There was a time, not so long ago, when a high percentage of the residential closings that we were doing were short sales. Short sales really ramped up following the bursting of the housing bubble and then peaked during the foreclosure crisis.  We all know how we got there and we remember the no doc, no review teaser loans.  Short sales were a fact of life.  We represented both buyers and sellers in short sales.  In both cases, we were at the mercy of the lenders in addressing the ridiculous number of requirements for approvals and then waiting for months on end for the approvals to come back.

Fortunately, those days are behind us. Short sales are rare, but not completely gone.  So, if you are selling you’re house, how do you know if a short sale is right for you and what will a short sale mean for you?  I haven’t thought much about these questions for a while, but like most of my blog posts, I am inspired to write about this now because recently, a new client inquired about short sales.  The client was transferred from South Florida to Atlanta, leaving behind a house with an outstanding mortgage balance (combined 1st and second) of over $800,000.  The house is not yet listed for sale, though the client has already relocated.  The agent expects that the house will sell for under $700,000.  The client wanted to know what to do and what will happen.  His first question was whether we should apply for short sale approval with the lenders now.

The answer is no. Obviously, if the agent is correct, there will be a short sale.  However, until a contract is signed, there is no approval to obtain from the lenders because we don’t know the amount of the deficiency.  And, because there are 2 lenders, the contract might be enough to satisfy the 1st mortgage leaving the 2nd unpaid.  If the 1st insists upon full payment, the dynamics of the negotiations would change completely.

In addition, in order to approve a short sale, lenders require an appraisal of the property. The appraisal must be by an approved appraiser and can’t be too old.  So, we couldn’t submit an appraisal yet.  The appraisal might be stale by the time a contract is signed.

Another factor is the client’s ability to pay the deficiency. If the client is liquid or has net worth or otherwise has income, lenders are less willing to write off the deficiency.  Where 2 lenders are involved, the client has a bigger hurdle, especially if the 1st mortgagee takes all of the sales proceeds.  Attempting to obtain pre-contract approval would bring attention to these issues far too early in the process.

At this point, I suggested to the client that it would be a bad idea to have any conversation with either lender until there was a contract in place. Once a contract has been signed, it should be submitted to each lender for approval and a case made for the short sale.  Here, the arguments have to be made that the client is unable to pay the deficiency.  I explained that lenders are supposed to make this decision on a primarily objective basis, but we can give subjective reasons for an economic hardship.  But, since we are not in the crisis mode any more, it is now difficult to predict how lenders will lenders will react and that the client needs to be prepared to address the deficiency.

Short sales can’t be counted on as escape routes for home owners or as a simple alternative to the foreclosure process any more. Lenders are less willing to write off deficiencies without a compelling economic hardship.  Because there isn’t a back log of short sales to approve, lenders will carefully review every request for short sale.  If you have other options, you should consider them as well.

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        In the recent decision of Ober v. Town Of Lauderdale by the Sea, No. 4D14-4597 (2016) (See Copy of Case Here) issued by the Fourth District Court of Appeal, the Court held that real property liens arising after a final judgment of foreclosure are not discharged by Florida’s lis pendens statute.

            The sequence of events giving rise to this case were as follows:  In November, 2007 a mortgagee recorded a lis pendens on a residential property as part of a foreclosure proceeding. In September, 2008 the foreclosing bank obtained a final judgment of foreclosure. However, the foreclosure sale was not held until September, 2012, more than 4 years after entry  of the judgment of foreclosure. Meanwhile, between the time the final judgment of foreclosure was entered and the foreclosure sale was held, the Town of Lauderdale by the Sea recorded a total of seven liens on the property related to code violations occurring after the final judgment of foreclosure was entered in September, 2008.

            When the house was finally put up for foreclosure sale in September, 2012 along came James Ober who purchased the property at clerk’s auction. Shortly after the certificate of title was issued, the Town of Lauderdale by the Sea imposed 3 more liens on the property. At some point after receiving the certificate of title to the property, Mr. Ober discovered the true status of title and filed suit to quiet title in order to strike the Town’s liens against his newly purchased property. The Town of Lauderdale by the Sea counterclaimed to foreclose its liens and both parties moved for summary judgment.

            Both the trial and appellate courts agreed with the Town of Lauderdale by the Sea’s position that the lis pendens applied to only liens existing or accruing prior to the date of final judgement and that the lis pendens did not continue until the date of the judicial sale.

            This decision is of great importance to secured lenders of every stripe including banks and mortgage holders.  In order to avoid the possibility of intervening liens attaching to the property to be auctioned at a foreclosure or clerk’s sale, secured creditors should be prepared to proceed with the foreclosure sale once judgment has been entered. This entails requesting the earliest sale date possible and including the details of the sale date in the final judgment of foreclosure.  Otherwise, liens recorded within 30 days of  the date of entry of the judgment of foreclosure (i.e., when the judgment becomes final) could become a cloud on title and necessitate the filing of a separate action in an effort to foreclose these “gap period”  liens. For the same reasons noted above, the prior common practice of allowing the foreclosed borrower to remain in possession of the property under a consent judgment after entry of the judgment of foreclosure but before an agreed upon delayed foreclosure sale date will need to be reconsidered in favor of an alternate means of settlement.

            Clearly, the foreclosure landscape has been altered as a result of the recent Ober decision of if you could benefit from our assistance in helping you better adapt your own practices and documentation  to  these important changes, please do not hesitate to contact us.

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