ASK A LAWYER-Reader's Protection Homestead is Safe

Orlando Sentinel, December 28, 2009

Question:
My wife and I have a second home that we rent out, but owning two homes is proving to be too much for us financially. If we default on the mortgage for the second home, and the lender obtains a deficiency judgment against us, can the lender collect the judgment by foreclosing upon our primary residence?

R.C.
Orlando

Answer:
If the lender on the second home obtains a deficiency judgment against you, the lender cannot collect upon that judgment by foreclosing or otherwise forcing a sale of your primary residence if that residence is your protected homestead property.

In Florida, protected homestead property is the property upon which a Florida resident's primary residence is located. It does not matter how much the property is worth, but there is a size limitation. Protected homestead property is limited in size to a half acre if it is located within city limits and 160 acres if it is located in an unincorporated area.

Visit our website for more information on this subject.

Frank Pohl founded Pohl & Short, P.A. based upon the belief that a high quality small commercial law firm was needed in the Orlando, Florida area as an alternative to the large commercial law firms. He still believes that client responsiveness and satisfaction has a place in a fast changing legal profession. Frank has been involved in the Central Florida community for more than twenty-five years. He has been a dedicated past board member of many local organizations over the years. Frank graduated magna cum laude with a B.G.S. Degree from the University of Miami in Coral Gables, Florida; attended the University College at the University of London as an undergraduate studying British literature and British history; obtained his Juris Doctorate Degree in 1979; and obtained a Masters of Law and Letters Degree (LL.M.) from New York University School of Law in 1980. Frank is a member of The Florida Bar, the California Bar, and the District of Columbia Court of Appeals. He is also admitted to the U.S. Supreme Court. He has served on the Orange County Bar Association Real Estate Committee and is a member of the The Florida Bar’s Real Property and Corporation and Business Law Section. He has also served on the Florida Bar Grievance Committee.

Bidding at the Courthouse Steps

Winter Park Home, Volume 7/ Issue 4, 2009

Due to the number of active foreclosures in today’s marketplace, I frequently receive calls from individuals looking to get a “deal” at the courthouse steps. The callers are asking for advice on how to determine the various pitfalls that can occur when bidding for a property.

I always recommend that the client have our office obtain a complete title search on the property to confirm that there are no problems in the back chain of title, and to provide a review of the foreclosure file. I determine whether all necessary parties to the suit have been named and properly served, and whether there are any superior mortgages or liens that would not be eliminated by the foreclosure. In addition, I also explain that being the successful bidder at a foreclosure sale does not guarantee the bidder has clear title to the property. For that reason, I always recommend that the client obtain a title insurance policy to ensure that he or she is acquiring title to the property free of any significant issues.

The bidder first needs to be certain that there are no issues that predate the recording of the mortgage that is being foreclosed. For example: In 1980, John X and Mary Y purchased property as joint tenants with right of survivorship. Mary Y sold the property to Phil Byer in 1994, and signed an affidavit that John X died in a motorcycle accident in California, without producing an actual death certificate. Phil Byer then executes a mortgage in favor of a Lender. In 2009, the Lender forecloses on the mortgage, and Jack Jones is the successful bidder at the foreclosure sale. Every interest subsequent to the recording of the original mortgage is properly foreclosed. Jack Jones goes to sell the property, and then John X shows up and declares that he is the rightful owner of a one-half interest in the property. Obviously if Jack Jones had obtained title insurance when he bought the property, he would have recourse under his title insurance policy. Now, it is too late - Jack will have to deal with the fact that he only owns a half interest in the property.

There are many examples of defective foreclosures, the consequences of which could have been avoided if the prospective bidder had obtained the necessary title work and foreclosure analysis in advance. Even if the foreclosure is done correctly, there may also be hidden expenses that a bidder at a foreclosure sale can incur. For example, real property taxes are never eliminated by foreclosure. And many city and county code enforcement liens have the same rights of priority as property tax liens, and are not eliminated by foreclosure.

A prospective bidder also needs to be aware of the rights of homeowners associations (HOAs) and condominium owners associations (COAs) in relation to platted land and condominium developed land. The consequences of not knowing the status of outstanding association dues, which may not be apparent from a review of the foreclosure file or from the title search, can be financially significant.

A purchaser of a lot in a platted subdivision in which there is an HOA is liable for all prior unpaid assessments up to the time of purchase, unless paid for by the seller. If Jack Jones in the example above is the successful bidder and the prior owner has not paid dues for the last five (5) years, then Jack Jones will be automatically responsible for all outstanding HOA dues. This is true even if the Lender named the HOA in the foreclosure action. If the amount of outstanding dues is significant, Jack might be better off not bidding at the sale. He could then attempt to purchase the property from the Lender, who under a standard purchase contract would pay all outstanding dues up to the time of closing.

There is one scenario in which Florida law does limit the amount that the association may recover in a foreclosure action. This occurs only if the foreclosing Lender holds a first mortgage, the Lender joins the HOA in the foreclosure action, and the Lender purchases the property at the foreclosure sale. In this one scenario only, the maximum amount of HOA dues that will be owed is the lesser of one percent of the original mortgage debt, OR the amount of the HOA dues that became due and are outstanding 12 months prior to the issuance of the Certificate of Title. Only the first mortgage holder gets the benefit of this reduction– any other purchaser at the foreclosure sale will be responsible for paying all outstanding HOA dues.

The condominium statutes are similar to the HOA provisions, except that the first mortgage holder/bidder that names the association will be responsible for the lesser of 6 months of outstanding dues obligations prior to the issuance of the Certificate of Title (vs. 12 months for the HOA), or one percent of the original mortgage debt.

In addition to the pitfalls listed in this article, there are numerous other traps which could surprise the unprepared bidder at a foreclosure sale. Prospective bidders at a foreclosure sale should always consult with an attorney to obtain a title insurance commitment and an analysis of the foreclosure action before completing a “purchase” of real property at the courthouse steps.

Visit our website for more information on this subject.

Frank Pohl founded Pohl & Short, P.A. based upon the belief that a high quality small commercial law firm was needed in the Orlando, Florida area as an alternative to the large commercial law firms. He still believes that client responsiveness and satisfaction has a place in a fast changing legal profession. Frank has been involved in the Central Florida community for more than twenty-five years. He has been a dedicated past board member of many local organizations over the years. Frank graduated magna cum laude with a B.G.S. Degree from the University of Miami in Coral Gables, Florida; attended the University College at the University of London as an undergraduate studying British literature and British history; obtained his Juris Doctorate Degree in 1979; and obtained a Masters of Law and Letters Degree (LL.M.) from New York University School of Law in 1980. Frank is a member of The Florida Bar, the California Bar, and the District of Columbia Court of Appeals. He is also admitted to the U.S. Supreme Court. He has served on the Orange County Bar Association Real Estate Committee and is a member of the The Florida Bar’s Real Property and Corporation and Business Law Section. He has also served on the Florida Bar Grievance Committee.

ASK A LAWYER - Tenant Died, So Who Gets Security Deposit?

Orlando Sentinel, August 24, 2009

Question:
I own a mobile home in Florida and rent it for $435 per month, with a $500 security deposit. My latest tenant passed away before the 1-year lease expired.

Do I remit the security deposit to the tenant’s rental broker, his family, or do I wait for instructions from the probate court? And if I am unable to re-let this unit before the next month’s rent is due, can I deduct one month’s rent from the security deposit?
D.H.
Clermont

Answer:
Presuming there are no provisions in your lease that specifically address these issues, you should notify and deal only with the duly appointed personal representative of the tenant’s estate.

Before you make any claim for the deposit, you will need to give the personal representative notice of your intent to make a claim against the deposit in accordance with the applicable landlord-tenant statute. Additionally you will have to file a timely statement of claim in the estate, notifying the personal representative of what you contend you are owed.

There are rather short deadlines for filing a claim in an estate, so you should not delay. A probate attorney can assist you with this process.

Visit our website for more information on this subject.

Frank Pohl founded Pohl & Short, P.A. based upon the belief that a high quality small commercial law firm was needed in the Orlando, Florida area as an alternative to the large commercial law firms. He still believes that client responsiveness and satisfaction has a place in a fast changing legal profession. Frank has been involved in the Central Florida community for more than twenty-five years. He has been a dedicated past board member of many local organizations over the years. Frank graduated magna cum laude with a B.G.S. Degree from the University of Miami in Coral Gables, Florida; attended the University College at the University of London as an undergraduate studying British literature and British history; obtained his Juris Doctorate Degree in 1979; and obtained a Masters of Law and Letters Degree (LL.M.) from New York University School of Law in 1980. Frank is a member of The Florida Bar, the California Bar, and the District of Columbia Court of Appeals. He is also admitted to the U.S. Supreme Court. He has served on the Orange County Bar Association Real Estate Committee and is a member of the The Florida Bar’s Real Property and Corporation and Business Law Section. He has also served on the Florida Bar Grievance Committee.

SURPRISE! A Hidden Federal Lien

Winter Park Home, Volume 7 / Issue 3, 2009

There is a significant hidden federal tax lien that may attach to real property conveyed by a foreign Seller. It may not turn up in a search of the public records and, ultimately, impose an obligation on the Buyer to pay a portion of the Seller’s income tax obligation.

Congress passed the Foreign Investment in Real Property Tax Act (“FIRPTA”) in 1980. This law was enacted to enable the federal government to prevent foreign sellers from escaping the income taxes on transfers of real property situated in the United States. Foreign nationals were routinely collecting proceeds from a sale, and not reporting the income/profit generated by the sale of that property. Under FIRPTA, the Seller is obligated to pay 10% of the gross sales price to the Internal Revenue Service, unless the Seller can provide proof that either no taxes or a lesser amount is owed on the transfer. The Act further provides that if the 10% is not paid, or otherwise satisfactorily addressed by the seller, a lien for 10% of the sales price automatically attaches to the real property. As a result, a Buyer could be obligated to pay the IRS 10% of the gross sales price of the property.

Consider the following example. Patrick Irish, a citizen of Ireland, owns real property in Florida. Mr. Irish and Joe Buyer enter into a Purchase and Sale Agreement for a purchase price of $1,000,000. Mr. Buyer obtains a title search on the property, and determines that there are no recorded liens against the Seller. In an attempt to save closing costs, Mr. Irish and Mr. Buyer dispense with obtaining a title insurance policy, and independently prepare the Warranty Deed and conduct a closing without the services of legal counsel or a title insurance underwriter.

The format and execution of the deed conform with Florida law. The deed is recorded, and all documentary stamps and real estate property taxes are paid. Six months later, Joe Buyer receives a letter from the Internal Revenue Service assessing him $100,000 for the transfer from the Seller. Mr. Buyer of course now seeks legal counsel and asks “What is this letter about?” Due to FIRPTA, Mr. Buyer learns that he may now have to pay the IRS $100,000.

In a typical real estate closing, the Seller signs an Owner’s Affidavit that establishes, among other things, whether or not the Seller is a foreign individual as defined under FIRPTA. When the Seller is a foreign individual (which includes foreign corporations and other legal entities), it is standard practice for the closing agent to complete and submit the relevant FIRPTA forms, along with 10% of the gross sales price, to the IRS’ FIRPTA Unit–all within 20 days of closing.

The 10% tax must be submitted even if the settlement statement reflects that the Seller did not receive any money from the closing. If there are insufficient funds, the Seller must come “out of pocket” to pay this 10% obligation, or the closing cannot be completed. The Seller may reduce or eliminate that payment obligation by timely filing a withholding certificate with the IRS, which establishes that no taxes, or a reduced amount of taxes, are owed. Of course, none of this was done by Mr. Irish and, as a result, Joe now owes the IRS $100,000, or must otherwise justify to the IRS why that money is not owed. Joe can seek reimbursement from the Seller. Unfortunately, the outcome of that request is very predictable.

There currently exists one exemption under FIRPTA pertaining to the payment of this 10% obligation by the foreign Seller. This exemption applies when the gross sales price is under $300,000; the property is residential in use; and, the Buyer signs an affidavit stating that he (and his relatives) will live on the premises more than half of the number of days that the property is occupied by anyone for residential purposes during each of the two years following the purchase. Periods of time when the property is vacant are excluded from this calculation. In other words, you can’t rent or “loan” the property to non-family members for more than half the time the property is occupied during a given year.

Sometimes these affidavits are executed in a spirit of cooperation with the Seller, without the underlying requisite intent to reside on the property for the stated time periods. If the affidavit is proven to be fraudulent, the tax obligation will attach to the real property, together with any penalties for fraud. The Buyer will then be obligated to pay taxes he or she may not otherwise have been obligated to pay if he or she had not signed the affidavit. If there is any question as to the validity of the statements in this Buyer’s affidavit, the Buyer clearly should not execute the document.

In addition to the typical arms-length sale of property by a foreign Seller, there are other events which may trigger the application of this FIRPTA obligation.

For example, a foreign corporation may decide to distribute real property to one of its shareholders. Technically, no money is paid. However, the IRS may treat this as a taxable transfer. If 10% of the gross property value is not paid to the FIRPTA unit, the shareholder/transferee may not only be obligated to pay the transfer tax for the property conveyed from the corporation, but that same shareholder (if a foreign citizen) may also have to pay taxes a second time, when selling the property at a later date.

Whenever real property is being transferred to you by a foreign individual or entity, it’s wise to protect your financial interests by consulting with an attorney or CPA before proceeding with the conveyance. You should ascertain through legal counsel that the FIRPTA rules have been satisfied and that this potential hidden lien will not attach to the property being purchased.

Visit our website for more information on this subject.

Frank Pohl founded Pohl & Short, P.A. based upon the belief that a high quality small commercial law firm was needed in the Orlando, Florida area as an alternative to the large commercial law firms. He still believes that client responsiveness and satisfaction has a place in a fast changing legal profession. Frank has been involved in the Central Florida community for more than twenty-five years. He has been a dedicated past board member of many local organizations over the years. Frank graduated magna cum laude with a B.G.S. Degree from the University of Miami in Coral Gables, Florida; attended the University College at the University of London as an undergraduate studying British literature and British history; obtained his Juris Doctorate Degree in 1979; and obtained a Masters of Law and Letters Degree (LL.M.) from New York University School of Law in 1980. Frank is a member of The Florida Bar, the California Bar, and the District of Columbia Court of Appeals. He is also admitted to the U.S. Supreme Court. He has served on the Orange County Bar Association Real Estate Committee and is a member of the The Florida Bar’s Real Property and Corporation and Business Law Section. He has also served on the Florida Bar Grievance Committee.

AS A LONGTIME SUBSCRIBER, WHAT DO YOU GET OUT OF READING OBJ?

Orlando Business Journal - June 26-July 2, 2009

"I get plugged into what matters most - it's all about our community. Nearly every OBJ article will bring to mind a friend, a client, a family member or a business associate. These are the folks who matter most to us, and the OBJ is where we find out about the things that affect them the most."

Frank Pohl founded Pohl & Short, P.A. based upon the belief that a high quality small commercial law firm was needed in the Orlando, Florida area as an alternative to the large commercial law firms. He still believes that client responsiveness and satisfaction has a place in a fast changing legal profession. Frank has been involved in the Central Florida community for more than twenty-five years. He has been a dedicated past board member of many local organizations over the years. Frank graduated magna cum laude with a B.G.S. Degree from the University of Miami in Coral Gables, Florida; attended the University College at the University of London as an undergraduate studying British literature and British history; obtained his Juris Doctorate Degree in 1979; and obtained a Masters of Law and Letters Degree (LL.M.) from New York University School of Law in 1980. Frank is a member of The Florida Bar, the California Bar, and the District of Columbia Court of Appeals. He is also admitted to the U.S. Supreme Court. He has served on the Orange County Bar Association Real Estate Committee and is a member of the The Florida Bar’s Real Property and Corporation and Business Law Section. He has also served on the Florida Bar Grievance Committee.

FENCE ENCROACHMENTS

Winter Park Home, Volume 7/Issue 2, 2009

John J. owns a lot in a platted subdivision, and called me concerning his neighbor’s recently constructed fence. The fence encroaches the length of the Easterly side of John’s property by approximately one foot. He overheard his neighbor joking to some friends that he would eventually own this strip by adverse possession. John asked me if his neighbor was right – that he would lose ownership of this one-foot strip of land over time if he did not take any affirmative steps to challenge his neighbor.

I first asked whether he or any of his predecessors in title ever gave his neighbor permission, either verbally or in writing, to build a fence on his property. John gave me a copy of his title insurance policy which confirmed, as of the date he purchased his property, that there were no recorded grants of easements in favor of his neighbor. He also confirmed that he has never given his neighbor permission to construct a fence on any portion of his land. I then explained that Florida law requires any transfer of an interest in real property, including a grant of an easement to construct a fence, be in writing and recorded in the public records in order to be enforceable. Additionally I explained that even if he gave verbal permission to his neighbor, that permission could be subsequently withdrawn.

He will not lose his property to his neighbor by adverse possession. Adverse possession claims fall into two categories – those “under color of title,” and those “without color of title.” In each category the person claiming adverse possession must physically occupy the property, to the exclusion of all others, for a minimum period of seven years. This possession must be open and notorious, without the consent of the record title owner. The adverse possessor will typically construct a wall or fence to establish the boundaries.

“Color of title” means that the adverse party bases his/her claim upon a recorded document in the claimant’s chain of title. A title search of John’s property revealed that there are no recorded instruments to support a claim under this category. The second option – “without color of title” – does not require proof of interest based upon a recorded document, but does include additional requirements, including proof that the “adverse claimant” has paid taxes on the property for seven consecutive years. The claimant must file a return with the Property Appraiser within one year of taking possession, and pay taxes on the land for seven consecutive years. Since the property appraiser’s records reflect that John is the only person paying taxes on his land, there is no valid basis for his neighbor to claim adverse possession “without color of title” over a portion of John’s property.

John then asked whether his neighbor could establish an easement right to use this same strip of land. The answer is a qualified yes, and only over a twenty year period - his neighbor would also have to judicially establish that his possession is actual, continuous, and uninterrupted for twenty consecutive years, and that possession is without the owner’s express or implied permission. The right to use the land must also be exercised under some claim of right, inconsistent with the rights of the owner.

Florida courts have consistently ruled in favor of the fee property owner and rarely in favor of the claimant in these matters, and have held that the use of another’s land is presumed to be with the owner’s permission. The burden of proof is on the claimant to prove that such use or possession is adverse to the owner. The owner does not have to show that the claimant’s use was permissive. The claimant is given the burden of presenting competent evidence to rebut the presumption of permissive use.

I advised John that he has the right to ask his neighbor to move the fence to the property line, and that if his neighbor refuses he can move the fence himself (since it is on his property). John admits he is happy with the quality of the fence, has a good rapport with his neighbor, and only wanted to know his legal rights. He also told me that he will tell his neighbor that for now he is OK with the location of the fence, and that he will ask that it be moved back to the property line the next time it needs to be repaired or replaced. John also assured me that if his neighbor does not comply with his directions that he will contact me again to address the matter more formally.

As true as the expression “good fences make good neighbors” may be, fence encroachments can create significant friction between neighbors. Relocation of an encroaching fence, or a properly drawn fence line agreement can settle issues that may otherwise be unresolved for many years. In these situations, each neighbor should retain their own legal counsel to address the issues and available solutions.

Visit our website for more information on this subject.

Frank Pohl founded Pohl & Short, P.A. based upon the belief that a high quality small commercial law firm was needed in the Orlando, Florida area as an alternative to the large commercial law firms. He still believes that client responsiveness and satisfaction has a place in a fast changing legal profession. Frank has been involved in the Central Florida community for more than twenty-five years. He has been a dedicated past board member of many local organizations over the years. Frank graduated magna cum laude with a B.G.S. Degree from the University of Miami in Coral Gables, Florida; attended the University College at the University of London as an undergraduate studying British literature and British history; obtained his Juris Doctorate Degree in 1979; and obtained a Masters of Law and Letters Degree (LL.M.) from New York University School of Law in 1980. Frank is a member of The Florida Bar, the California Bar, and the District of Columbia Court of Appeals. He is also admitted to the U.S. Supreme Court. He has served on the Orange County Bar Association Real Estate Committee and is a member of the The Florida Bar’s Real Property and Corporation and Business Law Section. He has also served on the Florida Bar Grievance Committee.

ASK A LAWYER - Where There's A Will, Here There's A Won't

Orlando Sentinel, April 20, 2009

Question:
My mother, who was living in New York, passed away about two years ago. She made my sister executor of her will.

My sister has refused to share the contents of the will with my brother and me, and we don’t know what lawyer prepared it. What can we do to obtain a copy of my mother’s will?

D.C.
Orlando

Answer:
Each state has its own laws regarding wills, which means you will need to contact a New York lawyer for more advice.

However, if this were a Florida resident’s will, the person possessing the original will has a legal obligation to deposit it with the local clerk of court within 10 days of learning that the maker of the will has died. The will is then a public record that can be viewed by any interested party.

If a person holding a Florida will refuses, or otherwise fails to file the will with the appropriate clerk of court, you can file a petition with the probate court to compel the filing of the will. The person who refused to file the will may be forced to pay the petitioner’s attorney’s fees and costs if the court finds “no just or reasonable cause” to excuse that person’s failure to deposit the will.

Visit our website for more information on this subject.

Frank Pohl founded Pohl & Short, P.A. based upon the belief that a high quality small commercial law firm was needed in the Orlando, Florida area as an alternative to the large commercial law firms. He still believes that client responsiveness and satisfaction has a place in a fast changing legal profession. Frank has been involved in the Central Florida community for more than twenty-five years. He has been a dedicated past board member of many local organizations over the years. Frank graduated magna cum laude with a B.G.S. Degree from the University of Miami in Coral Gables, Florida; attended the University College at the University of London as an undergraduate studying British literature and British history; obtained his Juris Doctorate Degree in 1979; and obtained a Masters of Law and Letters Degree (LL.M.) from New York University School of Law in 1980. Frank is a member of The Florida Bar, the California Bar, and the District of Columbia Court of Appeals. He is also admitted to the U.S. Supreme Court. He has served on the Orange County Bar Association Real Estate Committee and is a member of the The Florida Bar’s Real Property and Corporation and Business Law Section. He has also served on the Florida Bar Grievance Committee.

Local Owner Speaks Out

Orlando Business Journal, April 10, 2009

Local owner speaks out on whether his business will benefit from Obama's stimulus plan:

"Ultimately, the stimulus package should filter down to Main Street and create activity so the legal business as a whole benefits. I don't think we have seen the increase happen yet, but it appears we're heading in the right direction"

Frank Pohl founded Pohl & Short, P.A. based upon the belief that a high quality small commercial law firm was needed in the Orlando, Florida area as an alternative to the large commercial law firms. He still believes that client responsiveness and satisfaction has a place in a fast changing legal profession. Frank has been involved in the Central Florida community for more than twenty-five years. He has been a dedicated past board member of many local organizations over the years. Frank graduated magna cum laude with a B.G.S. Degree from the University of Miami in Coral Gables, Florida; attended the University College at the University of London as an undergraduate studying British literature and British history; obtained his Juris Doctorate Degree in 1979; and obtained a Masters of Law and Letters Degree (LL.M.) from New York University School of Law in 1980. Frank is a member of The Florida Bar, the California Bar, and the District of Columbia Court of Appeals. He is also admitted to the U.S. Supreme Court. He has served on the Orange County Bar Association Real Estate Committee and is a member of the The Florida Bar’s Real Property and Corporation and Business Law Section. He has also served on the Florida Bar Grievance Committee.

SHORT SALES

Winter Park Home, Volume 7 / Issue 1, 2009

Short sales reflect the current downturn in real estate valuations - they are real estate closings in which there are insufficient sales proceeds to pay off the outstanding liens and closing costs of the seller. They typically occur because the outstanding balance due on a mortgage is greater than the current market value of the property. The buyer typically will be told in advance that the seller has contacted or will contact the lender in an attempt to have the lender accept less money than the outstanding mortgage balance.

There are three primary options that a seller needs to consider when presented with a contract offer which will result in a short sale. First, he/she can take a loss on the sale of the property and pay the difference from other funds. Although this represents an economic loss, this approach will not impact the seller’s credit rating, and the seller will not have to deal with the fallout of a lowered credit rating or potential bankruptcy proceeding.

The second option is for the seller to ask the lender to accept less than the amount currently owed. The lender may agree to cooperate with the seller’s request, if the partial payoff is likely to be preferable to the alternative – i.e. the costs involved in a foreclosure action, the associated costs in holding the property, and the reality that the amount realized by the lender when selling the property after a foreclosure (especially in today’s market) may be less than the offered partial payment. However, most lenders will not even consider this request unless the seller is already significantly behind in his payments – generally a minimum of three monthly payments.

Prior to entering into any short sale agreement, the lender will require additional proof from the seller relating to the seller’s overall financial position and the current value of the property, together with other requirements. Lenders will not readily grant permission to accept less money than owed, so the documentation provided by the seller will be carefully scrutinized. If, for example, the lender determines that the information provided on the original loan application was “inaccurate,” the seller could also expose himself to charges of mortgage fraud. Before requesting a short sale agreement, the seller must carefully consider all potential ramifications of this action. Our law firm always recommends that the lawyer meet with the client to review his or her options, consider the tax consequences of the sale, and the impact on the seller’s credit rating before proceeding with a short sale.

If a seller is able to obtain permission from the lender for a short sale, he/she still needs to address the tax consequences of the transaction. The lender will either forgive the additional indebtedness, or require the seller to execute an additional promissory note for the amount that is not paid off at the closing. In other words, the debt does not merely disappear. A forgiveness of debt will most likely result in an additional tax obligation to the seller – the IRS will treat this forgiveness as additional income. The only exception to this rule is if the property in question that is being considered for a short sale is a seller’s primary residence. The tax laws currently provide that the debt forgiven by a lender during the sale of a debtor’s primary residence is exempt from being treated as taxable income (up to $2 million of forgiven debt is eligible for the taxable exclusion, and $1 million if married and filing separately). A new promissory note, on the other hand, does not relieve the seller of the existing financial obligation, and the seller can still be sued for non-performance under its terms.

Both the contract seller and the contract purchaser need to be aware that the process of obtaining an approval by a lender for a “short” payoff is a difficult and time consuming process. This article is only intended to outline some of the issues, and is not intended to fully explain all the steps and hurdles that may occur. Each party needs to obtain his or her own experienced real estate counsel to fully understand the ramifications of the short sale contract. The seller needs to thoroughly understand each of his/her options.

When our firm represents a buyer in this situation, we not only initially advise our client of the steps that are involved prior to closing, but we also recommend that our firm, as buyer’s counsel, hold the escrow deposit. A Short Sale Addendum to Purchase and Sale Contract should always be included as part of the contract under these circumstances, which provides that the contract is contingent upon: 1) each of seller’s lien holders approving the purchase price and the terms of the contract and HUD-1 Settlement, and confirmation that these lien holders will satisfy or release the liens for the reduced payoff amounts; 2) timely notice by the Seller that the lien holders have approved these terms; and 3) acknowledgment by the buyer that the lenders/lien holders are not obligated to approve the contract. The buyer of course must not be related to the seller, and the contract must be a good faith – arms length transaction.

The third option, of course, is for the seller to stop making payments altogether, and to allow the property to be foreclosed. This will have a significant impact on the owner’s credit rating, and may prevent the owner from obtaining financing to purchase other property for years to come. It is noteworthy that borrowers often file bankruptcy to halt the foreclosure process. This is a stalling tactic only, and most likely will not prevent the foreclosure from ultimately being completed.

Short sales represent significant hurdles for a seller, and a recognition by a buyer that the seller will not be obligated to complete the transaction in the event that the seller is unable to obtain the necessary consents from the outstanding mortgage and lien holders. Both the buyer and the seller should retain their own legal counsel to represent them through this potential closing quagmire, and to realize that there are many potential issues involved for both the buyer and the seller.

Visit our website for more information on this subject.

Frank Pohl founded Pohl & Short, P.A. based upon the belief that a high quality small commercial law firm was needed in the Orlando, Florida area as an alternative to the large commercial law firms. He still believes that client responsiveness and satisfaction has a place in a fast changing legal profession. Frank has been involved in the Central Florida community for more than twenty-five years. He has been a dedicated past board member of many local organizations over the years. Frank graduated magna cum laude with a B.G.S. Degree from the University of Miami in Coral Gables, Florida; attended the University College at the University of London as an undergraduate studying British literature and British history; obtained his Juris Doctorate Degree in 1979; and obtained a Masters of Law and Letters Degree (LL.M.) from New York University School of Law in 1980. Frank is a member of The Florida Bar, the California Bar, and the District of Columbia Court of Appeals. He is also admitted to the U.S. Supreme Court. He has served on the Orange County Bar Association Real Estate Committee and is a member of the The Florida Bar’s Real Property and Corporation and Business Law Section. He has also served on the Florida Bar Grievance Committee.