San Diego short sale


Saturday, October 27, 2007

san diego short sale vs foreclosure - IRS tax billl

The first question an upside down homeowner must ask themselves is why do a short sale.
Do I wish to help the lender?
Do I wish to help the buyer?
Do I wish to make money for the Realtors?

What am I doing for myself?

Am I really saving my credit?
Maybe, for now it looks like a short sale is better for your credit score, but that could change.

Am I risking tax for loan forgiveness by doing a short sale?
If you are a california homeowner you may be hitting yourself with a very large tax bill for loan forgivness. If the bank writes off $100,000 you could get hit with a tax bill as if you received $100,000 in income. That might even jump your tax bracket.

I have heard many realtors and loan brokers say there is no way around it.
Wrong, a foreclosure or deed in lieu does not cause loan forgiveness for some california home owners where a short sale does. (there are other ways to eliminate or minimize the tax bill)

In our next post will show how some short sales have credited deficiencies for home owner where none existed before.

Sold out juniors in California foreclosure law

A further exception to consider is that 580 d does not bar recourse seconds from pursing deficiencies against homeowners.

We have read that Indy Mac says it is going to seek deficiencies against California homeowners.

Because properties values have slid about 20% many of those 100% financing 80 20 loans will put the second into a sold out junior status. If you do not have purchase money protection you might want to review all our pre-foreclosure solutions including a short sale.

Sold out junior situations are one of the situations in which a San Diego homeowner could really benefit from a short sale

Exception to Recourse loans and deficiencies

A lender may have the right to pursue a deficiency but it still has to decide whether to go the longer tricker route of pursuing a judicial foreclosure or using a non judicial foreclosure or trustees sale.

Many if not most people tell homeowners not to worry about deficiency after a foreclosure. (watch out for short sales, many lenders do seek a deficiency after a short sale to the financial ruin of the homewowner and dismay of Realtors who practice law without a license and call themselves short sale specialists and loss mitigators)

It is true that most banks sought non judicial private sales in the early and mid 90s, but back then the amount were much smaller and much of the real estate mess in san diego was caused by restructuring and relocation.

This time around many people still have high paying jobs whose salaries could be attached and whose deficiencies are greater than six figures.

We have already seen many banks say they will seek deficiencies on seconds.

California Recourse loans and Short Sales

If you loan does not fit within one of the exception cited in the previous post, you most likely have a recourse loan. (some loans may be written as non recourse loans as part of retirement planning vehicles so you may wish to read your loan document)

What does it mean if a San Diego homeowner has a recourse debt. It means the lender could elect to go after the homeowner for a deficiency between the amount of the loan and the amount it got paid after a foreclosure sale.

Recourse vs non recourse loans and short sales

As seen in a previous blog entry -

barring certain exceptions a loan is a non recourse loan when the loan is made to purchase 1-4 units, the money goes into the purchase and the owner intends to occupy at least one of the units.

or, when the seller "carries back" some or all of the financing for the purchase of real property.

It has been noted that some exceptions to the purchase money protections might be waste, and fraud.

Practice tip, a short sale might be an opportunity to draft a release which could extinguish any problems which may have been part of the original loan transaction for both the lender and the borrower.

Now some people contemplating a short sale may have to consider whether their loan applications were less than perfect.

If there were problems with your loan application do not despair. Speak with your San Diego attorney. You have many options including short sale, deed in lieu or perhaps even looking into whether the loan broker made mistakes

Deficiency - Sold out juniors

Deficiency After Nonjudicial Foreclosure: "Cal. Code Civ. Pro. 580d does not bar a deficiency for a sold out junior (see Walter E. Heller Inc. v. Bloxham, 176 Cal.App.3d 266 (1985)), although, as we have seen, section 580b will bar some sold out juniors from recovery of a deficiency. However, the holder of a junior deed of trust that has sold itself out through non-judicial foreclosure on its senior lien will be barred from a deficiency on the note secured by the junior lien. In Simon v. Superior Court, 4 Cal.App.4th 63 (1992), a bank gave two separate, sequential loans to a debtor. The first loan, for $1,575,000, was secured by a first deed of trust on the debtor's personal residence. The second loan, for $375,000, was secured by a second deed of trust on the same property. Neither loan was purchase money. After default, the bank non-judicially foreclosured the first, credit bidding less than the amount due, and then sued the debtor for $375,000 on the second note. The court barred the bank from recovery on the second note, holding that it amounted to a deficiency barred by 580d."

Deficiency After Nonjudicial Foreclosure

Deficiency After Nonjudicial Foreclosure: "Cal. Code Civ. Pro. 580d bars a deficiency following a non-judicial foreclosure. Prior to its enactment in 1940, creditors could obtain a deficiency (unless barred by Cal Code Civ. Pro. 580b) following either judicial or non-judicial foreclosure, but judicial foreclosure was (and still is) subject to redemption for a year following sale and non-judicial foreclosure was (and still is) free of any right of redemption following sale. Enactment of Cal. Code Civ. Pro.580d is therefore said to have created a 'parity of remedies,' allowing the creditor to elect between judicial foreclosure (with a right to a deficiency but subject to a statutory right of redemption) and non-judicial foreclosure (with no right to a deficiency but free of the right of redemption). By barring a deficiency following non-judicial foreclosure, the hope was to discourage underbidding, a result supposedly accomplished for judicial foreclosure sales by the statutory right to redeem, following foreclosure, for the amount bid at the foreclosure."

Short sales vs. non judicial foreclosure law

When considering a short sale a san diego homeowner should assess whether the lender will be able to utilize a judicial or non judicial foreclosure.

580: "580d. Rendition of deficiency judgment after foreclosure under power of sale forbidden; Exceptions No judgment shall be rendered for any deficiency upon a note secured by a deed of trust or mortgage upon real property or an estate for years therein hereafter executed in any case in which the real property or estate for years therein has been sold by the mortgagee or trustee under power of sale contained in the mortgage or deed of trust. This section does not apply to any deed of trust, mortgage or other lien given to secure the payment of bonds or other evidences of indebtedness authorized or permitted to be issued by the Commissioner of Corporations, or which is made by a public utility subject to the Public Utilities Act (Part 1 (commencing with Section 201) of Division 1 of the Public Utilities Code)."

San Diego short sale law purchase money protection

This law is one of the basic consumer protection laws for owners of California real estate.

It is the basis of purchase money protection. And no short sale should be considered unless an recourse non recourse evaluation is undertaken.

A person with protection on this statue could be left much worse off after a short sale vis a vis a foreclosure. A upside down homeowner must make sure the short sale transaction has releases which leave them in an protected position.

580: "580b. Conditions under which deficiency judgment forbidden No deficiency judgment shall lie in any event after a sale of real property or an estate for years therein for failure of the purchaser to complete his or her contract of sale, or under a deed of trust or mortgage given to the vendor to secure payment of the balance of the purchase price of that real property or estate for years therein, or under a deed of trust or mortgage on a dwelling for not more than four families given to a lender to secure repayment of a loan which was in fact used to pay all or part of the purchase price of that dwelling occupied, entirely or in part, by the purchaser. Where both a chattel mortgage and a deed of trust or mortgage have been given to secure payment of the balance of the combined purchase price of both real and personal property, no deficiency judgment shall lie at any time under any one thereof if no deficiency judgment would lie under the deed of trust or mortgage on the real property or estate for years therein."

California law 580a - deficiency judgments

580: "580a. Deficiency judgments Whenever a money judgment is sought for the balance due upon an obligation for the payment of which a deed of trust or mortgage with power of sale upon real property or any interest therein was given as security, following the exercise of the power of sale in such deed of trust or mortgage, the plaintiff shall set forth in his or her complaint the entire amount of the indebtedness which was secured by the deed of trust or mortgage at the time of sale, the amount for which the real property or interest therein was sold and the fair market value thereof at the date of sale and the date of that sale. Upon the application of either party made at least 10 days before the time of trial the court shall, and upon its own motion the court at any time may, appoint one of the probate referees provided for by law to appraise the property or the interest therein sold as of the time of sale. The referee shall file his or her appraisal with the clerk and that appraisal shall be admissible in evidence. The referee shall take and subscribe an oath to be attached to the appraisal that he or she has truly, honestly and impartially appraised the property to the best of his or her knowledge and ability. Any referee so appointed may be called and examined as a witness by any party or by the court itself. The court must fix"

San Diego Short Sale Definition

You see lots of definitions of a short sale in which people state that the Lender agrees to accept less than what it is owed as full settlement of the loan.

That is a very dangerous definition. It is found in most of the websites on the net, it is found in most of the training materials I have seen for Realtors. And it is certainly stated by most Realtors.

It is also proof that you need an attorney to oversee your short sale transaction. The lender is trying to get its best deal and so is the buyer. The listing Realtor has to have the sale go through to get paid.

So who is going to be smart enough to make sure the seller is released from the deficiency. I have seen paperwork in which the lender states that is releasing he lien against the property but it is not releasing the seller from his or her liability on the note.

Whose is being paid to watch out for the sellers interest. More than one seller has contacted me and said, I sold my property via a short sale and now the bank is trying to collect the deficiency.

A short sale should be protecting your future not destroying it.

The note does not even have to part of the dea