Real Estate News
The short-sale nightmare
Think twice before tapping IRA, buying insurance
By Ilyce Glink
1/6/2009 8:00:00 AM
Q: We've worked for the last six months to buy a home that was a short sale. Our offer was accepted by the banks, and the house was taken off the market.
I've been living month-to-month at my complex paying an additional $200 per month in order to be flexible when closing came around. I incurred a $2,000 penalty for early withdrawal of my IRA funds for the down payment, and I imagine I'll be tapped again when I file my taxes.
We also paid $400 for the appraisal on the house. We had approval from both our first and second lenders, and the closing was set. We even purchased homeowners insurance on the house, but the seller backed out of the sale six days before closing!
Our houses are packed up and we have nowhere to go. Do we have any recourse to get these lost funds back? Can we place a lien on the house?
A: With the uncertainty in the marketplace, one of the lessons homebuyers are learning is that you can spend a ton of time chasing a property with nothing to show for it when you're done.
These days, a fair number of homes being sold are "short sales," defined as properties that are worth less than the remaining mortgage balance. In this situation, the seller is short the funds needed to sell his or her home, hence the phrase "short sale."
In a short sale, the owner of the home must get the lender (or lenders) to agree to take less than they are owed to release the lenders' liens on the home. If the seller gets his or her lenders to agree, the seller can go through with the short sale. At the closing or the close of escrow, the seller transfers title to the home to the buyer. The lenders are partially paid off (or perhaps don't receive any funds at all), but allow the closing to take place, and at the closing release their liens on the property.
It's terrible that you have gone through all that time and expense only to find out that the deal has gone sour. If your seller had the contractual right to back out of the deal, you may be out of luck.
You ask if you have any recourse to get any of your money back. That recourse would be set forth in the purchase and sale agreement you signed with the bank, and might allow you to be reimbursed for your out-of-pocket expenses, or recover your damages from the seller. If your seller defaulted under the contract, you may be entitled to recover your damages, which would be outlined in the contract for purchase.
If your seller got cold feet or decided to take a better deal for the sale of the home, you may have a legal claim against him for the failure to sell the home to you, particularly if you satisfied all of your requirements under the contract, including getting the seller's lenders to agree to the short sale to you.
You might also be able to sue the seller to force him to sell you the home. Unfortunately, some legal options can be expensive. In many short-sale situations, you might be dealing with a seller in financial distress who has little to lose if he defaults on his contract with you. Suing could be a minefield, and you might not wind up with the house.
Back at the ranch, you've made some mistakes that are already costing you.
Without the assurance of a sale you shouldn't have liquidated your IRA. You had no assurance as to when you would close, but once you liquidated your IRA and you did not redeposit those funds back in within 60 days, you were subject to the 10 percent early withdrawal penalty.
In addition, the entire amount withdrawn is taxed at your ordinary income tax level, and could kick you into a higher tax bracket. In general, no one should withdraw money from their IRA or other retirement account without an understanding as to the costs involved in the withdrawal. There are very limited times that you can take money out without penalty, and only some accounts let you take funds out without paying tax on the money invested.
When it comes to liens, you'll generally be permitted to place a lien against the seller's property only if you have a court judgment against the seller. But even if you could get it, it's of little benefit: There's no equity in the property. If the seller fails to sell you the property, it's likely to go into foreclosure (and your lien would be behind the lenders' liens against the property).
You might want to spend an hour or so with a real estate attorney who can help you figure out your next best course of action.
To get even more valuable advice from Ilyce, visit her Personal Finance and Real Estate Center.