Tampa homeowners considering a short sale might wonder if the bank may someday ask for repayment of the amount they are short. If the bank approves a short sale that results in the bank forgiving $50,000, for example on a home in Lutz, will the bank have the ability to seek repayment years later?
Unless explicitly waived in writing, a debt holder has the right to ask the court for a “deficiency judgment” to collect on debts that are not paid in full. This holds true for a foreclosure, a short sale, and even credit card debt. At the end of the short sale approval process, the bank will produce a letter proposing terms for the short sale acceptance. The precise wording in the “short sale approval letter” is very important in determining your future liability. Here are a few ideas to keep in mind:
#1) You Might Negotiate Away the Deficiency Judgment Before Closing
Upon approval of a short sale, the bank will send a letter with terms and conditions that must be signed by the homeowner. If you are not satisfied with the wording set forth in the letter, you can stop the short sale process. Alternatively, we can attempt to negotiate a change in the wording to remove the risk of a deficiency judgment. In many cases, Team Bohannon has been able to obtain language explicitly stating that a debt is satisfied, paid as agreed, or that the lender waives all rights to pursue a deficiency judgment.
#2) A Short Sale Deficiency Will Be Smaller than a Foreclosure
If the lender(s) and/or investors are determined to reserve the right to pursue a deficiency judgment in the future (for the short sale), you can decide whether or not you would accept the conditions of the short sale. If you allow the bank to foreclose, however, you will face a deficiency judgment. The amount of the deficiency will likely be likely be larger with a foreclosure. We have seen sellers say “I’m not gong through with a short sale if I have a deficiency”, only to later realize they would be stuck with a greater deficiency after a foreclosure. Why? If it takes an extra 6-12 months to complete the foreclosure process, we would expect: a) the condition of the home to deteriorate, b) Tampa real estate values to continue to decline, c) the bank to incur addition legal/tax/HOA/CDD fees, d) and additional uncollected penalties to be assessed. Hence the eventual sale price will be less, and the deficiency greater.
#3) A Deficiency Judgment Can Be Settled
If the bank or investor reserves the right to pursue a deficiency judgment at some point in the future, there is no guarantee this will happen. Remember, there is no automatic schedule for payments. There is talk that banks may bundle up hundreds or thousands of these bad debts and sell them to collections companies at some point. As with any unsecured deficiency or debt, we understand that uncollected debt can sometimes be settled for a fraction of the original amount.
#4) You Cannot Negotiate in Advance
It would be nice to know if a lender was going to insist on a deficiency judgment before you start the short sale process, but there is no way to know in advance. Calling a bank is kind of like calling the IRS: the answer you receive might vary depending upon who you speak to on any given day. And today’s answer might not be the policy in 3-6 months when the bank is considering the short sale. To complicate matters, the bank usually does not even own the loan, and decisions about deficiencies may be made the the investor who actually owns the loan. Furthermore, we have seen banks/investors be much more determined to pursue deficiencies from people with questionable hardships, strong income and other assets. Additionally, we cannot assume that a bank’s approach to short sales and foreclosures will make sense to us; as 53 banks have entered into “loss sharing agreements” with the FDIC that may provide incentives for banks to keep racking up the late fees and eventually foreclose.
In summary, there is no way to know in advance if you will risk a deficiency judgment. A short sale transaction at least gives you the potential to negotiate away a deficiency judgment, or to face a lower potential deficiency. Contact Team Bohannon today for additional information. We will use all of our experience and expertise to help you avoid a deficiency and move confidently into the next chapter of your life.
