SILVAR  :  Newsroom  : Real Estate Articles

Real Estate Articles

Short Sales Explained from the Seller/Buyer Perspective

Wednesday, August 4, 2010

The topic of short sales is much talked about but necessary because lawsuits involving this type of transaction are on the rise, according to Dave Hamerslough, an attorney with Rossi, Hamerslough, Reischl & Chuck and board attorney for the Silicon Valley Association of REALTORS®.

From the seller's perspective, Hamerslough says when contemplating a short sale, the first issue that needs to be evaluated is whether there was any fraud committed in the origination of the loan. If there was, a seller is taking a risk requesting a short sale by providing the lender with information (their hardship package) which may be inconsistent with what was previously provided to the lender on the original loan application.

Hamerslough advises sellers and their agents to obtain in writing a full and complete release of liability by the lender.

"Many sellers believe a short sale is a 'get out of jail free card' when it is not," says Hamerslough. "Releasing the lien of the deed of trust is not enough. The lender needs to confirm in writing a full, complete release of liability. Fraud claims remain viable in the absence of a full and complete release of liability by the lender. "

The goal of a short sale is to try and obtain a full and complete release of all liability from the lender(s) and an acknowledgement by the lender(s) that any loan obligations have been paid in full or fully satisfied. Hamerslough relates lenders provided such releases in the last economic downturn in the mid-1990s, but today, if they approve a short sale, most lenders do so with language which either expressly reserves the right to pursue the seller for any shortfall, or is silent on the issue and therefore leaves the seller potentially exposed to such a claim.

The attitude of lenders is different today because of the magnitude of this economic downturn, and the loan products utilized in the last 10 years and risks inherent in them are far different from those used in the 1990s. There has been abuse, such as misrepresentations being made to lenders regarding the income of the seller/borrower, or bank accounts with inflated balances, explains Hamerslough. Many sellers were asked to sign blank loan applications, or didn't review a computer generated application for accuracy. Also, in order to obtain a favorable loan rate, many investors/purchasers claimed the property they were purchasing was to be owner-occupied, when they intended it be a rental.

Now more in tune with these issues, Hamerslough says lenders recognize there may be an opportunity to pursue sellers or borrowers who have made such misrepresentations. "Reserving their rights against a short sale seller for any shortfall, or remaining silent on releasing the underlying note is a way of preserving the lender's claims," according to Hamerslough.

So the real estate attorney cautions, "In a short sale, expect to bare your financial soul. If there is any evidence of fraud in the origination of the loan, you need to stop right there … A short sale then, may not be a good option for a seller."

From the buyer's perspective, Hamerslough says buyers should request a preliminary report on the property, and find out the number of loans against the property, whether the property has a second loan, and whether the second loan is a recourse second. He notes if the loan amount is more than $40,000 it is likely the second lender will not walk away with just a few thousand dollars.

In addition, agents should know the buyer's rights in the event another offer comes in before their buyer's offer is approved by the lender and how competing offers would be handled. Hamerslough recommends during the first meeting with the listing agent, the buyer's agent should establish the "rules of the game."

"Short sales are fine as long as the rules and risks are understood by everyone involved," says Hamerslough. 


The Silicon Valley Association of REALTORS® (SILVAR) is a professional trade organization representing over 4,000 REALTORS® and Affiliate members engaged in the real estate business on the Peninsula and in the South Bay. SILVAR promotes the highest ethical standards of real estate practice, serves as an advocate for homeownership and homeowners, and represents the interests of property owners in Silicon Valley.

The term "REALTOR®" is a registered collective membership mark which identifies a real estate professional who is a member of the National Association of REALTORS® and who subscribes to its strict Code of Ethics.

Variations of this article have appeared in local area newspapers.

For further information, please contact Rose Meily at SILVAR Public Affairs, email , or phone (408) 200-0109.

» Back to Real Estate Articles

Site Navigation