For many home and business owners, a short sale can provide a path out of overwhelming debt while avoiding a burdensome foreclosure process. However, there are numerous risks and issues to look out for when pursuing such a transaction.
You should speak with our short sale negotiation attorneys in Seattle, WA before finalizing any agreement. Symmes Law Group has extensive experience reviewing and negotiating favorable short sale agreements. Our experienced real estate attorneys can help ensure your settlement resolves your financial obligations related to a home or business property.
What a “Short Sale” Means in Seattle, WA
In a typical real estate transaction, the sale price will cover the entire mortgage balance and closing costs. The Washington Department of Financial Institutions defines a short sale as a transaction where a lender accepts the proceeds from a property sale even though they are “short” of the total debt owed on the mortgage. Lenders generally agree to this arrangement to avoid the time and expense of foreclosure.
However, a short sale does not automatically mean the lender forgives the remaining balance or that you are no longer liable for the loan. Likewise, it does not mean all creditors involved will agree to the terms. The language in the lender’s approval document will influence whether you are still responsible for payments in the future.
When You Actually Need a Lawyer for a Short Sale
Some short sales may proceed without legal counsel. However, certain circumstances may require attorney involvement to protect your interests.
If any of the following situations apply to you, consulting a short sale lawyer is strongly recommended.
Multiple Loans or Liens
If your property has more than one creditor, each lienholder must approve the transaction. For example, this may apply if you have a second mortgage, home equity loan, or judgment lien.
A lawyer can help coordinate negotiations between lienholders and properly address each claim before closing.
The Lender Requests Additional Agreements
Some lenders approve short sales only if the borrower agrees to additional obligations, such as:
- Signing a promissory note for the remaining balance
- Making a cash contribution at closing
- Accepting a repayment plan after the sale
These terms can significantly change the financial calculus of the transaction. A short sale attorney can review these proposals, explain the long-term consequences, and propose possible seller-friendly alternatives.
The Property Is Commercial or Owned Through a Business
Short sales involving commercial or business-owned property can also be technical. Many business owners have personally guaranteed commercial loans, which means the lender may still pursue the owner for damages individually after the property is sold.
This deal type often benefits from legal review to ensure that a seller satisfies all loan and contract obligations before the sale.
You Are Facing Possible Deficiency Liability
In some situations, the lender may retain the right to pursue a deficiency judgment for the difference between the loan balance and the sale proceeds.
Without careful review, borrowers may unknowingly agree to terms that allow the lender to pursue them long after the transaction closes.
What a Short Sale Attorney Does That Your Broker or Agent Can’t
Real estate agents and brokers play a central role in short sales. For example, they may market the property, negotiate with buyers, and coordinate with the mortgage companies involved. However, brokers are not permitted to provide legal advice.
Once the lender approves the sale and provides the official short sale documents, a short sale attorney can step in and provide services that a broker cannot. They can:
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- Review the Lender’s Approval Letter: An attorney will examine whether the agreement includes a full release of liability, a waiver of deficiency claims, new repayment obligations, and/or restrictions on future disputes.
- Negotiating Legal Terms with the Lender: In some cases, lenders are willing to revise certain provisions in the short sale agreement. An attorney can propose terms that minimize your liability for future payments related to the mortgage.
- Identifying Hidden Legal Risks: Short sale agreements may include buried provisions that give the lender rights related to future collection or personal guarantees. Alternatively, the agreement may create new obligations involving other creditors. A short sale lawyer can review the entire agreement to identify risks that disadvantage you financially or legally.
When multiple lenders or lienholders have rights related to a property, your attorney can also help coordinate negotiations between the parties and address each claim before closing the short sale. Essentially, your attorney can protect you from one-sided agreements that emphasize your creditors’ rights at the expense of your own.
The Short Sale Process Step-by-Step
Short sales often take longer than standard real estate transactions because they require approval from one or more lenders. In fact, “How long will a short sale take?” is one of the most frequently asked questions about this process. Short sales typically involve the following steps:
1. Evaluating Financial Hardship
Most lenders require borrowers to demonstrate genuine financial hardship before approving a short sale. You may have to provide documentation such as income records, bank statements, and tax returns, to name a few.
2. Listing the Property for Sale
Once the borrower decides to pursue a short sale, they typically list the property with a real estate agent. The buyer will then try to obtain a purchase offer for the lender’s review.
3. Submitting the Short Sale Package
After receiving an offer, the borrower and agent submit a short sale package to the lender.
This package usually includes:
- The purchase agreement
- Financial documentation
- A hardship letter
- Preliminary settlement statements
- Property valuation information
The lender will then review the materials and determine whether to approve the sale.
4. Lender Review and Negotiation
The review stage is often the longest step in the short sale process. The lender may request additional documentation and/or conduct its own property valuation. Additionally, it may seek to negotiate the purchase price or propose new conditions for approval.
Many short sales stall at this stage; the lender or other creditors may disagree with the proposed terms but fail to offer alternative terms acceptable to the borrower.
5. Short Sale Approval
If the lender agrees to the transaction, it will issue an approval letter outlining the conditions of the sale. The letter may specify:
- Whether the lender waives the deficiency balance
- Whether the borrower must contribute funds
- Whether additional agreements must be signed
Many buyers hire a short sale attorney at this stage of the process to review the approval conditions and negotiate more preferable terms, if necessary.
Key Legal and Financial Risks to Protect Against in a Short Sale
Many individuals believe they should short sell their properties to resolve their mortgage debt. However, they also carry legal and financial risks that many borrowers do not fully understand until after the transaction closes. These include:
Deficiency Liability
Short sales almost always involve a deficiency balance, which is the difference between what you owe on the loan and the amount the lender receives from the sale. For example, suppose your mortgage balance is $600,000, and you sell the property for $450,000. Your deficiency balance would be $150,000.
If the lender does not explicitly waive this balance in writing, it may retain the right to pursue repayment through collection actions or lawsuits. A short sale lawyer can review the approval documents to determine whether the lender has clearly waived the deficiency.
Release Language
The scope of the lender’s release is also a key issue in short sales. Ideally, the short sale agreement should release you (as the borrower), your co-borrowers, and any personal guarantors (if applicable).
Without explicit release language, the lender may still attempt to pursue money from individuals associated with the loan.
Side Agreements and Contribution Demands
Some lenders approve short sales only if the borrower agrees to additional conditions, such as a cash contribution at closing or a promissory note or repayment agreement for the remaining balance. These terms may significantly affect the financial outcome of the transaction.
Before signing any new obligation, borrowers should understand exactly how the agreement changes their financial responsibilities in the future.
Tax Consequences
Tax liability is also a possible issue in short sales. In some situations, the Internal Revenue Service (IRS) may treat the forgiven portion of a loan as taxable income. This is often referred to as “cancellation of debt income.”
A short sale lawyer can help you identify potential tax exposure and recommend consulting a qualified tax professional if necessary.
Short Sales for Business Owners
Short sales are not limited to residential properties. Business owners sometimes pursue short sales when commercial property or business assets are secured by loans. These transactions often involve additional legal issues because of the potential for complex contractual provisions and multiple lenders.
Personal Guarantees
Many commercial loans require the business owner to sign a personal guarantee. This means the lender may pursue the owner individually if the business cannot repay the loan. Even if the property is sold through a short sale, the lender may still attempt to enforce the personal guarantee unless the agreement explicitly releases the guarantor.
A business short sale lawyer can review the loan documents and determine whether the proposed short sale releases the owner from liability.
Multiple Secured Creditors
Commercial properties often have several creditors involved, such as primary and secondary mortgage lenders and equipment financing lenders, to name a couple.
Before a short sale, each creditor may have a claim against the property or business assets. An experienced business short sale lawyer can help structure the transaction to resolve all issues related to assets and liabilities.
How to Choose the Right Short Sale Lawyer in Seattle
It is important to work with a lawyer who focuses on real estate and understands short sale agreements and lender practices.
During your consultation with a real estate attorney in Seattle, you will have an opportunity to ask questions and determine if they are the right fit. You should ask:
- How many short sale cases have you handled in Washington State?
- Do you regularly review lender short-sale approval letters?
- Have you negotiated deficiency waivers with lenders before?
- Do you handle commercial or business-related short sales?
- What is your fee structure for reviewing short sale agreements?
The answers can help you determine whether the attorney has experience with the issues most likely to arise in your situation. It can also help you get a sense of whether you will work well with the attorney during what can be a complex and emotional process.
Documents to Bring to Your Consultation
To make the most of your initial consultation, you should bring any documents related to the property or loan for the lawyer’s review. These documents may include:
- Mortgage or loan agreements
- Recent mortgage statements
- Property listing agreements
- Purchase offers from potential buyers
- Lender correspondence regarding the short sale
- The lender’s short sale approval letter (if available)
- Any documentation related to secondary liens or additional creditors
The attorney will use this information to evaluate your situation and identify potential risks before you finalize the transaction.
Contact a Seattle Short Sale Attorney Near You for Help
Short sales can offer an important path out of difficult financial circumstances, but they also involve legal agreements that can affect your finances long after the transaction closes.
Consulting an experienced short sale attorney in Seattle can help ensure the agreement protects your interests and resolves your debt as intended. Contact Symmes Law Group to schedule a confidential consultation to discuss how we can help you.
Frequently Asked Questions About Short Sales
Will the lender automatically forgive the remaining balance in a short sale?
Not necessarily. Some lenders agree to waive the remaining balance, but others reserve the right to pursue repayment after the sale closes. The lender’s approval letter should clearly state whether the deficiency is forgiven.
Can I be asked to sign new terms as a condition of approval?
Yes. Some lenders approve short sales only if the borrower agrees to additional conditions, such as a promissory note or cash contribution.
How long does a short sale typically take in Washington, and what delays it most?
Short sales often take several months or more (even according to estimates from the Washington Department of Licensing); the timelines vary widely depending on the lender and the complexity of the transaction. The most common delays occur during the lender review stage, particularly when lenders request additional documentation or conduct their own property valuation.
What happens if there are multiple liens and one refuses?
If multiple creditors have claims against the property, each lienholder must typically approve the short sale. If one creditor refuses, the transaction may stall or require additional negotiations.
