Common Short Sale Problems and Obstacles (2024)

During the mortgage crisis, short sales were difficult, if not impossible, to complete because of the overwhelming number of people requesting one. Since then, servicers and lenders have revamped their short sale guidelines, making the process easier and more efficient. However, it can still take a few weeks or months to wrap up a short sale. Problems tend to pop up in these transactions.

While you can complete a short sale without an attorney, hiring one to represent you is often a good idea. Lawyers are trained negotiators who can push the deal through and, in many cases, help you avoid a deficiency judgment after the sale. A lawyer will take steps to resolve conflicts and minimize the number of snags in the process.

Common Problems and Obstacles With Short Sales

If you're aware of the most common short sale problems, you'll be better prepared to deal with them as they come up. And if you need help dealing with issues that arise or want to try to avoid them in the first place, consider hiring a lawyer to help you navigate the process.

Getting the Lender to Agree to a Short Sale

The first task in getting a short sale is to convince your lender to agree to release its mortgage lien in exchange for receiving the proceeds from the sale. But lenders don't especially like short sales. They'd much rather get paid in full; banks owe their shareholders and investors a duty to get as much as possible for distressed properties.

Most lenders will, however, reluctantly approve a short sale under some circ*mstances. A lawyer can evaluate all of the factors that the lender will consider in deciding whether to approve the short sale—including your hardship, your assets and income, the appraised value of the home, and the adequacy of an offer—and present them in the best light possible to try to convince the lender to agree to a short sale more readily.

Unrealistic Buyer Expectations

Potential purchasers sometimes make ridiculously low offers, hoping to get an amazing deal on your property. Lowball offers don't meet investor guidelines, and the lender will likely return with a significantly higher counteroffer.

Also, because the lender might reject the first offer—especially if it's substantially lower than the listing price or below fair market value—uninformed buyers and sellers who expect a quick turnaround can get frustrated and bail on the deal before the sale is approved.

What Happens to the Deficiency?

Although the lender might agree to release its mortgage lien in exchange for the short sale proceeds, it might not release you from personal liability on the debt. So, if state law allows it, the lender could potentially come after you for the deficiency.

In many states, the lender can seek a personal judgment against you after the short sale to recover the deficiency amount. To avoid any nasty surprises following the short sale, you should determine what will happen to the deficiency before completing the transaction.

Negotiating a waiver of the deficiency. If your state doesn't have a statute that prohibits a deficiency judgment following a short sale, you might be able to prevent the lender from getting one by negotiating a waiver of the deficiency. But if you have sufficient income or assets, the lender might expect you to bring the cash to the closing to cover part of the deficiency amount. For example, say the lender will approve the short sale, but only if you agree to sign a $10,000 promissory note to cover some of the deficiency.

Even if the lender doesn't require you to bring cash to the closing, if your short sale agreement with the lender isn't worded correctly, in most cases, the lender may pursue you for a deficiency judgment after the sale. To avoid a deficiency judgment, the short sale agreement must expressly state that the lender waives its right to the deficiency. A lawyer can help negotiate a waiver of the deficiency and ensure this language is part of the written agreement.

Filing for bankruptcy or offering a lower amount. You might also be able to avoid a deficiency judgment by declaring bankruptcy or negotiating to contribute less than the lender is requesting. Rather than signing a $10,000 promissory note, you could offer to pay $3,000 at closing.

Lenders sometimes prefer to take less money at closing instead of trying to get more money out of you later on. A lawyer can handle the negotiations on your behalf. A bankruptcy attorney can advise you on whether bankruptcy is right for your situation.

Junior Lienholders Won't Accept the Payoff Amount

Any junior lienholders have to agree to the short sale. So, the negotiations might also include any other mortgage lenders, like second-mortgage holders and HELOC lenders, homeowners' associations, and judgment creditors.

To get the junior lienholders to agree, the first mortgage holder will offer each one a portion of the total amount they're owed—usually a small amount—to release their lien. Some banks and other entities have a reputation for being difficult when it comes to releasing junior liens.

If you don't devote adequate time and attention to each junior lienholder initially, you might run out of time to get their consent and complete the short sale. Good short sale lawyers are skilled negotiators experienced in successfully organizing the entire transaction and handling all parties involved.

Documentation Must Be Correct and Complete

One common reason short sales fail to close is problems with the documentation. For example, the documents might not get drawn up in time, be missing, or not be signed and dated correctly.

Short sale transactions require a lot of paperwork, and most people don't fully understand the legal consequences of the documents. A lawyer can give you legal advice about the transaction. For example, once the lender approves the short sale, you'll get an approval letter containing the agreement's terms. A competent attorney can provide a legal interpretation of this agreement and advise you about its legal effect.

Any problems with the documentation can slow the process down or kill the deal altogether. So, it's in your best interest to push for the loan documents to be prepared several days before the closing date and to review them carefully.

Should You Hire a Lawyer?

Whether you should hire a lawyer ultimately depends on your circ*mstances. In the end, even if you decide not to hire a lawyer to facilitate your short sale, paying for a consultation with a qualified attorney who can answer any questions you have on this topic could be worthwhile. Short sales can be tricky, so be sure your attorney knows how they work.