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Short sales – tax and legal liability can be an issue

The other day at a short sale workshop, one of the agents in the audience asked, “How do I know if the bank is going to waive the right to pursue deficiency?” That’s a great question, and probably not a topic that I write about often enough.

In a short sale, sellers are concerned about a lot of different things—missing payments, credit rating, the possibility of losing their home to foreclosure, etc. However, there are often a lot of questions about liability: 1) tax liability, and 2) legal liability. (That being said, remember that I am not an attorney and I do not play one on television. So, anyone facing the situations I describe should most certainly consult with an attorney or an accountant.)

The issue of tax liability relates to debt forgiven. In situations where debt is forgiven, the short sale seller will likely receive a 1099 from the bank. Luckily for many sellers, the Mortgage Debt Relief Act of 2007 addresses the concerns of many sellers with regard to tax liability.

But, what about legal liability?

This particular agent wanted to know how to work with the bank with respect to waiving the right to pursue a deficiency judgment. First off, some states now have anti-deficiency statutes in place. So, before you tear your hair out trying to fight with the lender about waiving the right to pursue a deficiency, learn about the anti-deficiency statutes in the state where you conduct business.

In many cases, if the short sale lender agrees to waive the right to pursue deficiency, this information will appear in the short sale approval letter. While every experienced short sale negotiator has his or her own techniques and strategies, I generally wait until I receive the approval letter before pitching a fit and pulling out all the stops with regard to waiving deficiency. I’ve learned that its often not good practice to make a mountain out of a molehill as doing so causes you to burn a whole bunch of bridges. (Too many metaphors, sorry.)

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The short answer:

So, the short answer to the agent’s question “How do you know if the bank is going to waive the right to pursue deficiency?” is this: you read the approval letter very carefully and have the short sale seller and his (or her) attorney review the approval letter to assure that the bank is going to waive the deficiency.

And, if you and or any of the parties are unhappy with the text of the approval letter, you can always go back and ask for changes or clarification of language. Now, is that clarification of language quick and easy to obtain? Not always, but I’m afraid that’s a topic for another post.

Written By

Melissa Zavala is the Broker/Owner of Broadpoint Properties and Head Honcho of Short Sale Expeditor®, and Chief Executive Officer of Transaction 911. Before landing in real estate, she had careers in education and publishing. Most recently, she has been able to use her teaching and organizational skills while traveling the world over—dispelling myths about the distressed property market, engaging and motivating real estate agents, and sharing her passion for real estate. When she isn’t speaking or writing, Melissa enjoys practicing yoga, walking the dog, and vacationing at beach resorts.



  1. LesleyLambert

    March 8, 2011 at 10:33 am

    I think it is crucial that a short sale have an attorney who specializes in the process involved. Good reminders here.

  2. Sheila Rasak

    March 8, 2011 at 11:50 am

    It’s been my experience that some lenders automatically place the deficiency recourse in their approval letters. That being said, in the state of California, and providing the loan was purchase money, federal and state laws will trump anything that’s been inserted by the lender’s legal counsel.

    • Judy Graff

      March 9, 2011 at 9:04 pm

      Ditto on Sheila from California’s reply.

  3. Moses Jaduis

    March 9, 2011 at 2:29 pm

    Thanks for the post. Its helpful to have clarity on such a confusing issue. We had an offer on a short sale for a long time and never heard anything. We eventually gave up.

  4. Jim Hale

    March 15, 2011 at 1:36 pm

    I’m looking forward to that “another post”.

  5. Jim Hale

    March 15, 2011 at 1:41 pm

    My short sale addendum has language that makes the sale contingent on the lender(s) waiving deficiency. I know no way to otherwise insure the seller comes out of a short sale with the hoped for result. Here only the second is at issue for deficiency.

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