FACTS: A seller had a mortgage, and two (2) judgments recorded as liens against his house.  The mortgage could be paid in full if the seller sold his property, but with the two (2) judgments, the encumbrances exceeded the seller’s net proceeds by $5,000.  The seller negotiated the judgments down to lower amounts so that he could sell his house.

The seller then went under contract with a buyer.  Upon review of the preliminary title report which showed the mortgage and two (2) judgments, the title/escrow company notified the seller a Short Sale Addendum should be signed by the parties.

ISSUE: If the existing mortgage is paid in full at closing, should the parties sign a Short Sale Addendum when two (2) judgments that are recorded as liens against the property exceed the net proceeds the seller will receive?

ANSWER: Probably.

DISCUSSION:         

The Short Sale Addendum to the Listing Contract reads at line 11: SHORT-SALE DEFINED: The term “short sale” is used to describe a sale in a situation where there is more debt owing against a property than the property’s value.  Therefore, the definition provided in the Short Sale Addendum to the Listing Contract would place the seller in a short sale scenario.  The parties should execute the Short Sale Addendum so that the parties’ rights and remedies are clearly set forth in writing.

The seller should also consult with independent legal counsel regarding tax consequences of forgiven debt.