Florida Real Property Law – Foreclosures and Short Sales

When a mortgagee commences a foreclosure action and the proceeds of the resultant foreclosure sale are insufficient to satisfy the indebtedness, the court has discretion to enter a deficiency decree for the remaining indebtedness. Additionally, under certain circumstances, the mortgagee may also bring an action at law to recover the deficiency. The amount of the deficiency is the total debt minus the fair market value of the property, as determined by the court. In determining fair market value, the court will consider the amount of any unpaid property taxes.

It is possible that the mortgagee could waive the right to recover a deficiency judgment and the parties could proceed with an uncontested foreclosure. Whether a mortgagee is willing to do this is up to the facts and circumstances of each case.

One alternative to foreclosure proceedings is a short sale. In a short sale, the lender agrees to accept less than the total amount due under the mortgage. However, not all owners or all properties qualify. In general, the following conditions must be met in order to qualify for a short sale:

The market value of the property has dropped less than the unpaid balance due to lender;
The mortgage is in or near default status;
The seller has fallen on hard times (does not include bad purchase decision, unhappy with neighbors, buying another home, pregnancy, moving into apartment) (does include unemployment, divorce, medical emergency, bankruptcy, death); and
The seller has no assets (if assets, the lender may deny or may approve it on the condition that seller later pay back the difference).

In addition to the above qualifications, a purchaser must be found and, most importantly, the lender must agree to sell the property in a short sale. It is important to note that the seller does not have to be in default before a lender will consider the short sale. Lenders may consider this course of action if the seller is current, but the value of the property has dropped substantially.

To pursue a short sale, the following general steps should be taken (although much will depend on the specific requirements of the lender):

Verify the value of the property.
Have attorney or real estate agent prepare and submit a Preliminary Net Sheet. This will be an estimated closing statement showing the sales price you expect to receive and all the costs of sale, unpaid loan balances, outstanding payments due and late fees, including real estate commissions. Once the calculations are performed, if there is any money remaining, the seller will not qualify for a short sale.
Call the lender and speak with a supervisor. If the lender is willing to work with the seller, follow their instructions, which may include some or all of the remaining steps.
Find a real estate agent who specializes in short sales. The lender will usually request that the agent accept a discounted real estate commission.
Prepare and submit a Letter of Authorization. This letter will give the lender permission to speak with a real estate agent or an attorney. Include the property address, loan reference number, name, date agent’s name and contact info.
Prepare and submit a Hardship Letter. This is a detailed statement of facts regarding how the seller got into financial trouble and makes a plea to the lender to accept less than full payment for the mortgage.
Prepare and submit a Statement of Income and Assets. All items should be disclosed, including savings accounts, money market accounts, stocks and bonds, negotiable instruments, cash, and other real estate.
Gather copies of all bank statements for the past 6 to 12 months (depending on the lender’s request). The seller should be prepared to explain any deposits, large withdrawals, or unusual number of checks.
Have real estate agent prepare a Comparative Market Analysis.
Have attorney or real estate agent prepare a Purchase Agreement and a Listing Agreement.

Short sales have practical, legal, and tax ramifications, including, but not limited to the following:

A short sale will show up on the person’s credit report and drop his/her FICO score. Sellers can ask that the lender not report the adverse action to the agencies, but it is up to the lender.
The lender could potentially still seek a deficiency decree for the unpaid balance.
The IRS could potentially consider the debt forgiveness as income. However, the passing of the Mortgage Forgiveness Debt Relief Act of 2007 should greatly reduce or eliminate this concern.

Christin Bucci, Attorney and Counselor at Law, LL.M., C.P.A.
*Member of the Florida Bar, Federal Bar for the Southern District of Florida, Ohio Bar, District of Columbia Bar, United States Supreme Court Bar & United States Tax Court*