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.)
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.