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Do You Need a Lawyer for a Sacramento Short Sale?
You may not need a lawyer in Sacramento to short sale a single family home.
Because of the liability that can befall a Sacramento real estate agent who does not tell a client to get legal advice when the client asks legal questions, every smart real estate agent will advise a client, especially a short sale client, to get legal advice — even if the client doesn’t really need a lawyer. Knowing this, a client might ask whether legal advice is necessary and, again, that is a tricky situation because we’re damned if we tell them no and we’re damned if we tell them yes. Besides, we’re not lawyers.
If a seller who is contemplating a short sale hires a lawyer, that seller will most likely pay the lawyer somewhere between $3,000 and $6,000. Out of pocket. Once — out of all the $65 million in short sales that I have negotiated over the past 8 years — I can recall only one time in which a negotiator agreed to pay a small portion of the lawyer’s fees. So, while a lawyer might tell a seller that they will ask to be paid from the proceeds of sale, it doesn’t really happen very often and, when it does, that payment is probably not in full.
If a seller who is contemplating a short sale hires a Sacramento short sale agent to handle the short sale, the commissions paid to the agent are paid from the proceeds of sale. There is no arguing with the negotiator about paying the agents because the commissions and all of the ordinary closing costs are paid from the proceeds of sale. Nothing out of pocket for the seller to pay, not to mention, a bank cannot under CA Civil Code 580e force a seller contribution; it’s against the law. A seller who hires a competent short sale agent basically gets the short sale completed for free.
Every so often, I might run across a situation in which the seller could use a lawyer’s assistance. It’s not to get a release of liability because you don’t need a lawyer for that. It’s not to avoid a deficiency judgment, because you don’t need a lawyer for that, as long as you’re doing a short sale. It’s not to advise whether the seller should do a short sale because short sales trump foreclosures. Short sales win hands down.
When I first started to do short sales, often I would refer the difficult cases to a lawyer, but I have discovered that I can handle them with ease (not to mention, laws favor the sellers now), so why not save the seller some money? Today, I might advise that a seller should hire a lawyer if the bank continually rejects the short sale for one reason and one reason only: because banks typically don’t want to mess with lawyers. Agents? Pfff.
I closed a short sale this week that I’ve been working on for almost 18 months, which is an unusually long period of time. We had received 3 or 4 rejections. I suggested that the seller hire a lawyer during the last go-around, but the seller said she could not afford it, and besides, she had “faith” in me. OK, I don’t give up — I have a ton of perseverance, and I am analytical. She begged me to re-submit one more time. I repackaged the short sale and resubmitted, and was accepted! Maybe short sale sellers don’t need a lawyer? Maybe sellers need only a top notch short sale agent who stays up to date on all of the changes in short sales?
Many lawyers hand over the package to paralegals or assistants and they don’t personally negotiate the file anyway. They also might not know much about real estate or have extensive experience in real estate. I’ve talked with lawyers who did not know how to fill out a HUD for Bank of America. The bell curve applies to just about any profession. You’ll find bankruptcy lawyers who offer to negotiate short sales because it’s another avenue of revenue for them. When short sales go away, they will go back to bankruptcy cases. Some will suggest bankruptcy alongside a short sale, which doesn’t make a lot of sense to me. You can’t do both simultaneously.
But people are afraid when it comes time to do a short sale and they don’t know where to turn. They think they need a lawyer to do a short sale. They are worried about consequences and liability and taxes when laws mostly remove those concerns. Will a lawyer tell a potential client that they don’t need a lawyer to do a short sale? If you ask a real estate agent if this is a good time to go on the market, what would an agent say? Same deal. Except most people in California do not need a lawyer to do a short sale.
California Short Sale Taxes vs. Personal Liability
A reader from my homebuying website on About.com asked me this morning if he could stop paying on a promissory note after his short sale closed. His short sale agent negotiated, he said, two purchase-money loans in 2010, in which he ended up paying the second lender $5,000, plus he handed over an additional $10,000 promissory note to a credit union. I suspect that the credit union loan was not a purchase-money mortgage because credit unions were not in the business of financing 80 / 20 combo loans. I’m betting that second loan was a hard-money loan. But that’s neither here nor there. The main problem for this guy seems to be that he negotiated a discounted payoff and promised to repay part of it, which he hopes to undo.
This is a pretty good example of short sale confusion. Not only do some people hope that once a law changes or goes into effect that it’s retroactive and can reach back into the past to change agreements or somehow alter things that were legal to do into being against the law — which ain’t gonna happen — but personal liability is often confused with taxation issues. Whether in California a seller has personal liability for a loan after a short sale is a separate issue from whether a seller is liable to pay taxes on that forgiven debt. Mortgage debt relief and whether banks can legally pursue a seller for a deficiency are not the same thing. They are two different things.
But wait, you might say, does this mean a bank might try to collect the balance due on a short sale at the same time the government goes after a seller for taxes on that balance due? Yes, that’s exactly what I am saying. It’s a double whammy.
Fortunately, SB 458, passed in California in July of 2011, added Section E to the California Civil Code 580. It basically says that short of mortgage fraud, in which case it can still pursue, if a seller does a short sale on 1 to 4 units, the bank can’t pursue; can’t go after the seller. But that’s for short sales that closed after July of 2011. It doesn’t matter if the loan was hard money or purchase money, whether the property was owner occupied or a rental, whether the loan was in first, second or third position. Can’t go after the seller. This is a good reason to avoid foreclosure and try to do a short sale. Especially if a seller has a hard-money loan because, legal experts say, foreclosure proceedings do not offer any protection for the seller against a hard-money loan.
But can the seller be taxed on a short sale? On the federal side, for 2013, the mortgage debt relief law has been extended to January 1, 2014. The California law regarding short sale taxes for 2012 has expired. State legislators are working on an extension. This is the part where the law after extension the last time was made retroactive. It took California lawmakers almost a year to pass the extension last go around. We were sweating. But then they made it retroactive. Will they do it again this year? We sure hope so. But this is a classic example of why a seller in Sacramento should get legal and tax advice before doing a short sale. Don’t rely on your Sacramento short sale agent to dispense legal and tax advice because we are not allowed to do it.
Why You Might Not Care About Mortgage Debt Relief
Many of my Sacramento short sale sellers are concerned about the mortgage debt relief extension, which is presently sitting at the U.S. Senate in limbo. Mortgage debt relief is the process of relieving a seller of having to pay taxes on forgiven / canceled debt. For example, if you sell a home for $100,000 and you owe $200,000, the bank is forgiving $100,000 of debt when it does a short sale or a foreclosure. Under regular IRS rules, you might be responsible for paying taxes on $100,000 of income that you did not get in your hot little hands. If you’re in a 30% tax bracket, that’s $30,000 you could owe the IRS.
At present, this relief from taxation expires at the end of this month, on December 31, 2012. There is a bill extending the relief through 2013. It stems from an original bill that was passed 5 years ago and has been extended ever since: the 2007 Mortgage Forgiveness Debt Relief Act. The big question is will it be extended again?
The bigger question should be what happens if it doesn’t? Are you affected? This is the question I would like every Sacramento area short sale seller to ask an accountant. Don’t go poking around online reading crap that may or may not be true — including this blog. I am not an accountant. I cannot give you tax advice. I am a Sacramento short sale agent. I sell homes all over a four-county area. Lots of them. More than 100 a year. But I don’t give tax advice.
Having said that, I will tell you that accountants have told me that California purchase money loans are not affected. They say it does not matter whether you close this year or next year or ten years from now, if you have a purchase money loan and you live in California, there are no taxes due on that canceled debt. Furthermore, mortgage debt relief is not a short sale exception. If you have to pay taxes for some reason on canceled debt, it applies to foreclosures as well as short sales. So, opting for foreclosure instead of doing a short sale is not going to save your butt. But don’t take it from me, ask your accountant.
Moreover, ask your accountant about insolvency exceptions. If you owe more than your assets are worth, you might be insolvent. Insolvency does not mean you are sleeping under a bridge and holding a sign saying something goofy like you will work for food when what you mean is you would like somebody to give you some money. It means your liabilities exceed your assets. Almost every short sale seller is in that boat. If you are insolvent, the government makes an exception for you.
So, before you get all excited over whether the mortgage debt relief will be extended, please, I beg of you, talk to an accountant. Doing a short sale is stressful enough without adding this little quirk to it. It might be totally unnecessary for you to stress over mortgage debt relief. Read this recent article by reporter Ken Harney in the Washington Post, after he interviewed this Sacramento short sale agent about mortgage debt relief.
Taxes for that Sacramento Short Sale
Time is running out to avoid paying taxes on a Sacramento short sale. The 2007 Mortgage Forgiveness Debt Relief Act expires on December 31, 2012. This is the law that exempts a short sale seller from paying taxes on forgiven debt for a personal residence. Will the law be extended? Most likely, if the past is any indication and the future continues to be as uncertain as it is. You know how they say history repeats itself. That’s because it does. And we have an election year. It’s in the 2013 budget.
Some of you may not recall what happened last go-around with this short sale tax issue. When it expired, it was not renewed right away for the following year. Sellers were closing short sales fearing the worst: that not only did they lose their home, but now the government would be sticking outs its hand and taxing them on the short fall difference. We had California taxes to deal with at the same time. It was a scary problem. Congress dinged around on the short sale taxation extension and finally granted the extension. Then our California exemption came through, too. Just in time for taxes. And it was made retroactive. We were all biting our fingernails.
I am working on a Bank of America HAFA short sale. Yeah, I know, I’m a sucker for punishment. I have a few of them. You can read all the government rules for HAFA about the timeframes to process a HAFA short sale, and they are pretty much meaningless. It takes Bank of America a good 4 months, on average, to approve a HAFA short sale. If you’re teamed up with a Green Tree mortgage in second position, God help you. Green Tree closes files after 90 days. So, you can see the problem. Not only that, but after 6 months, Green Tree sends its loans to charge off. It’s better not to have a short sale charge off if you can avoid it.
This particular seller is very concerned that she won’t close this year. I believe she will. It’s been 9 months already. You can get pregnant and give birth in that period of time. Bring a tiny new life form into being. But that HAFA short sale at Bank of America can’t close within a reasonable timeframe.
Your safest bet is to close your short sale escrow within the confines of the 2012 calendar year. That way there is no question. But if you have to rollover into 2013, do so knowing it’s a risk. Although, a calculated risk. Do you think the government will hang all of these short sellers out to dry? This Sacramento short sale agent says probably not. Not if history repeats itself.
