This has been a topic on my mind for a while. I have been ‘specializing’ in short sales in the last couple of years, out of necessity. But it’s not what you think. It’s not because of all the “get rich,” “profit from short sales,” and the “new commission stream” emails I get from all the companies pitching their programs, certifications and products related to short sales – I got into this segment because the CLIENTS truly deserve someone who not only cares and is educated, but who is doing it for purely the right reasons.
I can’t advise clients in legal or tax matters, but surely I should know enough to know when a client may not be seeing the whole picture, or heading down the wrong road, shouldn’t I? As in any profession, shouldn’t we know more than our clients if we are saying we are “specializing” in something? Worse, if you’re an “EXPERT.” If you’re calling yourself an “expert,” and you’ve never done a short sale, where does that leave the client? Be sure your agent has A LOT of experience, or partners with someone who does.
I take my fiduciary duty to my clients seriously. When I take on a short sale listing, it is typically after several meetings, exchanges and discussions of options, loan mods, HUD counseling and every conceivable way they could save their home FIRST, before proceeding into the short sale track. Then,
Clients are STRONGLY urged to seek the counsel of an attorney and CPA before deciding on the course of short sale. It is rare that clients will walk away completely “scot free,” and they need to understand this. And, I tell them WHY they must talk to a tax and legal expert, those reasons include:
In California as it stands now, anyone who has done a short sale in 2009 through now, may be looking at a state income tax hit – and according to some news reports – many are shocked. Shocked? How could that be? How could a client be shocked if they were adequately advised to seek the counsel of a CPA or attorney for tax matters? (this may change if the lawmakers bring a satisfactory bill for consideration, but last week the bill was vetoed by the Governor for too much other “junk” that was contained within it)
How about those second loans and HELOCS? I hear clients are shocked and calling their agents wondering “how” after a short sale, these banks are still coming after them, or have referred them to collection agencies. Again, a discussion with an attorney about recourse debt vs. non recourse debt could’ve helped avoid any surprises. Refer to the not walking away scot free above… Most don’t. If you refinanced and got a second, used your HELOC for things other than your home, or simply used your home’s equity as an ATM machine – you very well may not have been totally forgiven for the deficiency on that debt.
Oh, and the HOA dues. I’ve heard some sellers have decided to foreclose because the HOA dues could not be negotiated away or down. The banks wouldn’t pay them all, and the buyer said no way. Some sellers thought/think if they walk away, and let a loan foreclose it makes all the HOA’s go away too. It may not be true. I often advise clients that if you can keep your HOA dues current, DO IT. If you can’t, then you need to let me know so we can keep in touch with that HOA and keep it from becoming a lien. We can often work with an HOA prior to that point and work out a pay-off arrangment. Remember, the banks have very little incentive to pay off thousands and thousands of HOA dues. In a foreclosure they may get wiped out, but they WILL go after you. Be careful.
What about the language in those short sale letters? What if they say things like …. oh…. “we reserve the right to pursue you for the deficiency.” Does that not sound scary? What if that is your first loan, and your deficiency is in the 100’s of thousands of dollars? Don’t you think a trip to an attorney would be a good idea? Has your agent said “non recourse is non recourse, they can’t go after you.” Well that sounds like legal advice to me, and you better hear that from an attorney if you are going to rely on it.
Oh, and have you heard the one that a “short sale is ALWAYS better than a foreclosure?” Good grief. No, this may not be true for some people, and every single circumstance is different.
What about those clients that have tens of thousands, or even , hundreds of thousands of consumer debt, credit cards, on top of recourse loans, HELOCs, other homes, boats , cars and more? Do you think it might be in the best interests of that client to see an attorney? Yes, I think so. Did you know that sometimes, yes sometimes, a bankruptcy may be in that person’s best interests? Again, it might cost you a listing, but what happens when that house short sales? Often leaving that second open to collections and STILL leaving them saddled with all that other consumer debt with no relief. We have to help our clients consider all options by getting them to the appropriate EXPERTS outside of the real estate field. LEGAL, TAX and CREDIT implications can be huge and all angles should be considered. It may keep that client IN THEIR HOME, and it will help you keep a client for life, for doing the right thing for them. Remember, that fiduciary?
Is this an investment home for the client? If so, do you know what their Fed tax implication will look like? They should, as it could be huge. People get wrapped up in the Federal Mortgage Debt Forgiveness Act like it is there to help all homeowners. It’s not true. It is there for primary owner occupants – if you read the text. It is not meant to protect investors. So be careful that the client knows what the ramifications of foreclosure or short sale is.
And, believe it or not, these are things just on the top of my mind and surely does not encompass every complication. Clients contemplating a foreclosure or short sale must seek the counsel of a CPA and/or attorney in conjunction with the real estate advice of their realtor. Most people are surprised at how complicated the “after” process is. Getting through a short sale is the easy part. Making sure a homeowner knows the in’s and out’s is vital.