In real estate, a short sale is when a bank or mortgage lender agrees to discount a balance due to an economic hardship on the part of the mortgagor. The home owner/debtor sells the mortgaged property for less than the outstanding balance of the loan, and turns over the proceeds of the sale to the lender in full satisfaction of the debt. In such instances, the lender would have the right to approve or disapprove of a proposed sale. Extenuating circumstances influence whether or not banks will discount a loan balance. These circumstances are usually related to the current real estate market climate and the individual borrower's financial situation.
A short sale typically is executed to prevent a home foreclosure. Often a bank will choose to allow a short sale if they believe that it will result in a smaller financial loss than foreclosing. For the home owner, the advantages include avoidance of having a foreclosure on their credit history. Additionally, a short sale is typically faster and less expensive than a foreclosure. In short, a short sale is nothing more than negotiating with lien holders a payoff for less than what they are owed, or rather a sale of a debt, generally on a piece of real estate, short of the full debt amount.
Lenders have a department (typically called a loss mitigation department) which processes potential short sale transactions. Typically, lenders do not accept short sale offers or requests for short sales until a Notice of Default has been issued or recorded with the locality where the property is located. Lenders have to approve of any buyer's or listing agent's commission in advance, a primary reason for non-brokered short sales with a specialist or facilitator to save on the margin. Many of these facilitators work with a private lending party for their financing, such as a partner or syndicate. Lenders have a varying tolerance for short sales and mitigated losses.
The majority of lenders have a pre-determined criteria for such transactions. Other distressed lenders may allow any reasonable offer subject to a loss mitigator's approval. "Red tape" is very common in short sales, similar to REO and HUD properties, requiring potentially multiple levels of approvals and conditions. Junior liens, such as second morgagees, HELOC lenders, and HOA (special assessment liens), may need to approve of the short sale.
Frequent objectors to short sales include tax lieners (income, estate or corporate franchise tax - as opposed to real property taxes, which have priority even unrecorded) and mechanic's lien holders. It is possible for junior lien holders to prevent the short sale. While it is frequent if not common for a lender to forgive the balance of the loan in question, it is unlikely that a lien holder that is not a mortgagee will forgive any of their balance. Further, it is common for a lender to omit updating the zero balance and settlement option on the mortgagor's credit report, or even flat refuse to do so "due to their financial loss."
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Short Sales are when the home is for sale for less than the loans on the home. In the peninsula most of the short sales involve 2 lien holders. That is the frustrating part. Getting 2 banks to agree to how much they receive from the sale. Banks prefer to sell a home as a short sale vs. foreclosing due to the cost involved in foreclosing. I have heard $30,000-$50,000. The big problem with Short Sales is that the banks are overwhelmed and it takes a minimm of 3 weeks just for the banks to look at the short sale package. The short sale package must include the detailed information on the seller's financiails, a hardship letter as why they cannot continue making the payments paystubs, bank tatements and more. The banks will not tell the seller or the agent what price they will accept (I understand this is changing in some areas but not yet in the Bay Area). After only receiving an offer will they respond and it usually takes 2-3 months. During this time they obtain apraisals or BPO (similar ot an appraisal. Many agents put a low list price to get an offer so they may begin a discussion with the bank. Banks may not accept many of the list prices on short sales. Someone commented that Short Sales are easy. I strongly disagree. A Deal? I won't necessarily say that. Banks are not here to sell something below market value. They do a lot of research before agreeing to accept. Remember with short sales or florclosures the owners were not able to make the payments so they most likely did not take care of the home. In general they need more work than an invidual seller and are therefore priced accordingly.
Many banks will leave the homes in a short sale position for many months. Some after 2-3 months of no payments may file the NOD (Notice of Default) to begin the foreclosure process.
I have heard that only 25% of short sales actually close. You may make offers on several short sales at the same time due to the length of time it takes banks to respond..
Follow the link for additional information on Short Sales and Foreclosures.
I have represented buyers and sellers in short sales on the Peninsula. If I could be of any help please do not hesitate to contact me at 877-Lee-Sells or 650-358-3959. Lee Ginsburg
Let me know if I can help...
Notice of default filed - 24 (pre-foreclosure)
Tax liens filings - 85
Foreclosure - 2
Bankruptcies - 7
The total comes to 118