Phoenix Short Sales: Be Careful What You Wish For

How quickly the tune has changed. It seems that not so long ago, the general advise given by all was “hurry up and get into real estate” or some variation of that. Fast forward to the present where the prevailing cry is “do a short sale”.  This term - “short sale”- not only seems to be part of every real estate deal nowadays, but the phrase promiscuously rolls off the tongue of just about everyone once the topic of real estate comes up, even by those who don’t own property. With Americans caught in the pincers of two toxic economic strains, crippling job losses and plummeting home values, any lifeline seems welcomed. Very simply, a short sale is the sale of the property when the mortgage debt exceeds the current value of the home. “Alright, so I get to sell my house which now happens to be worth about half of what I paid for it and, I don’t have to keep making an exorbitant mortgage payment, which is bleeding me dry - what’s the problem?”  Well, plenty, and it could be expensive too.  Like most things in life that sound too good to be true, the short sale reality seldom lives up to the promise. First, the process is time consuming (60 to 90 days to get lender approval is not uncommon), it’s cumbersome, and much like a visit to a proctologist, quite invasive (from a financial disclosure point of view).  Additionally, the lender is not obligated to give an approval; it’s completely discretionary on their part.  But the big gotcha is that depending on the circumstances, the lender may not agree to forgive the debt entirely.  That’s right, even after you short sell your home you may still owe the bank for part of the debt - the very debt you wanted to get out from under! Although many are under the impression that the bank will forgive the debt, this unfortunately is not always the case. Indeed, a few months back a client asked me to review such a proposed agreement, only to learn that the bank did reserve the right to come after him for the difference between the fair market value of the home and the outstanding mortgage, which would have totaled over $200k. OUCH! Not surprisingly, the client chose to forgo the short sale. Suffice it to say, I didn’t get a Christmas card from the client’s real estate agent (real estate agents do earn a commission on short sales). So although the lender may agree to go along with the deal, the seller/owner is strongly advised to review the bank documents very carefully to see what terms the bank is proposing.  Another significant danger of a short sale is that there were many mortgages that were originated as “stated income” loans.  A stated income loan was one where you “stated” how much you earned, without having to prove it.  Despite this accommodation by the lender, the borrower was still required to swear that the income information was truthful. Why is this a concern if you’re doing a short sale? Here’s why: it’s customary for the bank which is being asked to approve a short sale to require your tax documentation and wage information. If upon review of these documents the lender determines that the income you stated was grossly inflated, there could be allegations of mortgage fraud, which may expose the seller/owner to criminal liability.

Please be aware that a multi-department mortgage fraud task force was recently created in Arizona to investigate and prosecute these, and other forms of mortgage fraud.  This task force consists of the FBI, IRS, and several local police departments.  The better alternative is to force the lender to take the property back through a trustee sale (otherwise generally referred to as a foreclosure).  There are three general advantages to this. The first advantage is that going the foreclosure route generally, although not always, bars a lender from going after a homeowner for any unsatisfied mortgage debt. This should be carefully analyzed with a real estate attorney. The second advantage is a more practical one, since by forcing a lender to go through the entire foreclosure process, you get to vacate the home LATER rather than SOONER. Why force yourself to leave the home sooner than you have to?  You’ll just end up paying rent somewhere else far earlier than necessary. The last advantage is more aspirational, in that it buys time for solutions - perhaps you were unemployed, and in time, you may find a new job, allowing you to keep your home; perhaps a loan workout can be obtained which suits your current situation; lastly, and certainly not least, the State and federal government are furiously working to find solutions to keep people from losing their homes to foreclosure. Indeed, the weekend before I wrote this article, several national banks agreed to a moratorium on many foreclosures (for approximately one month until mid-March) to give the government more time to draw up new plans to help homeowners.  Finally, as I write this, President Obama is on his way to Arizona, presumably to unveil his administration’s new homeownership retention program.  In sum, it’s important to have all the facts in before you move forward with a short sale. So although on the surface, it may seem like a shiny solution to your financial woes, it’s good advise to remember the age old maxim - “all that glitters is not gold.”

Law Office Of

Joseph A. Velez


Real Estate & Business Law Attorney

The Law Office of Joseph Velez

Commercial Real Estate & Business Law Attorney

Scottsdale Financial Center

7272 E. Indian School Rd., Suite 111

Scottsdale, Arizona 85251


Our law office represents clients throughout the Phoenix, Arizona area including the cities of Scottsdale, Maricopa, Mesa, Surprise, Paradise Valley, Avondale, Gilbert, Chandler, Glendale, Florence, New River, Fountain Hills, Peoria, Surprise, Queen Creek, Tempe, Sun City, Apache Junction, and Casa Grande. We serve the counties of Maricopa, Yavapai, Gila, Pinal, La Paz, Yuma, and Pima County.

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One hour initial office consultation fee is $295 for the matters discussed above.