Hi Eleana- The first question to ask yourself is have you done short sales with true hardship before? How did they go? When there is an opportunity to utilize short selling as a way of investing or just saving further loss, it brings up more concerns than justifications. I was approached with this same scenario and checked this with 2 attorneys I use regularly and trust. And their answer was this.....while it may be Morally Ambiguous, it is not unethical. Truth is it is the bank's decision and they will evaluate the assets, income and Hardship letter from your client as the first step and could take many routes:
1. Full Debt Forgiveness: doubtful as your client still has money, and a job, or a decent chunk of liquid capital to buy their next home
2. Partial Debt Forgiveness w/ Money Due at Closing: common approach to short selling when true hardship is not justified, but the client can show considerable loss in value over a short period
3. Partial Debt Forgiveness w/ a Promissory Note: bank absorbs some of the loss and lessee is left with a loan to pay down
4. Short Sale Denied
This is still a negotiation with the Lessor (s). There is no way to predict which will happen as many of these loans were re-wrapped and pooled for investors. So not only do you have 1 or 2 Lien Holders, but you might also have an investor behind your clients loan. In addition, your success will depend on how much needs to be forgiven and who the lender (s) are.
Now let's look at your clients purchase. In a normal sell to buy situation, your client buying a home may have to make their deal contingent on the sale of their home. Here's where it gets really fuzzy. A short sale contingency is something that depending on your Board of Realtor's ethical guidelines is likely to have to be disclosed to the listing agent and the seller of the home your client now wants to purchase. Most Listing Agents and home owners are likely to hesitate with this type of contingency as it dances with the line a bit and is a high risk of failure. Thus, they are taking time off the market and might lose value for something that is beyond the normal level of risk. In addition, timing the purchase of this A to B transaction is a small window as the short sale will hit your clients credit report within 1-3 months. If your closing on the B property doesn't occur within this window and credit is pulled right after the short sale closes, there is a good chance that it could fail.
This type of transaction management is incredibly stressful and not for the faint of heart.
Now, let's look at your own reputation and license. Ask yourself....are you willing to take on this risk and the risk of License suspension or worse?
There are many times we are approached with new ways of making money that flirt with the line. While it is your own business decision, you still have to be fair and honest and do what is in the best interest of all including your client.
Again, the lenders make the call to approve the short sale, you make the decision on what business you take especially where questions of ethics are involved
I hope this helps answer a few questions.