Expert: Diann Tonnesen - 12/20/2009

Question
QUESTION: We have been approved by our lender to do a short sale and a buyer to buy our home but my question is our loan is $296,000 and our house was appraised at $120,00...there is a difference of $176,000 between what we owe and what the house was appraised at. Once the house is sole for $120,000 are we going to have to pay the $176,000 difference of this house?????

ANSWER: Hi Linda,

You will need to review the short sale paperwork and terms agreed to by your bank VERY carefully to answer this question. If your lender has agreed to approve a short sale on your home, you should be getting (or have already gotten) paperwork to sign that states the terms the bank is agreeing to. Typically the paperwork would list the sales price the bank will agree to and how much in closing costs the bank will agree to pay. This paperwork could include whether they want you to sign a promissory note for a specific portion of the deficiency balance of $176,000. Or it may relieve you of all further responsibility.

BUT THE PAPERWORK MAY ALSO INCLUDE A STATEMENT SAYING THAT THE BANK RESERVES THE RIGHT TO COME AFTER YOU LATER FOR A DEFICIENCY.  There can be a wide variation in terms even within the same bank, so again, you must go over the specific terms being offered by your bank for your home in detail. Also remember that, within reason, you can usually negotiate the terms being offered. (Just as an FYI, on a foreclosure the banks do have the right to go after the borrower later for a deficiency judgment, but as a practical matter I have never seen one do so. The same would probably hold true for a short sale that retained the right to pursue a deficiency. They know that the borrower would just file bankruptcy anyway, so they don't bother. But you need to be aware of the possibility, however remote.)

Another thing you need to consider is that the bank may report your deficiency of $176,000 to the IRS. You should definitely contact your tax consultant to see if the deficiency amount could be added to your income. You might be subject to paying taxes on that amount. It is possible to negotiate to have this waived, but again, you need to do your homework in advance.

Hope this helps!

Diann



---------- FOLLOW-UP ----------

QUESTION: We have a short sale real estate agent working this for us...but I have found that she leaves things out if we don't ask. When I spoke to her last night she stated that she spoke to our lender over the phone and got an figued amount that they would consider $120,000, but she said she had no actual paperwork from the lender?? THE Question....Is that typical? She wants us to sign an addendum where the buyer is willing to pay $117,500  (she stated the bank  accepted that amount)for the house but we have to sign the addemdum and return it quickly before the lender changes their mind...is that typical? We feel rushed and when we ask her questions she is very vague.

Answer
It is possible that your agent got a "verbal" okay from the bank's short sale negotiator and that the bank's actual paperwork will follow later. As a general rule in real estate, I would never sign anything until you feel that all your questions have been answered to your satisfaction. But just to be on the safe side, you could also have your agent add a clause to the addendum that states that the sales contract is subject to your review and acceptance of the final terms of the bank paperwork on the short sale.