When I started practicing law in 1987, two of my very first projects involved judicial foreclosures on agricultural property. There had been a downturn in real estate values in the central valley, and a number of vineyard properties had been purchased on a speculative basis during the boom years. It’s a familiar cycle – investors see huge gains in real estate prices, and they want to participate in these gains and so they buy properties hoping that the prices continue to increase. But if a market drops, or adjusts, investors who purchase such lands aren’t able to sell or refinance their properties. When investors can no longer make their payments, lenders foreclose.
Some foreclosures are conducted judicially, which means that the borrowers can be personally liable for unpaid amounts due on the loan (in some circumstances, borrowers can be liable following non-judicial foreclosures as well). This is a hard experience for investors to go through. Most investors don’t buy real estate so that they can lose money. But when property values depreciate, borrowers can lose the down payment and their property. With some loans, borrowers can also have personal liability for the unpaid amounts due on the loan.
After the mid-1980s, it seemed like property values stabilized and then increased dramatically. In the 1990s, there was what seemed like a small drop in values, but this drop didn’t seem too dramatic. As a result, I wasn’t involved in many foreclosures in the following years.
That’s all changed over the past several years. This enormous market readjustment has resulted in record numbers of foreclosures and short sales. Banks continue to struggle with handling these foreclosures, and homeowners are faced with challenges that seemed unthinkable a few years ago.
Foreclosure and short sale matters involve complex considerations of lender liability and tax law. Many homeowners don’t realize the complexity or the significance of the issues involved. Because hundreds of thousands of dollars of potential liability or debt forgiveness can be involved in a foreclosure or short sale, the risks to homeowners can be significant. Homeowers do well to consult professional, competent legal and tax advice in connection with any proposed foreclosure or short sale.