Primo Porcuna's Blog

Homeowners who have accumulated negative equity and experienced a financial hardship may be candidates for a short sale, in which the lender takes a loss as part of the transaction in order to avoid a foreclosure.

The lender’s cooperation is key, and the need for that cooperation presents a way for the Realtors to provide a service to the seller and create a closed home-sale transaction, rather than walk away from a homeowner in such a situation.

Negative equity, sometimes referred to as being “upside-down,” occurs when a property’s market value is less than the outstanding debts and liens against the property plus the cost of selling the property, according to Sterling Watkins, broker/owner of Short Sales Services in Folsom, Calif. One way to broach the subject of a short sale is to ask to see a copy of the homeowner’s most recent loan statement. Homeowners who believe foreclosure is a cure for negative equity may be surprised to be told otherwise.

“The biggest misconception is that once the house goes away in foreclosure, the loans went with it. [The Realtors] has to explain that that’s not the way it is. [The homeowner] used the house for security for the debt and just because the security went away, doesn’t mean the debt went away,” he explains.

However, Realtors should be aware that the vast majority of foreclosures in California are foreclosures on a deed of trust, which do not allow the foreclosing lender to pursue the homeowner for any balance remaining on the foreclosing lender’s loan after the sale. Also, if a lender forecloses on a mortgage that was taken out by the homeowner to purchase his or her home (purchase money mortgage/deed of trust), the lender by law is not allowed to collect a deficiency judgment against the homeowner. Realtors should refer clients who have questions about whether they will owe money after a foreclosure sale to a knowledgeable specialist in this area as this can be a complicated question depending on the mortgage.

Lenders generally won’t countenance a short sale in the absence of financial hardship or if the homeowner is a candidate for forbearance or loan modification. Forbearance defers loan payments until the homeowner can recover from a temporary financial setback. Loan modification restructures the loan to enable the homeowner to make the payments, perhaps over a longer period of time. In such cases, the Realtor should refer the homeowner to the lender.

If the situation warrants a short sale, the Realtor should review the homeowner’s information before it’s submitted to the lender to make sure it presents a complete and accurate picture of the financial hardship.
The Realtor also should negotiate with the lender on the seller’s behalf, such negotiations require plenty of patience because banks “negotiate in a different fashion” than Realtors do. “They come back with a very hard-line approach to what they want.” Negotiations can be particularly difficult if a mortgage insurance company is involved as a “hidden third-party that influences the outcome”.

A short sale may involve adverse tax consequences for the home seller, though some exemptions may apply. Realtors should always refer home sellers to a competent accountant who can explain the tax effects of the short sale.