Nevada Short Sales and Deficiency Claims
Posted by: Mark Albright on Tue, Apr 09, 2013Share this post
The difference between what you owe the lender and what the lender received in an approved short sale, simply known as the deficiency or a short sale deficiency, can be sought by lenders in more than half the states through something called a deficiency judgment. In Nevada, such a claim by a lender to seek a deficiency judgment after a short sale can be filed up to 6 years after the close of escrow. This is due to Nevada’s 6 year statute of limitations on written contracts.
However, lenders in many states, including Nevada, may agree to give you a full or partial waiver of your deficiency in order to clear the mortgage off their books. You can try to negotiate this personally or have your agent or attorney attempt it. If accepted, you’ll have to make sure that appropriate “no-recourse” language is inserted into the final agreement, stipulating the lender must accept the sale price and has no recourse to collect the difference against you.
For a homeowner who obtained a purchase money loan for their property prior to October 1, 2009 and subsequently was foreclosed upon, the 1st lien holder has 6 months to pursue a deficiency judgment for the balance owed to the bank. Junior lien holders (2nd, 3rd mortgages) have a total of 6 years to pursue a deficiency judgment, similar to a short sale deficiency.
Effective on October 1, 2009, Nevada became a limited recourse state similar to California. Loans made after October 1, 2009; by a lender to a borrower who continuously occupies the subject home as a primary residence are now nonrecourse. This means that the lender may not pursue a foreclosed borrower to recover a deficiency balance after the foreclosure sale. However, keep in mind that this new law does not change the statutes regarding short sales… it only applies to foreclosed homes and borrowers.
The following requirements must be met in order for the new Nevada law to apply to loans recorded after Oct. 1, 2009:
1. The real property is a single-family residence
2. The loan was used to buy the property
3. The borrower continuously occupied the property as a principal residence after the loan was made
4. The original loan was not refinanced
5. The loan was made by a financial institution
In summary, the lenders (1st or 2nd) have 6 years within which to pursue a deficiency judgment against a borrower after a short sale, UNLESS whoever is negotiating on behalf of the seller (such as the listing agent or an attorney) is able to have the proper language included in the short sale approval from the bank/lender.
The waiver or forgiveness language could state something as follows, “Upon receipt of the agreed amount, Lender will waive the remaining balance due on the above referenced loan and release the borrower from any further obligation therein, including any deficiency claim, and waive all rights to pursue further judgment or deficiency.”
Nevertheless, even if the lender agrees to the foregoing waiver/forgiveness language, the lender will likely still report the debt to the IRS as settled for less than the amount owed and issue a 1099 for the remaining balance.
If you have not been occupying the home recently or continuously as your primary residence, since IRS waiver of deemed tax income is usually tied to owner residency and occupancy in the home (at least for 2012 and 2013), make certain that you contact your tax advisor regarding the tax implications of a short sale or foreclosure, even if you are successful in getting a waiver from your lender of the potential deficiency claim.
A Short Sale, even without a Waiver of Deficiency, may, depending upon all of the circumstances, often nevertheless be better than a foreclosure sale. For one thing, the amount you can sell the property for on the open market in Las Vegas, at least now, will generally be far more than at an auction, which will reduce the deficiency balance.
Additionally, you will have the right to negotiate the settlement of the deficiency. Remember that in order for the lender to obtain a Deficiency Judgment against you, the lender will first have to commence a new lawsuit and go in front of a Judge to request a Deficiency Judgment. Many lenders will not pursue borrowers without substantial evidence it will be financially rewarding, which is rarely the case.
A number of lenders will write off the deficiency and consider the matter settled months after the short sale. Sometimes it is worth closing escrow and taking the risk.
Some experts recommend that you close on the short sale, avoid the foreclosure and then deal with the deficiency later if it becomes an issue.
Obviously your goal should be to receive a written Waiver of Deficiency prior to closing. However there may be times when this is just not possible. As long as the Short Sale puts you in a better position than being foreclosed on it may make sense to go ahead and close escrow..
G. Mark Albright
Albright, Stoddard, Warnick & Albright
801 So. Rancho Dr., Suite D-4
Las Vegas, NV 89106
Phone (702) 384-7111
Fax (702) 384-0605
About the Authors: The law firm of Albright, Stoddard, Warnick & Albright is an A-V Rated Nevada-based full-service law firm having attorneys licensed in Nevada, California and Utah. Our firm’s practice includes a strong emphasis on personal injury accidents. Call us at 702-384-7111.
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