You can draw parallels between a short sale agent and a lawyer who specializes in short sales, but they are as different as a flutophone is from a tuba. Real estate agents sell real estate. Lawyers give legal advice. I would no more ask a lawyer to sell my house than I would expect a real estate agent to get me an acquittal for murder. I caution sellers who ask an agent legal questions about a short sale. But do they need a lawyer to do the short sale? Maybe not. Especially not in California where the laws already offer consumers protection.

A while back, a seller hired me to sell her home as a short sale in El Dorado Hills. Her home had previously been in escrow when it was listed by a different agent. Allegedly, that real estate agent told the seller that it was the seller's responsibility to negotiate her own short sale. The agent said she didn't have enough time to call the bank and, if the seller wanted the bank to accept her short sale, the seller needed to call the bank herself.

Needless to say, that's why the listing expired and the short sale canceled. It's not a good idea to try to negotiate your own short sale, for a multitude of reasons. On the other hand, there are plenty of real estate agents running around who are calling themselves certified short sale specialists because they slept through a 3-hour class somewhere but have closed few, if any, actual short sale transactions.

Why You Need to Hire a Lawyer to Negotiate a Short Sale

To cut to the chase, if you have legal questions, you need to hire a lawyer. It is against the law for a real estate agent who is not licensed to practice law to dispense legal advice. Even if the agent knows the answer to a legal question, a real estate agent is not allowed to tell you.1

Laws change all of the time. Banks have lawyers on staff who graduated from top-tier law schools. If a bank can find a way to put the squeeze on the seller of a short sale, do you think the bank will hesitate in the slightest? Here are 3 good reasons to hire a lawyer to negotiate a short sale:

Release of Personal Liability

Although a bank may forgive the balance between the mortgage balance and the final sales price, the bank might not release the seller from personal liability. This means it is possible that the bank might be able to legally garnish a seller's future wages, attach bank accounts or otherwise pursue the seller for that money. It's called a deficiency judgment.2 The short sale approval letter may or may not contain verbiage that spells out the bank's specific rights. Absence of such language is no guarantee the bank has released a seller. 

Lawyers say that even a purchase money loan (which carries no recourse in California, subject to certain conditions) could possibly come back to haunt a seller years later, especially if the bank reserved the right to collect or somehow was able to prove the terms of the loan had changed during short sale negotiations.3 Laws in California protect sellers of 1 to 4 units.4

Asset Protection

Banks scrutinize a seller's financial statement. Banks examine a seller's bank accounts, tax returns and have been known to pull a seller's credit report. If the bank is taking a loss on the sale, obviously the bank would like to recoup part of that loss. That's why the bank looks at the seller's assets and disposable income.

If the seller is attempting a short sale without hardship, it is highly likely that the bank will ask for a seller contribution. Even if the seller qualifies for a short sale through a financial hardship, the bank could demand a contribution. This means the seller could be required to bring in money to close. Laws in California protect sellers of 1 to 4 units.4

Peace of Mind

Once the short sale has closed, most sellers would like to put the ordeal behind them. A lawyer can offer a seller this assurance. A real estate agent cannot.

Why Some Sellers Don't Hire Lawyers to Negotiate Short Sales

Who has more power in negotiations with a bank? A lawyer or a real estate agent? The correct answer is the lawyer. So, why don't more sellers hire a lawyer to negotiate the short sale? For the following reasons:

• Don't understand the benefit
• Agent, family or friends told them not to
• Can't afford to pay a lawyer
• Erroneously believe their agent provides legal services for free
• Face no liability and have no assets

Personally, I believe every short sale seller can benefit from a legal consultation prior to putting a home on the market as a short sale. I suggest to all of my clients that they obtain legal advice. Especially if I spot red flags that could come back to bite them. While the government HAFA short sale program offers some protections for sellers, it doesn't take the place of obtaining legal advice. Also, some states require that a lawyer handle the short sale. California is not one of those states. In California, generally licensed real estate agents handle short sales.