The top 10 short sale myths:

Myth 1: Arizona is a non-recourse state.
While there are laws that protect the homeowner from deficiency in a foreclosure or deed-in-lieu, these laws do not apply in a short sale. Only an experienced real estate attorney, after reviewing all loan documents, deeds-of-trust and short sale documents can properly ascertain that liability. As a Realtor you should NEVER give advice as to the homeowner's potential for deficiency liability. Even if that advice is technically correct, some lenders may file lawsuits regardless of the merits of the case, knowing that a certain percentage of borrowers will pay just to avoid going to court. Additionally, homeowners will often make incorrect statements as to the nature of their loans. Currently, we find about 60% of our clients are incorrect as to the nature of their loans which affects the potential for anti-deficiency protection. If a borrower is sued by their lender, there is a reasonable chance they will file a suit against the Realtor that handled the short sale. These suits can be difficult to defend, even if the Realtor made no representations as to the homeowners potential liability resulting from a short sale. For more information on deficiency liability read our article and blog on this subject.

Myth 2: Referring a homeowner to an attorney removes the liability from the Realtor.
If that homeowner does not retain the attorney, the protection for the Realtor is limited. Referring a homeowner to an attorney that represents the Realtor's company can also leave a disgruntled seller with a legitimate complaint relating to who was being represented by the attorney and the fact that the attorney had a conflict of interest. A written legal opinion as to the homeowner's potential for a deficiency lawsuit from a qualified, independent attorney provides the Realtor the most protection against a lawsuit arising from deficiency issues.

Myth 3: Realtors are protected by E&O insurance against lawsuits as a result of a short sale.
Many insurance providers require a rider for E&O coverage of short sales. Some designated brokers have elected not to provide this rider. Check with your designated broker to ensure you are covered.

Myth 4: Lenders lose more on foreclosures than short sales.
Since the lender may be protected by mortgage insurance or may have sold a loan into pools, the investor may receive more sales proceeds through a foreclosure at a lower sale price than through a short sale. In a foreclosure, the senior note holder (investor) gets paid before junior tranch holders are paid. This could result in a better payout for the senior note holder as a result of foreclosure (the senior note holder carries the majority vote on decisions related to this loan). Lenders also use NPV (Net Present Value) calculations to determine their best option. This takes into consideration many factors that consider the econimic interests only of the lender/investor. Hence, the reason that lenders/investors will sometimes make decisions to foreclose that seem on the surface not to make sense is often the result of the NPV test.

Myth 5: It is possible to have the lender report a short sale as paid in full as agreed on credit.
Although this has happened in a very few cases last year; the reality is that lawsuits by lenders on the new loans against previous lenders that did not report short sales have quickly put an end to this option. On rare occasions this may be negotiated if a forensic audit turns up a serious violation.

Myth 6: I should advertise myself as a short sale expert.
Although this may look good in advertising, it can quickly backfire on the Realtor. By calling yourself an expert you are held to a higher standard; that of a true "expert". Homeowners can claim they followed the advice of the Realtor because he/she claimed to be an expert and the Realtor will be evaluated at the higher standard of care.

Myth 7: If the borrower receives a 1099, the lender has taken their losses and will not pursue a deficiency judgment.
In the past it was accepted that the 1099 was an indication that the lender had written off the loan losses and would not pursue the borrower. However, lenders have sued borrowers years after that 1099 filing. In a recent appellate case (December 2009) of Amhurst Bank vs. Fossett the lender argued that they only file the 1099 because of federal accounting requirements and it was not releasing the borrower from liability. That court did not make a decision but sent the case down to the lower court to decide. Lenders are working hard in all states to get the rules changed in order to recapture more of their losses.

Myth 8: Once a trustee sale is completed there is no way to reverse it.
It may be possible to unwind a foreclosure after the trustee sale has completed. However, this requires careful analysis of the lender's actions and some proof of wrong doing on the part of the lender.

Myth 9: Borrower must be delinquent to get short sale approval.
We have seen some instances in which a short sale is completed without the borrower going delinquent. However, it is generally the case that lenders will not approve a short sale for a borrower that keeps their payments current. The flip side of this is that it creates more pressure on the Realtor to complete the short sale before the property goes to foreclosure. Usually lenders will extend trustee sale dates to facilitate a pending short sale, but not always. Increasingly, lenders are unwilling to extend short sale dates even with a valid offer pending on government loans.

Myth 10: Anti-deficiency laws do not apply to investment properties.
Although these laws are open for interpretation, the law simply states that the property must be "utilized". There are several cases in which the courts have determined that renting is considered a utilization of the property for purposes of allowing anti-deficiency protection.