Thursday, May 10, 2012

2012 - The Year of The Short Sale

Many ask "Why would I want to short sale my home if I already surrendered it in a Bankruptcy, won't the bank eventually foreclose?"  There are several reasons a post petition debtor would want to short sale a home even if surrendering in a bankruptcy. 

#1  A Fresh Start toward Loanworthiness may depend on when debtor's name is taken off title.
At present in Nevada, foreclosure can take several years to be completed, so if the debtors ultimate goal is to get a fresh start on credit repair, until the house is no longer titled in the debtor's name, the fresh start may be delayed.  Many lenders start the waiting period for financing post bankruptcy based on when the foreclosure is completed or when the short sale closes, rather than the discharge date of the debt.  For a Nevada homeowner post bankuptcy looking to immediately improve their credit for future financing, a short sale is the quickest way to get the house out of the debtor's name and kick start the clock.

#2.  While the debt may be discharged, the debtor is still liable as a landowner
As indicated above, if a debtor is waiting for foreclosure to occur, it may take years to be completed by the lender, and in the meantime the debtor is still responsible as a land owner for the property.  If the property sits vacant, there are numerous consequences that create liability for the debtor that have nothing to do with the loan obligation.  Cities and counties can impose health and building code fines should the property be deemed in violation. Squattors and/or others may take up residence in the vacant property and cause harm or nuisance to neighbors. Often home owner's insurance policies are void if the property is vacant for an extended period of time, and if the debtor informs the insurance carrier that the property is vacant, then an additional premium will have to be paid if vacancy coverage is offered, otherwise there may be no insurance coverage to protect the debtor for premises liability.  Without insurance, the debtor could now be in a situation where an event occurs post petition creating liability as a land owner, and a debt thus created that may not be dischargeable.

#3.  Potential Tax Issues may Occur with Post-Petition Disposition of Property
While the underlying debt is discharged in Bankruptcy and therefore not factored as "income" as would normally occur when debt is cancelled, there may be instances where tax liability could be created if it takes several years for the property to be transferred out of the debtors name.  This is a complex tax issue that requires the assistance of a tax professional to determine if there could be tax liability later on for the debtor.  If there could be a tax issue such as a gain for post-petition disposition of the property, then a short sale while the bankruptcy estate is still open would cause the "gain" to go to the estate, rather than the debtor.

There may be valid legal reasons for why the debtor would not want to sell the property post-petition.  In the past, many bankruptcy practitioners would advise against a "short sale" post petition because the debtor is entering a contract that could lead to post petition litigation as all real estate transactions have a certain level of exposure to lawsuits.  But given the choice of evils, a debtor may be better off to short sale as opposed to waiting for the bank to foreclose.

THE AMERICAN DREAM IS AN ALBATROSS FOR MOST IN NEVADA and specifically Las Vegas, is still in the midst of the foreclosure crisis. With almost 70% of all home values being upside down, unemployment at an all time high, and the financial strain that many adjustable rate mortgages have become, selling may be the best option for a homeowner looking for an answer to their financial stress. A short sale or short payoff occurs when a lender agrees to accept less than the outstanding loan amount in exchange for a release on the lien to the property (the collateral). Even if there is more than one lien on the property, a short sale may be possible if both lenders agree to accept less than the outstanding loan balance. Short sale may be best in situations where the following circumstances are burdening a borrower:

•Declining real estate values
•Unexpected health issues resulting in difficulty making mortgage payments
•Lending rate increases on adjustable rate loans
•Over-extended borrower with multiple mortgages
Job loss or transfer

Short sales are more complicated and time consuming than an average real estate sale, making it important to retain an experienced attorney to oversee and negotiate the transaction.

Lenders Prefer Short Sales
Short sales are more beneficial to a lender than a foreclosure. Lenders prefer short sales because they are not in the business of managing and owning property, and short sales are less expensive than completing the foreclosure process. Lenders accepting short sales receive a substantial percentage of the outstanding loan amount due without waiting for a time consuming foreclosure, and they are able to avoid foreclosure and maintenance fees.

Short Sale is not for Everyone
There may be tax consequences and/or legal consequences for a seller in a short sale. I encourage anyone who is contemplating short sale to meet with both an attorney and a tax professional to fully evaluate whether short sale is right for you.

Buying a Short Sale
For buyers, a short sale may permit the purchase of a better home at a more affordable price. Many homeowners or squatters who take up residence in an abandoned home bound for foreclosure, cause intentional damage that may not be immediately evident or the shear lack of maintenance requires costly repairs, making some foreclosures a virtual "money pit." In most instances, when you buy a short sale, you are buying the home from the current homeowner who is most likely still  occupying the property. Even if the property is vacant, most homeowners are still maintaining the property and will be required to disclose any known defects, such as mold or other major repairs. While most short sales are "as-is", you still have the opportunity to have an inspection so that you know exactly what you are buying. The wait for approval may be long and there may be issues related to the lenders contracts and terms that complicate or may even frustrate the short sale process. But ultimately, buying a short sale as opposed to buying a foreclosure, will result in you having more information about the condition and less likelihood of ending up in a money-pit.

Whether your are a seller or a buyer in a short sale transaction, an attorney can help you navigate the complexity and minimize risk.