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A Legal Overview of Buying a Short Sale Home: an Interview with John Dorsey of John Dorsey and Associates

By John Dorsey

Tell us about your firm and the areas of law you practice.

John Dorsey & Associates - Power Ten Legal Group practices in both litigation and transactional work involving real estate, construction, business law and contracts. We operate under Power Ten Legal because a "power ten" in the sport of rowing is a command used in racing to focus the crew at a critical time in racing on finding that additional strength, technical concentration and drive to push ahead. As a rower for more than two decades, John Dorsey applies the same concepts from a "power ten" to the representation provided to clients. We practice in Massachusetts, Pennsylvania and New Jersey.

What makes short sales an attractive choice for home buyers?

Short sales can be attractive because it offers a chance to purchase property generally below market prices. The bank in lieu going through the foreclosure process will sell the real estate and buildings thereon for less than the amount owed on the mortgage and note accompanying the mortgage. The reason - banks may find it easier to unload the property through a short sale rather than incurring the costs and potential liability of owning or managing the property taken in foreclosure. Short sale is also a good tool for helping a distressed borrower escape crushing debt.

What role does an attorney play in the purchase of a short sale home?

The attorney plays an important role. The attorney drafts the offer to purchase, purchase and sale agreements, deeds and other closing documents to ensure the represented party is protected from issues that may arise even after the conveyance. For the seller, it is important in Pennsylvania that the agreement with the bank discharge through short sale, all liability the selling mortgagor may have on both the note and the mortgage. The short sale should release an liability attached to the property via the mortgage and the borrowers personally via the note. That means that in agreeing to a short sale, the bank is releasing the property in full and the mortgagor individually in full. This will prevent the bank from then seeking a deficiency judgment for the difference between the short sale price and amount owed on the mortgage. In Pennsylvania, mortgage actions are actions against the land for which the borrower can not be personally liable. However if the bank also proceeds against borrower individually as a signatory of promissory note accompanying a mortgage, then the borrower may be individually liable. For these reasons, it is important the the written agreement with the bank provide a full release of the borrower on the note and mortgage. As for the buyer, attorney assistance is useful, for among other issues, ensuring there is nothing 'clouding' the title. A cloud on the title could be a municipal lien, water lien, mechanic's lien or other subordinate mortgages with other banks that must be satisfied. The attorney can work with the title report to remove any cloud, or ensure documents needed to properly discharge any lien or mortgage have been properly filed. While it is the seller's obligation generally to deliver good title, no buyer wants to deal with these issues post-closing.

When should someone who is considering buying a short sale consult with a lawyer?

When developing the offer, to ensure the contingencies are properly worded.

What are some of the biggest challenges with the contract that a potential short sale buyer faces?

Every case is different, some transactions have no issues. When issues do occur, often times it is getting the proper paperwork from the bank or other banks. Often times, this type of transaction is an example of the 'squeaky wheel gets the grease' so being diligent with the bank is important to keep the ball rolling. Also, if there is financing involved for the purchase, the buyer's bank will want need to be closely involved.

Do you have any advice about what to be cautious about when buying a short sale home in Pennsylvania?

Yes, each person should consult an attorney for their particular circumstance. But general wisdom on the issue suggests that a buyer should be counseled to do a thorough inspection of the premises as often times when money is short maintenance and repairs are a low financial priority. Also, get a good title examiner and complete report. It is also important there is an executed agreement in place with the seller's bank that the bank is accepting the short sale as full satisfaction of the outstanding mortgage balance on both the note and mortgage.

What's the best way for someone to contact you and your firm? 1-888-491-0333

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