Does bank go after my first investment home and primary residence if I shortsale the second investment home?

May I ask if I short sale the second investment home, will the bank go after my 1st investment home? Will they require me to sell the 1st investment home to pay off the balance owe from the shortsale of the second investment home? Can they go after my 1st investment home since that house is not under water?

Asked on August 1, 2012 under Real Estate Law, California

Answers:

Cameron Norris, Esq. / Law Office of Gary W. Norris

Answered 8 years ago | Contributor

First of all, if you are going to venture into real estate investments--I would recommend grabbing a few books on real estate transactions.  If you do a search for "Real Estate Principles" you should find some books that satisfy educational requirements for real estate license applicants.

Second, short sale on the "second investment home" is not such a bad idea in 2012--as this year the IRS will not be coming after you for taxes on the portion of debt that is forgiven.  Normally forgiveness of debt is considered gross income and you would normally be taxed on it.  It is unclear whether or not this will continue in 2013.

Third, if you short sale your home you can only be held liable on the deficiency (the bank's loss) if they foreclose in a certain way.  In CA we have both Non-judicial and Judicial Foreclosures.

Non-judicial foreclosures usually take around 4 months, the bank would file a notice of default, record notice of sale, then under CA CCP 580(d), the bank is forever barred from suing the borrower on any deficiency in the amount collected on the loan.  They would get the house and that's it.

Judicial foreclosure is a slower process.  It gives the borrower a one year redemption period when even after the foreclosure sale, they can come back and repurchase the home.  Deficiency is allowed.  The bank can offer less than what was owed at the auction, then come after the borrower for the difference.  There are limits though, as under CA CCP 580(a), the bank can only collect a deficiency in relation to the fair market value of the property (amount borrowed-fair market value=greatest deficiency allowed).  However there can always be some argument about what FMV is.  If the bank does judicial foreclosure, gets a judgment for the deficiency--then they can try to levy on bank accounts, garnish wages, auction off vehicles or place liens on other homes you own.

That said, banks HARDLY EVER do judicial foreclosures.  It takes a lot longer, it is more expensive, and the redemption period creates a lot of uncertainty for the buyer at auction.

So, yes your 1st investment home could be subject to a lien for the deficiency balance if 1) you default on your loan on the 2nd investment home, 2) they do a judicial foreclosure, 3) you don't pay the deficiency balance, 4) then they take collection efforts on the judgment.

Although banks hardly ever conduct judicial foreclosures, it is within their right.  You should really sit down with a local real estate attorney and examine your options.  You should also learn more about the process on your own.

Also keep in mind that the anti-deficiency rules are VERY specific to CA.  This information should not be relied on without consulting an attorney and will be completely wrong all together in most other states.

Best of luck.


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