What is a Short Sale? 

With foreclosures on the rise in Southern California, the team at REALESTATE-SANTAMONICA.COM has been getting a lot of inquiries about short sales.  Mostly people are asking what they are.  Well in short…no pun intended, a short sale is a transaction where the lender is willing to take less money than what is actually owed on the mortgage.  The point behind this is to avoid a foreclosure.

Foreclosing on a home is something that the bank as well as the borrower usually tries to avoid.  When the borrower defaults on a mortgage (doesn’t pay for months in a row), the borrower begins to accrue much more than just the mortgage payment.  Quickly other expenses begin to add up, such as late fees, attorney fees etc…not good.

With a foreclosure the lender can lose nearly half of the mortgage amount because of the costs involved in foreclosing on a property:  attorney fees, lost interest, property maintenance, court costs etc.  Foreclosure is also a very drawn-out process.  It can take over a year in some states.  Because of this, many lenders are amenable to a short sale over a foreclosure so that they can simply cut their losses and move on.

Short sales can also be in the homeowner’s best interest as well.  Most agree that the primary benefit to the homeowner is that he/she is able to get out from under the mortgage without suffering through a foreclosure.  Additionally, the homeowner’s debt is getting taken care of for much less than is actually owed on the home.  The homeowner’s credit is usually spared some of the wear and tear caused by foreclosure as well.

What is the process?

When a homeowner gets behind on the mortgage and wants to try and avoid foreclosure, the lender must be contacted immediately.  The last thing a lender wants to do is foreclose, but there is a process that needs to be started to make a short sale possible.

The lender will usually require quite a bit of information including:

-Hardship Letter.  Basically the homeowner is telling the lender the story behind being late with the mortgage.  Additionally the letter should request a short sale.

-Bank Statements.  This is to verify assets…or sadly, the lack thereof.

-Income documentation.  W-2’s or 1099’s to verify the borrowers’ income.

-Value of Home.  Banks will either order an appraisal or a CMA “comparative market analysis.”  CMA’s are generated by realtors and we at realestate-santamonica.com can help with that.

-Listing Agreement.  This just documents that the home has been put on the market.  After it  sells, the purchase agreement is included as well.

With any luck the lender will approve the short sale and the home will not go into foreclosure.  If the short sale occurs, a preliminary proceeds sheet is generated.  This document lists the net proceeds of the sale after the mortgage is paid off, as well the closing costs and all other related fees.  This amount will be negative…and is the shortage.

Potential Consequences

Before requesting a short sale, a borrower should consult with his/her attorney and/or accountant as there are a few things to be mindful of.

First, the lender may require the borrower to sign a note to repay the shortage.  Also the lender may file a collection or judgement to recover the shortage.  A good real estate attorney will be able to guide the borrower through this.

The IRS may also come calling for the income taxes owed on the amount of the shortage.  A tax professional should be contacted by the borrower regarding this.

Hopefully this shed a little light on the world of Short Sales and remember REALESTATE-SANTAMONICA.COM is here to help you.