Legal Question in Real Estate Law in California

Re: Short Sale

Short sale in real estate context is like a settlement agreement between you and the lender to sell your property to a third party in lieu of foreclosure for a lesser amount than the debt amount. I have done short sale myself and I know exactly what takes place. If you already obtained the lenders agreement, you need to get an agreement in writing that they will not sue you for a deficiency judgement. Call me at 213.388.7070 for a consultation.

Re: Short Sale

First, I have to admit I don't know what a "short sale" is in the context of real property. That term is often used in the securities (stocks and bonds) business to refer to borrowing stock you don't own so you can sell it now and buy it later when the price is lower to return the borrowed shares. It's a time-honored way to speculate that the price of the stock will decline.

Normally, only the owner of a house can sell it; if the lender is selling, it would probably be a foreclosure under a power of sale in a deed of trust. Technically, the trustee is selling, but it does so for the benefit of the lender.

There are some other possible meanings for "short sale" as you use it; maybe you have given the lender a deed in lieu of foreclosure, or you have given the lender some sort of agency authority to sell the property on your behalf.

In any case, I'm going to assume that by whatever means the house is sold, you're saying that the proceeds of sale will be insufficient to pay the costs of sale plus pay off all the liens on the property. That situation results in what is known as a "deficiency" and in some circumstances the lender/creditor may have a right to sue for the balance due, i.e. they may sue for a "deficiency judgment."

Which creditors can sue for a deficiency judgment?

The rules are somewhat complicated. Many years ago, all lenders could get deficiancy judgments. In the Great Depression, this resulted in too many homeowners being wiped out, so laws were passed to outlaw deficiency lawsuits on purchase-money loans. Later on, another law extended the protection to any instance of foreclosure under a power of sale in a deed of trust, whether or not it was a purchase-money loan. There are a couple of other less important limitations on the ability of a creditor to get a deficiency judgment.

What is left is judicial foreclosures (going to court instead of using a trustee's sale) on non-purchase-money loans, i.e., seconds that a homeowner takes out after purchase to extract equity, and MAYBE some kinds of voluntary deals such as voluntarily allowing the lender to sell the property without using a foreclosure of any kind - but even then, if it were a purchase money loan, that prohibition would apply.

A lender can also usually sue for "waste" done on the property (such as cutting all the trees) that impairs its value, without regard to the antideficiency laws.

Since I don't know exactly what is meant by "short sale" here, I can't give you a yes-or-no kind of answer, but I'd be very concerned that this lender is trying to find a way around the antideficiency laws. Take all your papers to a local real-estate attorney before agreeing to any non-foreclosure workouts with this lender.

Re: Short Sale

Yes, they are entitled to get full payment on the loan.