By Lawrence Vergun, J.D., MBA
Many of my clients holding residential and commercial real estate are asking about short sales, what they are, and how they work.
Typically, short sales occur when the value of the real estate is less that the amount of debt secured by the mortgages or deeds of trust on the property. While short sales occur during the sale of property, they are arranged in advance of the sale. In agreeing to a short sale, the bank holding a mortgage or deed of trust on the property accepts less than the full amount of the debt owned to the bank.
The reason that a bank accepts less than the full amount of what is owned to them is that you are able to convince the bank (through accurate documentation – which they will ask you to provide) that you are financially unable to pay the full amount.
It is important that you do not handle short sales yourself, unless you are particularly experienced with these types of transactions. Ask a real estate broker or an attorney for assistance. I say this because there are a number of logistical things that require special handling.
Before considering a short sale, many banks would like to see an offer in hand by a potential buyer, as well as evidence that the property has been listed for some time. (Make sure that you do not enter into a binding agreement with a buyer to sell your property unless that agreement clearly states that it is contingent upon the approval of the bank. An experienced realtor will know the exact language that needs to be included in the agreement with the buyer of the property so that this contingency is in place.)
You also need to inquire about whether the bank or banks – and there may be more than one, if you have multiple mortgages or deeds of trust – will release you from liability for the unpaid balance of the debt if a short sale occurs. Banks are more likely to agree to this release if your property is owned as your residence, because in many states (including Oregon and California) a bank knows that if they had to foreclose on the property, they might not be able to sue you later for the difference in the market value of the property and the debt that is owned. There are many, many exceptions to this rule, so it is important that you consult with an experienced attorney to evaluate your risk of being sued later for the debt, and whether your bank will agree to release you from that liability. If you have more than one mortgage or deed of trust, an experienced attorney will be able to tell you which of the banks might agree to this type of release.
Finally, there may be tax consequences to agreeing to a short sale. So you should also seek the advice of a qualified tax professional.
If all of this sounds confusing, it is because there are many things to consider before you decide whether a short sale is the right thing to do. However, do not be discouraged. Ask your realtor or your attorney whether it is feasible, based upon your financial situation, the type of property that you own (commercial vs. residential), and the number of banks that are involved.
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Practicing
since 1988, attorney Lawrence Vergun has successfully represented individuals
and businesses in the areas of business, real estate, corporate and
intellectual property law. He is a member of the Business Practice Group at the
Harris Law Firm, PC in Hillsboro, Oregon
You can Email Mr. Vergun at lvergun@harrislawsite.com