Milpitas North San Jose Berryessa Real Estate News

In a short sale, a lender agrees to allow the sale of the seller's property even though the lender will not be receiving the full amount the seller owes from the proceeds of the sale.  The difference between the proceeds from the sale and the amount owed is a deficiency.  The question naturally arises as to whether the lender can try to recover that deficiency from the seller.

Prior to Jan. 1, 2011, the only way to be sure that the lender would not be able to recover a deficiency from a seller was to have clear language in the short sale agreement between the lender and the borrower that the lender would waive any right to pursue obtaining the deficiency amount from the seller.  If there was not any language waiving the right to pursue a deficiency against the seller, the lender would likely be able to pursue the seller for the deficiency.

However, in January of this year, Civil Code section 580e was added to California law, which states that when the first trust deed holder gives written consent to a short sale on a residential one-to four-unit property - investment or owner occupied - the lender is no longer able to obtain a deficiency judgment against the seller.  So now even if the first lender does not explicitly waive its deficiency right in its short sale agreement with the seller, the lender will be unable to get a deficiency judgment.

The new law does not, however, pertain to second trust deed holders.  Even if they approve a short sale, in the absence of clear language in the short sale agreement that the second will not pursue a deficiency judgment, the second trust deed holder may be able to pursue the seller for the deficiency amount.

If the second lender does not waive the deficiency, and the short sale goes through, the second lender would still need to sue the seller and obtain the deficiency judgment in court in order to place liens on any of the seller's property or garnish his or her wages.

Finally, while the new law does offer protection to the borrower, it would still be a good practice to have the lender clearly release its right to pursue the deficiency amount from the seller in the shortt sale agreement.