Legal Question in Real Estate Law in California
My husband and I currently own two properties in North San Diego County. Our first is a townhome that started as our primary residence. We then purchased a single family home that is now our primary residence and rent out the townhome. We've tried for four years now to handle both properties. But I think we have come to the end of our rope. Our income last year almost reached 150K and we lost the ability to write off nearly all of our losses from the rental. We are upside down on both properties of course. Luckily, we are working with our lender on our primary residence to get in a fixed rate, as that is our primary concern. My question is what are the ramifications we may face if we want to short sale our investment property? We have refinanced it since we first purchased it, which I understand makes things more difficult based on the reading I've done. Is it possible for the lender (1st or 2nd mortgage) to come after our home which is also upside down or any other assets or future assets we have? We are having a hard time keeping up with the rest of our bills and cannot afford to keep both properties.
Please help!
2 Answers from Attorneys
You have 2 issues. One is the tax liability on your townhouse, and the other is the posibility of a deficiency judgment against you by the second. I am a tax and real estate attorney, and a real estate broker, and have had at least 200 consultations with people in your situation. Each one is a little different, and it would be in your best interest to have a phone consultation with me or someone else like me to get a firm grip of what you can expect. I may not be able to solbe the problem, but can at least let you know what your rights and obligations would be in each scenario, so you can make an educated decision.
I think there is a three-step process to evaluating risk. First, is the loan a type that is ever subject to a default judgment? First loans for purchase money on an owner-occupied residence are not subject to default judgments. The fewer of these elements (1st position, purchase money, owner-occupied) that are present, the more likely the loan falls into a category where a lender could pursue a deficiency (there are statutory rules covering the significance of each). Next, has the lender already signaled an intent to foreclose by trustee's sale (giving notice) or to sue for judicial foreclosure (threats, service of summons and complaint, etc.)?
Finally, I've noticed that the relatively low percentage of borrowers who are sued for judicial foreclosure and potential deficincy judgment tend to fall into one or more of the following high risk categories (a) the lender believes, rightly or wrongly, that the borrower has lots of other assets from which a judgment could be satisfied; (b) the lender is an individual, a small investment partnership, or for some other reason is not able to absorb a loss; (c) the lender suspects, rightly or wrongly, that the borrower made untrue statements about income, assets, intended use of the property, etc., on the loan application, or is otherwise a 'bad guy;' or (d) the decline in value of the collateral, and hence the deficiency, was due at least in part to the borrower's personal fault, such as failure to do urgent mantenance or using the property for an illegal purpose.
There can be no guarantees, but on average most lenders aren't pursuing deficiencies, and the foregoing steps may help you evaulate your risk.
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