Legal Question in Real Estate Law in California

Re: Possible Foreclosure or Short Sale in CA

Here are my opinions:

1. Think of this from the lender's point of view. Lenders are motivated to do short sales as a cheaper and quicker way to achieve the same result as they would in going through a foreclosure. In addition, we see a lot of lenders trying to get a better position, for example by demanding a full-recourse promissory note for the deficiency, which is definitely not a good deal for the borrower. So, I think the answer here is that the terms of a short sale are 'whatever you can negotiate' and if the lender deems you able to pay the mortgage or to be able to pay a note, you probably have a weak negotiating position, but it's worth asking. Not all lenders are taking the same position on all loans and with all borrowers. Keep in mind what the borrowers represented to the lender on their loan applications back in 2007 regarding their incomes and other assets - the lender will be reviewing its files!

2. If the short sale is a sale to the lender, and the lender doesn't demand a note for the deficiency, I would think the two would be the same; the bigger issue may be whether you are exempt from the tax on the theoretical gain because the property was, for a while, your principal residence - this is a question that would require research, and you should either ask the IRS or study the issue on the IRS Web site. Of course, if you have to give the lender a note for the deficiency, there is no forgiveness of debt and no tax in any case.

3. If the lender can get you into court, it is very likely its lawyers will find a way to introduce any documents you furnished it as admissible evidence. Even if it doesn't introduce the documents themselves, the information shown on the documents will be a source of ideas for questions to ask you when you are called as a witness or maybe just as helpful aids in planning overall case strategy, including an initial decision whether to sue or not.

I think you best overall strategy here is to verify that your loan will be "non-recourse" with an expert (not the lender) under your current circumstances, and to keep it that way by avoiding any transaction substituting an obligation which is not purchase money.