What is a Short Sale?
A Short Sale is initiated when a lender accepts a discount on a mortgage to avoid a possible foreclosure auction or bankruptcy.
For example: A homeowner, who is facing foreclosure, has an existing first mortgage of $300,000 on a property that has a current market value of $200,000. The Seller lists the property with a real estate agent. A Buyer is found who makes an offer for $220,000. The Seller accepts the offer which is then submitted to the bank along with numerous documents supporting the Seller’s declaration that the Seller is not financially able to remain in the property. After much back and forth between the bank and the listing agent/negotiator (and junior lien holders if any) over a period of 2 to 8 months and submission of more documents, the bank agrees to the sale. Twenty to thirty days later the property is transferred to the Buyer which is considered acceptance as full payment for the first mortgage. This in a nutshell is a Short Sale.
Why is the bank willing to take such a discount? Several reasons. First of all, banks do not like excess inventory and bad loans on their books; therefore, if they see an opportunity in which they can sell the property without a huge loss, they will do it. Also, lenders know they could lose a lot more money if they had to go through the eviction process before the property goes to auction. There are so many fees and unknowns involved if the property goes to auction, that they would be better off taking the discount beforehand and be finished with the headache of it all.
What is the advantage to the Seller? All of the uncertainties, phone calls, letters, etc., from that lender suddenly come to an end. However the Sellers should understand that the Seller’s credit is likely to be impacted and the time for them to buy another home will also likely be impacted. Still, a Short Sale is much easier on the Seller than a foreclosure or bankruptcy.
There’s more; Effective Jan 1, 2011 California passed SB 931 which says "Unless otherwise exempt, no judgment shall be rendered for a deficiency for a first trust deed lender of one-to-four residential units if the borrower sells for less than the amount owed with the lender’s written consent. A first trust deed lender’s written consent shall obligate the lender to accept the sale proceeds as full payment and to fully discharge the remaining debt on the first trust deed." This protection, however did not apply to junior lien holders (2nds & 3rds) until 7/12/2011 when SB458 [now known as CA CCP Section 580(e)] was signed into law. It is effective IMMEDIATELY and requires that ANY lender (2nds & 3rds) in California who agrees to a Short Sale on a 1-4 unit property, MUST FULLY RELEASE THE SELLER OF THE DEFICIENCY.
It is safe to say that most lenders will accept a Short Sale, however, you may come across one or two lenders who will not discount. If the numbers work out for the lender they will do it.
I work with a Short Sale team that has successfully completed a high number of Short Sales since 2008. We stay on the cutting edge of the Short Sale experience and will continue to do so. If you are considering a Short Sale - or know someone who is or if you have a question about Short Sales - please contact me.
John F. DuPriest 916/933-2185 firstname.lastname@example.org www.dupriest.com