Do I Need a Lawyer for a Short Sale?

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 What is a Short Sale?

In real estate, the phrase “short sale” is used to refer to a situation where a home is sold at a lower price than what the homeowner still owes on their mortgage. In general, short sales are typically done when a homeowner is under pressure to complete the sale of their house as quickly as possible.

Obviously, no one really wants to sell their house for a price that they cannot profit from. Thus, the reason as to why these types of sales are even performed is because they serve as an alternative to foreclosure.

A common example of how a short sale may benefit the homeowner is when the homeowner has defaulted on their mortgage loan. Instead of having to face a foreclosure action, the homeowner can use the proceeds they received from the short sale to pay off their lenders. After accepting payment, some lenders might even be willing to cancel or forgive the homeowner’s remaining payments on the mortgage.

In addition, short sales may also help the homeowner to avoid the extra costs and fees associated with foreclosure actions. It is important to note, however, that the homeowner could still end up with a negative credit score due to their initial default.

When Does a Short Sale Happen?

As discussed above, a short sale occurs when a homeowner is delinquent on their mortgage payments. If permitted, then the mortgage lender will then allow the homeowner to sell their property for less than what it is worth.

The mortgage lender expects the homeowner to understand that all of the proceeds, despite the reduced amount, must go to the mortgage lender in lieu of the missed payments.

Once the sale has gone through, the mortgage company will lift the notice of deficiency it had issued against the homeowner.

What are Some Differences Between a Short Sale Versus a Foreclosure?

A homeowner is often provided with the choice between undergoing a foreclosure action or conducting a short sale of their house. The way to decide which option would be better suited for their situation is to review the differences between the two.

For instance, some of the features associated with short sales include the following:

  • The homeowner is responsible for conducting the sale and is thus in control of the process as well as their property until the sale is finalized;
  • Short sales typically result in receiving a better overall credit score, as oppose to those resulting from a foreclosure;
  • The home sale is performed using the regular public real estate market channels (e.g., seller-broker listings); and
  • Finally, short sales can sometimes be difficult to obtain since they are not always available as an option under some states’ laws. They can also take a very long time to process (i.e., short sale approval can often take anywhere from 2 to 3 months to process).

In contrast, the features associated with foreclosure actions generally include:

  • Foreclosures are initiated by the lender. Unlike short sales, the lender is the one who is in charge of the process, not the borrower;
  • Foreclosure can have an even greater impact on the homeowner’s credit score than a short sale (though this is not always the outcome); and
  • The home foreclosure sale is usually accomplished through an auction, or sometimes via a court-ordered judicial foreclosure sale.

When Might You Need a Lawyer for a Short Sale?

A lawyer can be useful in various situations, such as when there is a possibility that a deficiency judgment will be entered against the homeowner; when a homeowner needs help understanding the terms of a short sale agreement; and where a homeowner thinks that a foreclosure is bound to happen regardless of the short sale.

In serious or extreme cases, a homeowner will also need a lawyer if they think a short sale fraud has been committed.

As mentioned, there are some circumstances where a deficiency judgment may be issued against the homeowner despite the short sale. When this happens, the deficiency judgment will typically be based on the difference between what the homeowner owes the mortgage company and the proceeds collected from the short sale.

In those situations, a lawyer can help the homeowner to either get the deficiency judgment dismissed or negotiate on their behalf for a lower amount. A lawyer will also be able to assist a homeowner in court where they can help prevent a foreclosure from occurring and can defend and protect the homeowner’s rights during the process.

What are Some Differences Between a Lawyer and a Real Estate Agent in a Short Sale?

The key difference between lawyers and real estate agents in short sale transactions is that a lawyer does not only negotiate and help the homeowner with the short sale transaction as a real estate person does. Instead, a lawyer also provides the homeowner with legal advice and guidance about the short sale transaction.

A lawyer will also be able to help the homeowner during a foreclosure action or can assist them with filing for bankruptcy when a short sale does not go through and the homeowner faces foreclosure.

On the other hand, real estate agents cannot give legal advice to homeowners or provide them with legal representation in court. In some instances, a real estate agent may not even know how to negotiate a short sale deal with the lender.

Why Should I Hire a Lawyer to Negotiate a Short Sale?

The following are some reasons for why a homeowner should consider hiring a lawyer for a short sale:

  • Lawyers Can Provide Legal Advice About Legal Documents: Hiring a lawyer could be beneficial for a short sale because if the homeowner needs any legal advice or has any legal questions, a lawyer will be able to provide those answers. In contrast, a real estate broker who does not have a law license will not be able to give the homeowner any legal advice.
  • Lawyers Can Help Homeowners Negotiate: The first step of a short sale is to ask the lender to release its mortgage lien on the home in exchange for the proceeds of the sale. This is not a simple task because lenders always want to be paid in full. A lawyer can provide the homeowner with the information needed to convince the lender to go through with the short sale deal and can negotiate on the homeowner’s behalf with the lender.
  • Lawyers May Help Reduce or Eliminate Liability for Deficiency: A lawyer can help negotiate a waiver of the deficiency judgment or assist the homeowner with settlement negotiations to reduce the amount owed to some lesser amount. They can also make sure that this is included in a contract agreement to use as further proof if necessary.
  • Lawyers Can Get the Deal Done Efficiently: Since lawyers can assist with all aspects of the deal, including being able to communicate with all parties, it can make the short sale process go more smoothly and get it done efficiently.

Do I Need a Lawyer for Help with a Short Sale?

Although you are of course allowed to use a real estate agent, it might be a good idea to also set up a free to low cost consultation with a local foreclosure lawyer.

As discussed above, short sales usually involve many different legal issues in addition to just real estate matters. An experienced foreclosure lawyer will be able to walk you through both types of scenarios.

You should also think about hiring a lawyer if you need help with conducting a short sale. A lawyer will be able to inform you about your options and can also address any legal matters that arise during the process.

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