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Can my parents buy a new home and then short sell their old one?

By From page HSR2 | April 12, 2014

Q: My parents are in their late 60s and still live in the house that I and my sisters were raised in. More than 10 years ago, they went out and got a big loan on the house that they used to make some badly needed repairs and to pay for college for one of my sisters and two of their grandchildren. My mom is in really poor health and they live on a small, fixed income. They would like to buy a condominium at a retirement community in town. They have most of the money to pay for it and could get a small loan for the rest. Last week we spoke with a Realtor friend about the possibility of them short selling their house after they move into the retirement condominium. To our surprise, our friend said it would be illegal for them to get a loan on the new condominium if they knew they were going to be short selling their home. If it’s illegal, what other options do they have? If they short sell first, how long would they have to wait to get a new loan, even a small one, so they can buy a condo?

A: About two years ago I wrote a column answering a very similar question, but still the problem festers.

So first, let’s clear the air about what has become a rampant misconception about getting a loan and then short selling.

By now most regular readers will know we’re talking about what long ago became known as “buy and bail,” that is, the plan by which someone buys a new home while their credit is still good, knowing they are going to try to short sell the old home later.

I’m not sure where the mythology started, but I think it might have had something to do with the general feeling that there’s something wrong with short selling a home in the first place, so the owner shouldn’t somehow wind up in a better place because of it.

The truth is there are no laws forbidding a “buy and bail.” There are certainly laws making it illegal to lie on a mortgage application, but that’s simply fraud. For example, if the application were to ask if you intended to sell any other properties you own within the next year, you’d have to answer truthfully. But who would really care? People buy and sell houses all the time.

The idea that “buy and bail” was an illegal practice gained so much traction over the past couple of years that many brokers throughout California were forbidding their sales agents from participating in the practice.

So the simple answer is there’s no legal obstacle to your parents buying the retirement condo, even though they’re going to get a loan, and then short sell the other property.

However, there is a practical problem your parents may run into.

Short sales are not a normal part of the real estate market. They came into being around 1989 when we were experiencing what, by comparison to the past six years, was a small recession.

Home values dropped a whopping 10 percent or so and turned a small number of homes upside down in their equity.

By 1993 the market had risen and short sales vanished. It wasn’t until about 2007 that a few short sales started to appear again. And, of course, that turned into a flood.

However, beginning last year, the number of short sales dropped dramatically. Today they are quickly becoming rare.

I have no doubt that by this time next year the opportunity to short sale will be gone and thus leave upside-down homeowners with the generally much more damaging foreclosure route.

So if your parents are seriously considering doing a short sale, they would do well to move quickly.

If the agent they’re talking with won’t help them, there are plenty of others who will.

Tim Jones is a real estate attorney in Fairfield. If you have any real estate questions you would like to have answered in this column you can contact him at [email protected].


Tim Jones


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