Last week, I emailed the negotiator for a particularly pesky and difficult short sale lender and asked him, not so politely, to release my client. This was the fourth time I had asked him to release the deficiency (difference between what the lender was to receive and what the lender was actually owed).
The first three times that I asked him for a release, I felt like a cotton candy salesman in the Wrigley Field bleachers. He ignored me every time .
Fed up, I emailed him that “we might as well put a stake in this one unless you are willing to release any and all deficiency.” Finally, he agreed to release the deficiency.
It is possible to get a release of deficiency on the short sale of a first mortgage, and some lenders will just offer this up, which is awesome, but rare. Most short sale lenders ignore the issue and have to be hammered over the head with requests for it.
Most times, you will only get a release of deficiency if you are willing to pay something. This is called a “contribution.” In this case, the negotiator asked for $20,000 contribution from my client. We went back and forth a few times and ended up with a $7000 contribution and a full release of deficiency. The client was happy with the result.
Too many times, attorneys and agents negotiating a short sale don’t ask for a release of deficiency until it’s way too late. You have to ask for a release early and often and you need to know the exact release language that will be in the short sale approval letter. The release usually reads something like this: “Lender agrees to release owner from any and all liability and any deficiency under the note and mortgage in consideration of the payment of $____.”
I have seen quite a few short sales where the eagerness to collect a commission and/or attorney’s fees was so great that no one even discussed the issue of a release of deficiency with the seller and no one bother to even as the lender for a release. That is not good, but it happens a lot.
Here are some things to be aware of in getting a release in your short sale:
- A short sale with release of deficiency is better on the credit of the seller.
- Most first mortgage holders will not pursue the seller after a short sale. Try explaining that to the seller. Finality is good. Not having to look over your shoulder for 10 years is valuable. What if the lender dumps all its short sale and foreclosure notes to a debt collector and tries to collect the deficiencies. What then?
- Unless you are very lucky or a master negotiator, you won’t get a release of deficiency on a second mortgage in a short sale. That begs the question of why you are even doing a short sale with a second mortgage. I am not a fan of short sales involving second mortgages. Illinois needs to pass a law like the California law just passed that erases liability on second mortgages in a short sale. We need that to speed up and encourage short sales.
- The release of deficiency is put in the short sale approval letter and is not a separate document.