As a real estate agent in Florida, handling a short sale or foreclosure is a legal tightrope walk. One misstep in documentation or disclosure exposes you and your client to significant financial and legal liability.
This guide provides clear, actionable legal tips for agents handling short sales and foreclosures, specifically for Florida agents. We will cover your duties, the key differences between short sales and foreclosures in a judicial state, how to handle deficiency judgments, and the required disclosures you must make.
With Florida having one of the highest foreclosure rates in the nation in 2024 and 2025, this knowledge is more important than ever.
If you have a question about a distressed property transaction, call us at (772) 589-5500. Lulich & Attorneys is here to provide the legal support you need.
Schedule a Consultation Today!
Short Sale vs. Foreclosure: What’s the Difference for a Florida Agent?
Many agents use "short sale" and "foreclosure" interchangeably, but in Florida, they are fundamentally different legal processes with distinct implications for your role and liability.
What is a Foreclosure?
A foreclosure is a lawsuit initiated by the lender. Because Florida is a judicial foreclosure state, the process is governed by court rules, deadlines, and formal legal filings.
Your role is typically limited to listing a property that is already under the court's purview, potentially as an REO (Real Estate Owned) property after the lender repossesses it. An REO property is one that the lender takes ownership of after it fails to sell at a foreclosure auction.
What is a Short Sale?
A short sale is a negotiated settlement with the lender to sell the property for less than the outstanding mortgage balance. This is a pre-foreclosure strategy, not a lawsuit.
Your role is much more active: you are central to negotiating with the lender, managing extensive paperwork, and marketing the property under specific lender conditions. A lender may agree to a short sale because it is a less costly alternative to the foreclosure process.
Key Differences in Your Responsibilities
The way you manage the transaction, communicate with the parties, and advise your client changes dramatically depending on the path taken.
- Timeline and Control: In a foreclosure, the court controls the timeline. In a short sale, you are managing a negotiation timeline with the lender, which is unpredictable.
- Communication: Foreclosure communication is typically with the lender's attorney or REO department. Short sale communication is with the lender's loss mitigation department, which is designed to find ways to avoid the costs of foreclosure.
- Client Goal: The goal in a foreclosure is typically to sell the bank-owned property. In a short sale, the goal is to help the homeowner avoid foreclosure and settle their debt, which has a different impact on their credit and financial future.
The Elephant in the Room: How Do You Handle Deficiency Judgments?
The single biggest financial risk for a homeowner in a short sale or foreclosure is the deficiency—the difference between the sale price and the mortgage balance. If this isn't handled correctly, the lender may sue your client for the remaining amount via a deficiency judgment. This is governed by Fla. Stat. § 702.06. An agent who incorrectly assures a client they're "free and clear" without a written waiver faces a lawsuit for misrepresentation.
What Exactly is a Deficiency Judgment in Florida?
Simply put, it's a court order making the homeowner personally liable for the leftover debt.
For example, if the mortgage is $300,000 and the property sells in a short sale for $250,000, the lender may sue the homeowner for the $50,000 difference.
This transforms an asset-based debt (the mortgage) into a personal judgment, which leads to wage garnishment and other collection actions.
Your Role in Protecting Your Client (and Yourself)
Your responsibility here is not to provide legal conclusions but to identify the risk and direct your client to the proper resources.
- Never Give Legal Advice: Your primary duty is to state that you are not qualified to give legal or tax advice. Always recommend in writing that the client consult with an attorney to understand their rights and obligations concerning a potential deficiency.
- The Magic Words: "Full and Final Satisfaction of the Debt": The short sale approval letter from the lender must contain language explicitly waiving their right to pursue a deficiency. Without this waiver, the lender’s right to sue may remain intact.
- Reviewing the Approval Letter: Stress the importance of having an attorney review the lender's approval letter before closing. A verbal promise from a bank representative is not a legally binding protection for your client. The written word in that letter is all that matters.
- Foreclosure vs. Short Sale Deficiency: Deficiency judgments are also possible after a foreclosure auction if the sale price doesn't cover the debt. The process is different, as it's part of the existing lawsuit, but the financial risk to the homeowner is similar.
When your client is facing a potential deficiency, the stakes are too high for assumptions. Encouraging them to seek a legal consultation is the best service you can provide.
Your Legal Duties: Disclosure and Documentation in Distressed Sales
The paperwork and disclosure requirements in short sales and foreclosures are far more rigorous than in a traditional sale. A single missing document or an incomplete disclosure derails the entire transaction, causes the lender to reject a short sale offer, or even leads to accusations of fraud.
Federal laws like the Real Estate Settlement Procedures Act (RESPA) impose strict rules on lenders and servicers that indirectly affect your process, particularly around communication and timelines.
Heightened Duty of Disclosure
Under Florida Statute § 475.278, you have a duty to disclose all known facts that materially affect the value of a residential property. In a distressed sale context, this duty requires extra diligence.
- Property Condition: You must be meticulous in disclosing all known material defects. REO properties are typically sold "as-is," but that doesn't absolve you of your duty to disclose what you know.
- Multiple Offers: You have a specific protocol for submitting all offers to the lender in a short sale. Withholding offers is a serious ethical and legal breach.
- Arm's-Length Transaction: All short sales require an "Arm's-Length Affidavit," which is a sworn statement that the buyer and seller are unrelated and there are no side deals. You should explain to your client that this is a required part of the process to prevent fraud.
The Short Sale Package: Your Checklist for Success
A complete and well-organized short sale package is your best tool for getting a timely response from the lender. A typical short sale package includes several key components:
- Letter of Authorization: This allows you to speak to the lender on your client's behalf.
- Hardship Letter: A detailed, sincere explanation from the homeowner about the financial circumstances leading to the default.
- Financial Documents: This includes recent pay stubs, bank statements, and tax returns to prove the financial hardship.
- Purchase and Listing Agreements: The fully executed contracts for the sale.
Document Everything
Keep a detailed written record of every conversation with the lender, the buyer's agent, and your client. Note the dates, times, who you spoke to, and the substance of the conversation. This log is invaluable if a dispute arises later about timelines, approvals, or disclosed terms.
Managing Today's Florida Market: What Are the Current Challenges?
Current economic pressures in Florida are making these transactions even more difficult. Rising insurance rates, property taxes, and inflation are pushing more homeowners toward default. This increases the volume of distressed properties you may encounter, and these same factors make it harder for buyers to qualify, complicating your deals.
The Impact of Rising Costs on Homeowners
The financial "hardship" for many sellers is now a combination of job loss, medical bills, and skyrocketing carrying costs for the home. Florida’s ongoing rise in insurance premiums and property taxes is a major factor creating financial strain for distressed homeowners. This context is important when helping your client draft their hardship letter, as it provides a clear and verifiable reason for their inability to pay.
Investor Interest and "Fix-and-Flip" Deals
Investor interest in Florida foreclosures remains strong. As an agent, you should be prepared to work with cash buyers and investors who move quickly but may make lowball offers. Remember, you have a duty under Florida law to present all offers to the seller and, in a short sale, to the lender. Balancing the need for a quick sale with the goal of getting the best possible price for the lender's approval is a delicate act.
Tenants in Foreclosed Properties
The federal Protecting Tenants at Foreclosure Act (PTFA) was made permanent and preserves certain lease rights for tenants if their landlord's property is foreclosed. You should always verify if the property is occupied by a tenant and understand that a bona fide tenant may have the right to remain in the property for the remainder of their lease or, at a minimum, receive a 90-day notice to vacate after the foreclosure sale. This is a material fact that must be disclosed to potential buyers, as it affects when they can take possession of the property.
Frequently Asked Questions for Agents Handling Distressed Properties
What is the first thing I should do when a seller tells me they cannot make their mortgage payments?
Advise them to contact their lender immediately to discuss loss mitigation options. Then, strongly recommend they seek legal counsel from a firm that handles real estate law to understand their options before you list the property. This protects both your client and you.
Can I represent both the buyer and the seller in a short sale?
No. Florida law prohibits dual agency, where one agent fully represents both parties. It is considered an inherent conflict of interest. To facilitate a transaction with both parties, an agent must act as a transaction broker with limited duties to both sides, but this is highly discouraged in a complex short sale due to the potential for conflicts.
How much do I get paid on a short sale, and who pays me?
Your commission is paid by the lender from the sale proceeds and is not paid directly by the seller. The commission amount is determined by the lender and is outlined in the short sale approval letter. Be aware that this amount may be less than a traditional commission and is subject to the lender's approval.
What happens if the lender rejects the short sale offer?
If the offer is rejected, the property does not sell, and the seller is back to square one. The lender may then proceed with the foreclosure lawsuit. This is why having an experienced attorney involved is beneficial in negotiating with the lender and presenting a compelling case for the short sale.
Does a short sale or foreclosure affect my client's credit score?
Yes, both negatively impact a person's credit score, though a foreclosure is generally more damaging than a short sale. You should advise your client to speak with a financial advisor for specific credit-related questions, as you cannot provide financial advice.
Protect Your Clients and Your License with Lulich & Attorneys
Don't handle these complicated sales alone. Our firm has deep experience in Florida real estate law and works with you and your clients to ensure the process is handled correctly from a legal standpoint.
For legal guidance on a short sale or foreclosure, call Lulich & Attorneys today at (772) 589-5500.