Time for Another Residential Real Estate Boom as FNMA Relaxes Impact of Prior Foreclosure, Short Sale and Bankruptcy.

Since 2007, maneuvering through the murky waters of government-backed mortgage-finance policies seemed to be nearly impossible for borrowers and real estate professionals alike. Whether you were seeking a short sale from your lender, or you were a borrower forced to endure the painful experience of foreclosure, the end result to your credit was the same. Eventually, real estate professionals were turning away most borrowers with a foreclosure, bankruptcy, short sale, or deed-in-lieu on their credit record. Homeowners with disparaging credit were advised that foreclosures and short sales can stay on a credit report for up to seven years, making it difficult (if not impossible) to qualify for a reasonable loan. Conversely, struggling homeowners were watching their homes decrease in value while trying to avoid foreclosure or short-sale alternatives.

However, this all may be changing. As recent as July 29, 2014, the Federal National Mortgage Association (FNMA) decreased the waiting period for residential owners who had a previous bankruptcy, foreclosure, short sale or deed-in-lieu of foreclosure to purchase a new residence. Below is a comparison of previous vs. new waiting times for a borrower qualifying to purchase a new residence through FNMA:
• Foreclosure: Previous: 7 years, Now: 3 years with “Extenuating Circumstances” (including loss/decrease of income). The floodgates will open for this exception.
• Short Sale/Deed-in-Lieu/Charge-off: Previous: 4 years, Now 2 Years.
• Bankruptcy (Ch. 7): Previous 4 years, Now 2 years.
• Multiple Bankruptcies: Previous 5 years, Now 3 years from most recent Bankruptcy.

​As indicated above, FNMA lender underwriting requirements are relaxing. Since FNMA is the largest purchaser of conforming residential loans, lenders across the board will follow FNMA’s underwriting guidelines. It may take up to 6 months from FNMA’s guideline announcement for originating lenders to change their underwriting standards. This would then result in an increase in the number of purchases of residential properties, and an increase in demand and sales. If that happens, the end result would be greater demand than supply, which means increased property values.

​Within the next two years, the likely next step for FNMA will be to allow “stated income” or decreased documentation for income under certain circumstances. Another option for a FNMA underwriting change would be to offer new loan options that reduce the required monthly income threshold, such as (1) reduced LTV% (Loan-to-Value percentage) and (2) creative loan options, such as negative amortization loans (which were previously offered before the meltdown). Based on the strength of lending and real estate agent/broker lobbyists and the elapse of time since the last real estate crash (2007-10), additional relaxation may follow. Although the change in FNMA guidelines will be in small increments, when pieced together the result could be the same lending atmosphere that caused the 2007 real estate collapse. It is very possible that we are now embarking on a brand new real estate bubble. Not only will this affect homeowners, borrowers, brokers and real estate agents, but we will also see an increase in construction and development.

​The real estate attorneys at Kring & Chung, LLP, some of whom also maintain real estate broker’s licenses, are knowledgeable and ready to assist homeowners, agents, brokers with any and all real estate related legal matters in this rapidly evolving market. Whether you have easement issues or construction defects, are a borrower, lender, real estate professional or contractor, if you have any legal questions, please feel free to call Anna Greenstin Kudla at Kring & Chung.

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THE POWER OF A SHAM

Sham Guaranty Defense is a distinct way individual guarantors, partners, trustors/trustees, corporate executives and shareholders, can avoid liability when an underlying loan is in default. While this defense may be influential in assisting a select few in certain situations, it is a defense that is rarely used because it applies in limited circumstances.

Application of the Sham Guaranty Defense requires proving that the guarantor is actually the principal obligor and thus entitled to the same unwaivable protection of the anti-deficiency statutes.  Civil Code § 2787 defines a true guarantor as, “one who promises to answer for the debt, default, or miscarriage of another.”  A Sham Guaranty arises when a principal obligor purports to take on additional liability as a guarantor. Below are some examples of how California courts made distinctions in the application of the Sham Guaranty Defense between different types of borrowers and/or guarantors.

Trustors and Trustees. If a Trust is the principal borrower and the guarantees are executed by the Trustors and Trustees of that Trust, the guarantees may be considered unenforceable. Creating a Sham Guaranty requires proof that the principal obligor of the debt, the trust, is a mere pass through entity that does not award any separation or protection to the trust principals or the guarantors.   

The most well-known, and highly cited case in this area, is Torrey Pines Bank v. Hoffman, (1991)231 Cal.App.3d 308, 321.  In the Torrey Pines matter a husband and wife, who were the trustors, trustees and the primary beneficiaries of their revocable living trust, signed personal guaranties in connection with a construction loan to their personal trust. The court applied the “instrumentality” test, defined as whether the trust was “anything other than an instrumentality used by the individuals who guarantied the debtor’s obligation, and whether such instrumentality actually removed the individuals from their status and obligations as debtors.” (Id. at 320) Specifically, the court determined that the structure of the trust made no significant distinction between the guarantors and the trust/borrower. Thus, the husband and wife were deemed the primary obligors that could not guaranty their own debt. Therefore, the guaranties were deemed not enforceable.

This pivotal case does not protect all trusts. In Torrey Pines the court recognized that the greater degree of separation between trustors, trustees and beneficiaries exists, the more difficult it will be to establish guarantor protection.  Such was the case in the matter of Talbott v. Hustwit, (2008) 164 Cal.App.4th 148.  In the Talbott case the court made several distinctions between he guarantors and their trust.  For instances, the husband and wife guarantors were secondary, not primary, beneficiaries of their trust.  Moreover, they were not the named trustees but rather used a limited liability company as trustee, thus limiting their personal liability for their Trust’s obligations.  In Talbott  the court deemed the husband and wife as true guarantors because the trust arrangement “actually removed the[m] from their status and obligations as debtors.”(Id. at 153) Therefore, the guaranties were deemed enforceable.

Partners In comparison. Similarly, if a partnership is the principal borrower, guaranties signed by the partners may be held to be a Sham. In Riddle v. Lushing, (1962)203 Cal.App.2d 831, real property was purchased in the name of a partnership. The promissory note and deed of trust were signed by each partner. The partners also individually guarantied the note. The partnership defaulted. Although the court did not use the phrase “sham guaranty,” the court focused on whether the transaction created different liabilities for the partners as guarantors. Since, by law, partners were already jointly and severally liable for debts of the partnership, the court permitted the “guarantors” to invoke the protections of anti-deficiency law.

The above examples relate to real estate properties, individuals and partners.  To draft a detailed article addressing various loans, lender’s responsibilities, and countless defenses that could be applied to corporate executives and shareholders, would require this author to draft a dissertation.  We urge you to contact Anna Greenstin Kudla, or any of the litigation attorneys at Kring & Chung, to discuss what defenses, or claims, could be asserted on behalf of, or against, borrowers and guarantors. If you have any questions, feel free to reach out to Anna Greenstin Kudla.

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MARIJUANA DISPENSARIES BLOWING UP IN SMOKE

The medical use of marijuana is a hot topic in California. The regulation of dispensaries has generated numerous land use regulations, and landlord-tenant disputes now before the California Supreme Court. Dispensary regulation creates a mechanism for local government oversight of medical marijuana cultivation and distribution. Local state government enforcement includes zoning and conditional use permitting under the purview of the City Council. There are a number of legal issues that arise for landlords, tenants, employers, dispensaries, growers, and individual users of medical marijuana. Although the sale of marijuana is legal in California for medical purposes per the Compassionate Use Act, the sale and use of marijuana is a federal offense. Business and property owners have found that legal assistance is required in maneuvering through the conflict of state versus federal law.

Legal History
In 1996, California voters approved Proposition 215, the Compassionate Use Act (CUA), allowing medical patients in California the right to obtain and use marijuana. The intent of the CUA was to provide patients with terminal illness and sever health conditions access to the use of medical marijuana, which is not to be confused with recreational use. However, the CUA did not address specific issues of enforcement. In 2003, the California legislature passed Senate Bill (SB) 420, establishing the Medical Marijuana Program clarifying some of these issues, including the establishment of a voluntary state medical marijuana identification card (MMIC).

The MMIC identifies the cardholder as a person protected under the provisions of Proposition 215 and SB 420. It is used to help law enforcement identify the cardholder as being able to legally possess certain amounts of medical marijuana under specific conditions. Dispensaries must require customers to maintain a MMIC. Controversy arises as to whether the MMIC is valid, and whether the dispensaries strictly sell to MMIC holders.

Landlords Beware
Landlords must protect themselves with a proper lease agreement when leasing to a dispensary. While the sale of marijuana (for medical purposes per the CUA) is legal in California, the sale and use of marijuana is a federal offense. United States Attorneys in California have targeted medical marijuana cooperatives on the grounds that they are selling marijuana to the public, as well as MMIC holders. The prosecutors target dispensaries by threatening property owners with civil forfeiture of their property if they continue to allow it to be used to further a federal crime.

In fear of losing ownership, landlords are forced to evict tenants. Abrupt lease cancelations, if not permitted in the lease itself, result in unlawful eviction lawsuits. Many local courts have held that landlords may not evict a tenant based on a section of California law that provides for terminating a lease when the tenant has used the property for an “unlawful purpose.” (California Code of Civil Procedure §1161(4).) Courts have held that “unlawful purpose” must be understood solely with respect to state law, not federal law. If the tenant-dispensary complies with the provisions of the Compassionate Use Act, its activity is not “unlawful” under state law and the eviction is not upheld. Landlords should be educated about ordinance, zoning, and permitting restrictions in specific areas before allowing the operation of a dispensary. A standard lease agreement is not enough to protect the landlord from the dichotomy of state verses federal law. The landlord should insist to have the right of eviction based on a violation of any law, federal included. As discussed below, even though a tenant may have a valid business permit, a local ordinance may prevent that specific business operation.

Tenants Beware (City Ordinances can be a Nuisance)
Just as City ordinances differ from county to county, so do court orders regarding operating a medical marijuana facility. For example, the City of Temecula was successful in stopping a dispensary from operating in commercial zoning area, while the City of Lake Forrest was defeated in similar circumstances.

Cooperative Patients Services, Inc. (“CPSI”) operated a “Therapeutic Cannabis (Medical Marijuana) Patients’ Resource Center,” for a couple of years before Temecula filed a complaint to abate CPSI’s dispensary. The City of Temecula claimed that CPSI is a public nuisance and sought to prohibit the landlord, Evergreen Ventures, Inc. (“Evergreen”) from continuing to allow the dispensary to operate. The trial court issued a temporary restraining order prohibiting CPSI and Evergreen from operating a business without a valid business license or certificate of occupancy.

On October 9, 2012, the Court of Appeals, (in a case that has yet to be published, City of Temecula v. Cooperative Patients Services, Inc., 2012 WL 4788107 (Cal. App. 4 Dist)), confirmed the trial court’s ruling. The Appellate Court issued a ruling prohibiting CPSI from operating a medical marijuana dispensary. The court upheld zoning and city ordinances which prohibit medical marijuana dispensaries in commercial zoning districts. A violation of any provision of the Municipal Code shall be deemed a public nuisance which may be abated by the city attorney in a civil judicial action. Since, CPSI’s property is located in the Service Commercial Zone, they were forced to stop doing business. CPSI appealed arguing that the municipal ordinance on which Temecula relies is preempted by state law. The court held that Temecula’s city ordinances trumpeted the Medical Marijuana Program Act (Health & Saf.Code) and the Compassionate Use Act of 1996 (CUA).

However, on February 29, 2012, in the case of The City of Lake Forest v. Lake Forest Wellness Center (2012 WL 676644 (Cal. app. 4 Dist) also an unpublished case), Orange County lost its fight against the medical marijuana dispensaries. The Lake Forest Wellness Center successfully appealed a trial court’s order granting a preliminary injunction enjoining their medical marijuana activities in this nuisance abatement proceeding. Lake Forest Wellness Center and the Independent Collective of Orange County argued that medical marijuana dispensaries are authorized by Health and Safety Codes. The California Appellate court held that the City’s asserted blanket, per se ban on medical marijuana dispensaries contradicts state law and furnishes no valid basis to obtain a preliminary injunction. Rather, the City must show a dispensary did not grow its marijuana on-site, or otherwise failed to comply with applicable state medical marijuana law or permissible local regulations.

Conclusion
Whether you are a landlord seeking legal advice regarding the enforcement actions against commercial property owners for tenant activities, or a tenant dealing with evictions based on ordinance violations, Kring & Chung’s knowledgeable counsel can assist you. Our attorneys have many years of experience in drafting lease agreements, and resolving landlord tenant disputes. Should you need assistance in preparing, negotiating or revising a lease agreement or simply need legal assistance with obtaining a business permit, please do not hesitate to contact us at http://www.kringandchung.com

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Anti-Deficiency Senate Bill Regarding Short Sales

Homeowners who are “upside-down” on their loans and want to avoid foreclosure recently received a tremendous benefit from California Governor Jerry Brown. On July 15, 2011, Senate Bill 458 was signed into law extending the anti-deficiency protections of Senate Bill 931. Senate Bill 458 prohibits any deficiency judgment to be requested or rendered for senior or junior liens after a Short Sale of one-to-four residential units.

The previous Senate Bill 931 allowed a homeowner to sell their home at a value less than the existing mortgage, requiring the senior lienholder to accept the sale as a full payment of the existing obligation. The difficulty with Senate Bill 931 was that if the junior lienholders did not forgive the debt, the secondary loan on the property turned into personal debt after the Short Sale was completed. Many junior lienholders sold the lien to debt collectors who proceeded to seek the deficiency from the seller after the Short Sale was completed. This practice is now illegal. Pursuant to Senate Bill 458, all the lenders that agree to a Short Sale must accept the agreed upon Short Sale payment as full payment of the outstanding balance of all loans.

It is important to note that SB 458 does not apply to: (1) Properties that are residential rentals, commercials, vacant, and retail; and (2) Trustors that are corporations, limited liability companies, limited partnerships, or political subdivisions of the state. The lenders are permitted to seek damages if there is fraud, or if there are other properties intertwined with the loan. In addition, this does not change the process of a Short Sale. The homeowner must still apply and obtain approval from all the lenders. Depending on the homeowner, applying for a Short Sale may have drawbacks. For instance, the seller must disclose their entire financial status honestly and accurately, risking the chance that the lenders may deny the request for a Short Sale and proceed with the foreclosure. Moreover, this law does not prevent the lenders from negotiating with the borrowers’ agents and family.

With regards to credit score, unless the bank has specifically agreed not to report delinquent payments or the shortage of the sale, the homeowner’s credit score will reflect delinquencies and collections. Real estate agents should not give legal advice to clients facing foreclosure, nor assure sellers involved in the Short Sale process that their credit rating will not suffer adverse effects. Sellers of Short Sales must also seek tax advice before entering into a Short Sale contract. There could be tax ramifications due to debt forgiveness.

It is unclear how new laws will affect the lenders’ business practice, and what impact it will have on an already declining market. Under new law, lenders are entitled to negotiate sale price with agents, other lenders, and borrowers’ relatives. In addition, financial obstacles affecting title must be disclosed to buyers involved in Short Sale process. (See Kring & Chung’s November 2010 Newsletter discussing notices under Holmes v. Summers)

Sellers, buyers, and agents should seek legal advice prior to proceeding with a Short Sale. In order to protect both parties in a purchase agreement, addendums should be drafted extending time frames to accept and/or decline a Short Sale pending lender approval, time to obtain legal evaluation, and time to speak with a qualified CPA.

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Short Sale Disclosure

The duty of a listing broker and agent to a buyer has changed in light of the onslaught of short sales. On October 6, 2010, the California Appellate Court in the case of Holmes v. Summer, 4th Appellate Dist., 3rd Div. 2010, extended the listing agents’ duty to a buyer, requiring disclosure of financial obstacles effecting title. Specifically, if the listing agent or broker is aware that monetary liens and encumbrances exceed the sale price of a residential property, requiring the seller to either undergo a short sale or deposit a substantial amount of cash into the escrow to obtain a release from the lender, there is a duty to disclose this state of affairs to the buyer.

In the case of Holmes v. Summers, a buyer of a residential property sued the sellers’ Broker, asserting misrepresentation, failure to disclose, and negligence, when escrow was cancelled as result of the seller being unable to effectuate a short sale and/or come up with cash to obtain the release of a monetary lien. The Court applied a strict standard of care to the seller’s agent, scrutinizing everything she did. For example, the Court found fault with the fact that the Multiple Listing Service (“MLS”) advertised the sale of property for approximately $750,000, stating only that the “seller was motivated and that the [listing agent] would get a 3 percent commission.” The buyers were never advised that the property was subject to three deeds of trust, with a total debt of $1,141,000, or that the seller’s lenders would need to either approve a short sale or the seller would have to deposit $392,000 in cash to escrow to cover the shortfall. The buyers never did a title search, and in reliance on the purchase agreement, sold their home to fund the purchase of what they thought would be their new residence. When the deal fell through, the buyers sued the listing agent and broker, not the seller.

The buyers did not sue the seller because he was said to be “judgment proof.” This meant that since the seller could not afford to keep his home, he could not, in all likelihood, afford to compensate the buyer for his damages. Under different circumstances, even if a buyer sues the broker, agent and the seller and they are all found at fault, the legal theory of Joint and Several Liability would apply. This means that if two or more defendants are found responsible for an indivisible injury, each defendant is liable for the entire award regardless of the individual degree of fault. A so-called “deep pocket” defendant may be held liable for an entire damage award even if such a defendant is only fractionally liable. In the end, the same result would occur; the broker could end up responsible for all of the buyer’s damages, if in fact the seller is “judgment proof.”

Licensed real estate brokers and salesman should consider the following to limit their liability exposure. First, the agent should have an understanding of the client’s financial obstacles and advise their client from the start that they may be required to disclose such information to the buyers. This type of communication should be solidified with a signed written consent to use confidential information. Second, if applicable, the MLS should include notice of a potential need for Short Sale. Pursuant to Civil Code § 1088, an agent is responsible for the truth of all representations and information listed in the MLS. Constructive notice is not a viable defense. Assuming a title search would reveal the existence of deeds of trusts on the property, the agent cannot rely on a buyer doing such a search.

Balancing factors used by the Court to determine liability on the part of a broker and agent include: 1) the extent to which the transaction was intended to affect the plaintiff; 2) the foreseeability of harm; 3) the degree of certainty of injury; 4) the closeness of the connection between the defendant’s conduct and the injury suffered; 5) the moral blame attached to the defendant’s conduct; and 6) the policy of preventing future harm. By googling Holmes v. Summers, you can read Justice Moore’s analysis of these five factors. The factors arise out of equitable principals, requiring the broker and agent to apply a higher degree of care and consciousness to the Short Sale transaction. The real estate attorneys at Kring & Chung, LLP, some of whom also maintain a real estate broker’s license, are knowledgeable and ready to assist both the Seller and the Agent through the Short Sale transaction, and any other real estate related legal matters.

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The Purchase Agreement Arbitration Provision

The standard form residential purchase agreement published by the California Association of Realtors (“CAR”), was updated in October 2002. The Purchase Agreement adopted The Federal Arbitration Act (“FAA”) procedural provisions. Until recently, parties have interpreted this provision to mean that the trial court has no authority to stay or deny arbitration under the California Arbitration Act because the Agreement adopted the Federal rules.

On the contrary, on June 1, 2010, the California Supreme Court held that (“FAA”), incorporated into the newer CAR Forms, does not limit the trial Court’s authority to deny arbitration, arising out of a dispute between a “Buyer and Seller” involved in a Residential Purchase Agreement.  In the case of Valencia v. Smyth, 2010 DJDAR 8103, the owner of a residential property compelled the Buyers to arbitration after they filed a lawsuit. The Seller argued that pursuant to the California Association of Realtors Residential Purchase Agreement, by initiating under the FAA arbitration provision, the buyers were giving up their right to trial, and limited their rights to an arbitration proceeding, only. 

Arbitration proceedings are generally informal and, under California law, the arbitrator may base the decision on business custom and practice, technical insight, and/or broad principles of equity and justice, rather then the strict letter of the law. There are many benefits and disadvantages to arbitration. The Buyers in the Valencia v. Smyth matter did not want to proceed with arbitration and opposed the Seller’s petition to arbitrate. The Buyers argued that the Seller waived his right to arbitration by delaying the motion to compel and engaging in discovery.  

The California Supreme Court disagreed with the Seller, and upheld the trial court’s decision to deny the arbitration petition, in favor of the Buyers.  The Supreme Court held that, “there is no federal policy favoring arbitration under a certain set of procedural rules; the federal policy is simply to ensure the enforceability of private agreements to arbitrate.” (Volt Info. Sciences v. Leland Stanford Jr. U. (1989) 489 U.S. 468).  Essentially, determination of whether a dispute arising out of Residential Purchase Agreement must be arbitrated is a decision left for the reviewing Judge.

Under California law, a contractual arbitration provision does not make arbitration a mandatory alternative to trial. In order for a party to enforce a contractual arbitration provision, they must first file a petition to compel arbitration with the proper Court. A Judge may make factual findings based on affidavits, oral testimony, and declarations submitted by the parties. However, evidentiary support is required before the Court can grant a petition to compel arbitration, or deny the petition, based upon a defense such as fraud. The party seeking arbitration has the burden of proving the existence of an enforceable arbitration agreement, and the party opposing the motion has the burden of proving any defense, by a preponderance of the evidence. If the court finds there is a valid contract binding the parties to arbitrate, it cannot refuse to compel arbitration unless there is a valid defense under Code Civ. Proc., § 1281.2.

Some of the attorneys at Kring & Chung, LLP are also on the Orange County Panel of Arbitrators, and are available to answer any questions you may have. Our litigation attorneys are experienced and ready to assist both the Seller and the Buyer in either petitioning the proper Court to enforce contractual arbitration provisions, and/or oppose petitions to arbitrate. Please contact Anna Greenstin directly if you have any question regarding alternative dispute resolutions, including arbitration proceedings and/or mediation.

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Short Sales and Deficiency Judgments

As declining residential property values are starting to stabilize, mortgage lenders are approving more Short Sales as an alternative to foreclosure.  A homeowner may elect to pursue a Short Sale when the fair market value of the property is less than the amount of the loan, and the owner cannot cover the mortgage payments.  Some homes are encumbered with two or more loans.  All lien holders must approve before a Short Sale can occur.  If the loans are generated with different lending agencies, then the Real Estate Agent must contend with different business practices when assisting with the Short Sale application.  For example, lenders have different procedures regarding Short Sale applications.  Some lenders require submittals of offers.  Often the Seller must disclose his financial records and explain his financial hardship.  Financial information must be accurate and honest.   Otherwise, the Seller and his Agent could be liable to the lender for fraud.  

If the lenders approve of the Short Sale, a lender “Approval Letter” will follow.  More often than not, the Approval Letter will specifically state that the lender reserves its right to pursue a deficiency judgment against the borrower for the difference between the loan balance and the price received from the Short Sale.  This language is often overlooked by the Agent and the Seller, because they either do not understand the legal ramifications, or they are rushing to complete the sale.  Sometimes the Approval Letter is silent and the lender does not mention it is reserving its rights to recoup the deficiency.  The lender’s silence on this issue usually does not constitute a waiver of its right to do so.  Unless the Seller receives a written release directly from the lender, an unsophisticated Seller will be exposed to a possible deficiency judgment.  This means that, after the property is sold, the Seller may receive a demand letter from the lender to pay the difference between the sale and loan amounts.  

Agents must advise the Seller of government programs that may prevent lenders from going after the Seller for deficiency.  For example, in the last few weeks the Homeowners Affordable Modification Program (“HAMP”), through the Home Affordable Foreclosure Alternatives (“HAFA”), came out with a new law that prevents lenders from going after the Seller for the deficiency.  If the Seller meets the HAFA requirements, and proceeds with the Short Sale through HAMP, then the lenders must release borrowers from the obligation to repay the difference between the sales price and the loan amount.  No deficiency judgments are allowed for a first or second loan.  You can learn more about the HAFA requirements on line. 

Agents usually are not attorneys, nor are they Certified Public Accountants.  When their clients receive a demand letter from the lender, the Agents are sometimes just as bewildered as the Seller.  The Agent should advise the Seller, in writing, of the importance of speaking to an attorney or CPA about whether the borrower will remain liable for the deficiency.  If so, the Seller will want to reserve the right to cancel the Short Sale without penalties or pursue negotiations with the lender to obtain a written waiver of the deficiency and general release of all claims against the borrower.

Agents assisting Sellers with Short Sales use the Short Sale Addendum (C.A.R. Form SSA 11/07). Section F of Form SSA broadly advises the Seller that he can incur credit or legal consequences, or taxable income from a Short Sale.  It states that the Seller should “seek advice from an attorney, CPA or other expert regarding such potential consequences of a Short Sale.”   However, the language is ambiguous, and can create confusion about whether the Seller can cancel the sale after the lender approves of the Short Sale but does not release the deficiency.

In addition to using Form SSA, Agents and Brokers should also prepare a more detailed Addendum to the Purchase Agreement, permitting the Seller to meet with a lawyer or CPA to discuss the lender’s agreement, and thereafter allowing a five day window to cancel the sale, if necessary.  Such an Addendum to the Short Sale Purchase Agreement should include 1) the Seller’s right to terminate the Short Sale (within a limited period of time); 2) notice that the Seller may have negative tax, legal or credit consequences which result when the funds due at the close of escrow are insufficient to fully satisfy a loan secured by the property; 3) notice that the lender may agree to take less than the full amount of the loan without releasing the deficiency; and 4) advise the Seller that there are government programs that may assist the Seller with avoiding a deficiency judgment.

Essentially, the Agent should address Short Sale issues more directly, and bring to light the possibility of the lender “approving” the Short Sale, but not releasing the Seller from any deficiency.  Since proper documentation of the Short Sale process is necessary to maximize the Seller’s legal protection, an attorney should be consulted to guide the Seller through this process.  In addition, Agents should be advising the Seller of new HAFA programs that are being implemented to protect homeowners.

The real estate attorneys at Kring & Chung, LLP, some of whom also maintain a real estate broker’s license, are knowledgeable and ready to assist both the Seller and the Agent through the Short Sale transaction, and any other real estate related legal matters.

Anna Greenstin is an associate with Kring & Chung, LLP’s Irvine office.  She can be contacted at (949) 261-7700, or agreenstin@kringandchung.com.

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