Short Sales

The real estate profession has become increasingly based in legalities. While a handshake can signify an agreement, the contract is the foundation of the real estate transaction today.

With the increased focus on legal issues, NVAR provides members services in the legal arena. Various articles on current and hot legal topics are provided through the weekly NVAR Online News. In addition, the Legal Information Line is available to members.

There are many real estate related questions that arise often. These FAQs (Frequently Asked Questions) by topic are provided to assist you in finding quick answers.

Short Sales

Q:  What is a short sale?

A:  The sale of real property for less than the loan owed on that property is called a short sale.

Q:  What is the general short sale procedure?

A:  Generally a Seller who has a hardship asks his lender to approve a sale of his house for less than he owes on the loan. If the lender agrees, it will release the lien (Deed of Trust) so the Seller can sell the property.

Q:  If the lender agrees to approve a short sale on a Seller’s property, can the lender sue the Seller for a deficiency later?

A:  Yes and no. No, not if the Seller and his listing agent negotiate with the lender and the lender agrees in writing to forgive the debt in a short sale. However, if the Seller and his listing agent do not negotiate a forgiveness of the debt on the promissory, then yes, the seller’s lender can sue the seller for the rest of the debt (the deficiency).

Q:  How can the lender sue on the debt?

A:  When the seller purchased the property, he signed a Deed of Trust and a Promissory Note. Usually the lender will release the lien on the Deed of Trust so the seller can short sell the real property, but the lender does not forgive the debt on the Promissory Note. So, the lender can sue on the Promissory Note for breach of contract for 6 years after the debtor breaches.

Q:  If the lender does forgive the debt, does the debtor have to pay Federal Income Taxes on the forgiven debt?

A:  Yes and no. If the short sale was on the lenders principal residence, the Mortgage Debt Relief Act of 2007 allows the taxpayer to exclude income from the discharge of the debt. Debt reduced through mortgage restructuring, as well as, mortgage debt forgiven in a foreclosure or short sale on the taxpayer’s principal residence, qualify for the relief. No, not if the debt forgiven is on an investment or rental property.