak to a Florida foreclosure defense lawyer before missing that first payment. There are several things that Distressed Florida Homeowners can do prior to missing that first payment that could go a long way towards preventing the lender from pursuing a deficiency balance.
Finally, although there are no guarantees of permanently resolving the deficiency judgment issue inside of the foreclosure suit your success rate will increase considerably when you engage a competent Florida foreclosure defense attorney.
