An unfortunate trend has recently surfaced, one which has been adopted by several major lender institutions. Short sale lenders are, in some situations, holding the seller personally liable for any debt released by the lender during the closing of a short sale transaction.

Normally a ‘short sale’ is executed when the seller’s creditor agrees to incur a net loss in the sale of a property after the total of loans and the costs of sale are factored in. The value of the property is less than these costs and therefore the lender agrees to settle for less than the amount loaned by the seller.

While short sales are known as a safeguard for escaping foreclosure, many properties are now foreclosing to avoid massive debt on the part of the seller who is being held liable. This new trend could make sellers vulnerable to being sued for their remaining debt for up to the specified statute of limitations (depending on the state) from the date of the sale.

Some lenders try to remain silent on the issue of ongoing liability; but will retain the promissory note as evidence of the seller’s liability. This constitutes guilt by omission and does not benefit any of the parties involved as when the short sale agreement is finally presented, the sellers realize the risk and often chose foreclosure instead.

This dangerous practice of unwarranted liability has and will continue to cause large, uncompensated expenses in both time and money for sellers, buyers, realtors, and even lenders. Buyers would have wasted various expenses, such as credit reports and escalating appraisal costs. Lenders would often face a property of diminished value (due to damage incurred in the process of a foreclosure) and will have to market the property themselves. Realtors lose valuable time and in the end the seller is left with a foreclosed home. Thus despite the efforts of the realtors, sellers, and buyers, more frequent foreclosures are likely to result in compounding frailties in the homeowner market.