Is A Short Sale Better Than A Foreclosure Part 1?
The question: Is a Short Sale better than a Foreclosure? has been getting quite a bit of attention lately. I continue to be amazed at the number of potential clients, with whom I have the privilege of meeting, who tell me their accountant advised them to just let the house go. Others tell me they know somebody, have a good friend, or a coworker who has provided their opinion (gained through naive experience I guess) on this topic.
The consistent theme of the opinions are “just leave the house; walk away from it; why would you want to stay in the home when you owe almost twice as much as it is worth and you may die before you’ll ever make a profit on what you thought was a smart way to spend/invest your money”.
There are a myriad of iterations, but it boils down to the same concept. The real estate market is in the toilet, the value of property compared to the amount of money owed on it is an indigestible ratio for all parties involved and there seems to be no end in sight. So why not listen to the neighbor, the CPA, or (my favorite) the aerobics instructor? Why should you care? Because no one else does, that's why.
Very simple answer that you may share with anyone you discuss this topic with from this point on when discussing Florida real property: Because of Florida Law! Florida is a deficiency state. While reducing the Short Sale concept to elementary terms in the last blog, I briefly explained two of the most important legal documents included in a loan: (1) Promissory Note and (2) Mortgage.
When the Mortgagor (Borrower) stops making the required payments, such action shall be considered a default as defined within the loan documents. Upon the default, the Mortgagee (Bank or Lender) has the right to commence the legal proceedings to take the real property (collateral) from the Mortgagor. Foreclosing on the property provides the Mortgagee with the ability to have the real property sold for proceeds which shall be credited to the outstanding amount owed on the loan. Foreclosure addresses the Mortgagee’s lien on the property from the Mortgage. It does not cancel the Promissory Note.
Prior to the decline of the values in the real estate market, there may have been additional funds available after the loan plus costs, fees and penalties were paid in full. Such scenario rarely exists these days due to the values in this depressed market. Because the total amount of money owed most likely will not be paid in full by the funds from the sale of the collateral, there will still be an outstanding amount.
Florida is considered a “deficiency state”. This means the Mortgagee has a legal right to pursue the Mortgagor and obtain a deficiency judgment against them for the remaining amount of indebtedness existing after the application of the proceeds from the sale of the collateral. The Mortgagee has five years to pursue the deficiency judgment and this money judgment can not only be good for up to 20 years, but can also attach to other real property owned by the Mortgagor.
Even worse is how a money judgment can also be domesticated. This means that if the neighbor, aerobics instructor, etc., decides they are going to “walk away” from the home and start a new life by moving to another state, the judgment can be domesticated (converted) into a money judgment which the creditor can then collect upon in accordance with that new state’s laws.
This Blog was written by Attorney Annette Giardina Haber of The Dellutri Law Group, P.A.. Ms. Haber directs the firm's Real Estate Division.
