Our friends at Thomson Conant sent this article we thought our readers would benefit. Many, if not all, of these questions are often posed to a real estate agent verses a qualified attorney.
The stress of parting with a home can make even the most reasonable person become difficult to communicate with. Realtors need to be particularly cautious when answering questions that could later be taken as legal, financial or tax advice. Here are some of the questions that could come back to haunt a Realtor.
1. Will I still owe anything on the loan after a short sale?
This is the most dangerous question of all and should be avoided at all cost. Regardless of how well informed a Realtor is on deficiency statutes and related case law, the best answer is always to talk to an attorney. Homeowners rarely know the nature and history of their loans. We are currently finding that over 60% of homeowners that tell us their loans are purchase money only, are incorrect in their recollection. So when the Realtor makes a statement that the homeowner does not have deficiency liability, there is a very good chance that they are wrong in this assumption. To be clear, the anti-deficiency statutes do not apply to short sales. The statute clearly says it applies to foreclosures, but does not mention short sales. It takes an experienced, real estate attorney to make the determination of deficiency liability. Trying to make this determination based solely on the statements of and documents provided by the homeowner is placing the homeowner at risk. Lenders have been known to file lawsuits against homeowners even when they may be protected by anti-deficiency statutes. So even a correct answer to this question could potentially backfire. Additionally, the deficiency issue is too complicated for most homeowners to fully understand. Having these answers in writing becomes critical so there is no question about who said what and whether the homeowner fully understood the implications.
2. Will I have a tax obligation after a short sale?
This question should only be answered by a qualified CPA or tax attorney. There are numerous factors that are not disclosed by the borrower to the Realtor that may determine this answer. The Mortgage Debt Forgiveness Act of 2007 can often provide relief from these obligations and Section 108 of the IRC on insolvency may provide additional benefits to some homeowners. However, this is a complicated issue and should be left to the tax professionals.
3. Should I sign a note or pay money to the lender to get a short sale done?
This is a decision best left to the homeowner. If it is later determined that the borrower had no deficiency liability by going to foreclosure, completing a short sale where funds are required of the homeowner creates damages and places the Realtor at risk. By letting an attorney give a written legal opinion to the homeowner, the Realtor can shift the responsibility.
4. After the lender files a 1099 does this mean they will not file a deficiency suit?
Lenders are fighting hard in court to establish that a 1099 is filed only to comply with accounting requirements and this does not stop them from later filing deficiency lawsuits against the borrowers.
Short sales are likely to be the best answer for the vast majority of homeowners that are looking for a solution to their mortgage problems. The Mortgage Debt Forgiveness Act is set to expire at the end of 2012. We believe that this will force an increase in the number of people initiating short sales in the next 18 months. According to an article by Laurie S. Goodman (Dimensioning the Housing Crisis) there has already been 2.5M homes go to foreclosure or short sale. However, there are 7M in various stages of default (shadow inventory) and an expected 5M more that will soon follow. It appears as though short sales could take several years to work through this inventory.
