Legal Question in Real Estate Law in California

I couldn't begin to mention all the "possible" legal and tax problems, even if I knew you well and had been advising you for years. Nevertheless, here are a few of the more frequent problems that may arise. Keep in mind that although you are taking on some new risks, you are probably also avoiding or leaving behind some old risks and problems.

1. Dealing with your parents (or any relative) on a financial involvement risks the possibility of future strained family relations. Any deal you do should be well documented and you should intend to live up to it at all future times. Same for the parents.

2. The IRS not long ago adopted a policy of taxing the forgiven amount of an unpaid loan, when there was a foreclosure or short sale, as "income" to the borrower. I do not know at this moment if this is being done, or if there were a change of law or policy due to public outrage at adding insult to injury. When you are negotiating the short sale with the lender, be sure to inquire if you will be "1099ed" with imputed income on the difference between the short sale and the amount due.

3. Not all short sales are the same. Sometimes the lender forgives the unpaid amount and accepts the "short" purchase price as payment in full; other deals, sometimes at least, have left the seller liable for the shortfall. Make sure your short-sale deal takes you off the hook.

4. Every short sale requires finding a buyer -- sometimes the lender, sometimes a third party. The process of finding a buyer can be time-consuming.

5. We hear frequent reports of lenders foreclosing while a short sale was in the works.

6. The credit-reporting agencies will probably pick up on the short sale and you can expect a reduction in your credit rating that'll last for some years.

Simple: foreclosure, ruined credit for all on title or loan, huge judgement against all on title or loan.