Scottsdale and Phoenix, Arizona Real Estate Attorney- Short Sale FAQs

Law Office Of

Joseph A. Velez

480.710.5079

Real Estate & Business Law Attorney

  1. Legal Advisements: Having an attorney manage the case affords the client immediate access to a licensed Attorney with a full range of legal expertise and specific knowledge of the case details, should it be required.  Advice for bankruptcy, debt negotiations, and tax implications are immediately accessible.

  2. Detailed Case Overview: A full legal & financial review of a client’s loan scenario by an experienced attorney ensures a negotiating and/or legal advantage are identified and introduces into the case management and strategy.  

  3. Attorney Supervision for On-Going Negotiations:  Attorney representation on behalf of the client may be afforded a higher priority with lenders given the various legal options available to a licensed Attorney.

  4. Managing Potential Lawsuits:  As the case evolves through time, should it be necessary that other legal remedies and defenses be required, an attorney, intimately involved with the specific case, will be available to handle and manage them with a separation agreement.

  5. Attorney-Client Privilege: Interaction between client and attorney are legally protected and “privileged” by law thereby offering a high level of confidentiality and professionalism. 

  6. Attorney “Code of Ethics” Benefits: An attorney is bound by strict rules of legal conduct that offers the client a higher level of confidence in this critically important matter.


What are some of the seller benefits of a short sale?


Answer: With a short sale, sellers avoid having to go through a lengthy foreclosure process and prevent the impact of a foreclosure on their record.  A foreclosure can cause a deduction between 200-300 points and stays on a report for around 7 years.  Home loans and car loans will become difficult for a long time and/or future interest rates will be extremely high.  A short sale on a credit score can be as little as 100 points and several ‘strikes’ for the months of missed payments.  But once the property is sold and the debt is considered satisfied, a person can immediately begin rebuilding credit, so in as little as 2 years they can be eligible of another loan.  In the mean time they may still have the credit to satisfy a credit check for a job, a home, a rental, insurance, etc.


What are some of the risks of a short sale?


Answer: Not all lenders will offer to completely relieve the seller of the responsibility of paying off the balance of the loan when agreeing to allow the property to be sold.  In some cases the lien holder could request the homeowner sign a promissory note to pay back some or all of the difference. In this case the homeowner could refuse the agreement and allow the lender(s) to continue the foreclosure which typically nets a junior lien owner $0.  Depending on the structure of the loan the lien holder could still pursue a judgment to pay off the loan difference even after a home is foreclosed and/or sold at auction.


There is no guarantee all the lien holders will accept the short sale.  Second lien holders are toughening up and requesting higher pay-offs knowing they have control of the sale, and 1st lien holders may have strict guidelines preventing paying a 2nd lien holder more than a few thousand dollars.  In these cases a short sale may not be viable.


The short sale of a non-primary residence may be required to pay income taxes on the short sale amount forgiven.  When the lender decides to forgive all or a portion of a borrower’s debt, the forgiven amount is considered (taxable) income to the borrower.  It is important to know what to expect when it comes to tax implications.


Does a homeowner need to be delinquent on their mortgage for a lender to consider a short sale?


Answer: Some lenders will accept a short sale file for approval without the loan being delinquent.  Other lenders will not accept the file until the loan is delinquent.  It will depend on the lender.


What options other than a short sale might a homeowner have?


Answer:

  1. a.Cure the mortgage default (bring the payments current);

  2. b.Attempt a loan modification that adjusts the terms of the existing loan;

  3. c.Refinance the mortgage with another lender;

  4. d.Try to sell the home through normal channels/bring cash to the closing;

  5. e.Attempt to get the lender to accept a deed in lieu of a foreclosure; and/or

  6. f.File for bankruptcy.


What does a lender consider a “financial hardship?”


Answer: To some extent, that will depend upon the lender who is considering the short sale request. Generally, so long as the hardship is real and the lender believes the loan is likely to become delinquent as a result, the short sale request will be processed by the lender.  A big key to getting lenders to accept a hardship is to submit a strong hardship letter.  The hardship letter sets the tone for the entire file.  Below you will find a list of “hardships” that are common and frequently accepted by mortgage lenders.

  1. Immediate family illness or injury

  2. Illness or injury in the extended family - particularly if it forces relocation

  3. Job relocation when the property is equity deficient

  4. Job loss or significant income loss

  5. Divorce or split of domestic partners

  6. Adjustment in mortgage payment or unforeseen increase in living expenses


This list is not exclusive and there are many more reasons a lender will consider.

     

How does a bank determine the price it will accept on a short sale?


Answer: The estimated value of a property as determined by a real estate broker or other qualified individual or firm.  A Broker Price Opinion (BPO) is based on the characteristics of the property being considered for short sale.  Some of the factors a broker will consider when pricing a property include: the value of similar surrounding properties, sales trends in the neighborhood, an estimate of any of the costs associated with getting the property ready for sale and/or the cost of any needed repairs.  It is important to note that a BPO is not the same as an appraisal.  The bank will use the BPO to determine the price it will accept on the short sale of a property.


Will the banks negotiate on the price of a short sale?


Answer: Yes, but there are many factors that go into what net the banks will accept in a short sale.





























Will a homeowner owe income taxes after they sell their property in a short sale?


Answer: The tax liability from a short sale where the debt was forgiven does not apply if that debt was used to purchase or improve a primary residence.  This means that homeowners who negotiate with their lender to lower their original mortgage used to buy their primary residence will not have to pay taxes on the forgiven debt.  The same applies for borrowers who took out a loan or refinanced in order to improve the property.


But when a loan is taken out to purchase a second house, consolidate debt, pay college tuition, or for any other purpose besides buying or improving the primary residence, there will be tax consequences in a short sale.  The IRS treats any of this forgiven debt as if the bank gave the homeowners money, which the owners then immediately used to pay down the loan on the house.  Thus, the borrowers are forced to pay taxes as if they received the money from the bank as regular income.


There are other exceptions available under the Mortgage Forgiveness Debt Relief Act (www.irs.gov).  It is imperative the seller speak with their CPA about the tax consequences in a short sale.


Will a lender postpone a trustee sale to complete a short sale?


Answer: Generally.  Depending on the lender and the time frame the purchase contract was submitted to the lender(s) for approval, a lender will often postpone the trustee sale.However, it can be held on schedule even if there is a contract being considered by the lender.


Can a lender who forecloses on a loan secured by a deed of trust or a lien on an Arizona home sue the homeowner for a deficiency?


Answer: Yes, if the seller is not protected by Arizona Anti-deficiency Statutes, A.R.S. 33-814.  (G) and 33-729.  (A).  The Anti-Deficiency Law applies if a deed of trust on real property located on 2.5 acres or less which is “utilized” as a single one-family or single two-family (duplex) dwelling is foreclosed by using a trustee's sale (non-judicial foreclosure). No action can be brought post sale for the difference between the winning bid and the total debt on the day of the sale;.

What is a Short Sale?


Answer: A short sale is a sales transaction in which one or more of the secured creditors on a real property permit the conveyance of the property without being paid in full.  A short sale does not by its’ very nature address whether the underlying indebtedness is being released or satisfied.  Instead, a short sale is separate and apart from the enforcement of the promissory note. 


Can a seller use any Realtor to short sell their home?


Answer:  Any licensed Broker/Realtor can list a home on the MLS.  However, it is important that a seller do their homework and choose a Realtor who has substantial experience listing and negotiating short sale transactions.  For the short sale process to be efficient and successful, a Realtor must have experience short selling properties.


Does a homeowner need an attorney when short selling their home?


Answer: There are many benefits to having an attorney manage a short sale.

The Law Office of Joseph Velez

Commercial Real Estate & Business Law Attorney

Scottsdale Financial Center

7272 E. Indian School Rd., Suite 111

Scottsdale, Arizona 85251

480.710.5079

  1. What is the condition of the house?

  2. What is the demand in the local market?

  3. What is the Broker Price Opinion (BPO)?

  4. How long has the home been on the market and at what price was it offered?

  5. How well has the home been marketed?

  6. Are there any existing offers?

  7. What is the financial condition of the bank and the banking industry?

  8. What is the competition?

  9. What is the absorption rate?

  10. What are the recent sold prices including REO sales?

  11. How many payments are late?

  12. How much is the balance of the loan?

  13. How many lenders are involved?

  14. Is the mortgage insured?

  15. Who owns the mortgage?

  16. How well is the short sale package presented?

  17. Who is the negotiator?

  18. How many files are on the negotiators desk?

  19. Are there any contract contingencies?

  20. Is this a cash offer?

  21. How certain is the bank that the deal will go through?

  22. Who is the investor?

Our law office represents clients throughout the Phoenix, Arizona area including the cities of Scottsdale, Maricopa, Mesa, Surprise, Paradise Valley, Avondale, Gilbert, Chandler, Glendale, Florence, New River, Fountain Hills, Peoria, Surprise, Queen Creek, Tempe, Sun City, Apache Junction, and Casa Grande. We serve the counties of Maricopa, Yavapai, Gila, Pinal, La Paz, Yuma, and Pima County.

DISCLAIMER: This site and any information contained herein are intended for informational purposes only and should not be construed as legal advice. Seek competent legal counsel for advice on any legal matter.

One hour initial office consultation fee is $295 for the matters discussed above.