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What is a Short Sale in Real Estate?

Short sales have been a part of real estate since the invention of the home loan.

A "Short-Sale" occurs when a property is sold and the cash from the sale is not sufficient to pay your lender the entire amount due under the mortgage. Because of declining prices, short sales in Sacramento are becoming very common for homeowners who purchased between 2004-2008.

History of Short Sales in California

The last wave of short sales in California between 1991-1998, when the Federal government closed several military installations in many areas. These closures reduced demand for housing in these areas, and consequently, home values plummeted. Many of those who lost jobs during this period had to sell their homes and could not pay the entire loan balance.

Elements of a Short Sale

A short sale looks like any other real estate sale except for an extra step. This step can be complicated, and it has a number of implications that must be managed.

To complete a short sale, the homeowner must obtain approval from their lender(s).  This is somewhat similar to obtaining a loan, except in reverse. Rather than justifying why you can afford a loan, you are showing the bank why you can't afford it. This is called a "hardship", and is one of the factors in obtaining approval for a short pay-off.

Short sale approval requires as little as a week, and as much as 4 months. Generally, the larger the bank the more complex the short sale approval process is.

Another factor in getting a short sale approved is a market-value offer. Low offers are the #1 reason for denial of a short sale. It is difficult to obtain market-value offers in a short sale situation because of the added time required to close the sale.

The last major factor in a successful short sale is keeping the buyer. Because approval times can be long and the buyer has no idea whether your short sale will be approved, the buyer often finds other homes during the approval period, and cancels their offer. This starts the process over again.

For this reason, it is in the homeowner's interest to consult with a real estate broker who has a track record of successful short sale listings.

Carpenter Properties has a success rate what exceeds 80% since 2005. Much of this success is due to our ability to retain the original buyer.

What Constitutes a Hardship

• Loss of Income - Homeowners who loose some or all of their income can short sale rather than have their property foreclosed.
• Relocation - During bad real estate markets, homeowners are often displaced and must relocate to find employment.  Also, businesses may be forced to move, and employees are no longer within a reasonable commute. These is a very common reason for short sale approval.
• Change in Household - Births, marriage, divorce, death, and the combining of households are all reasons that are regularly accepted as hardships.
• Bad Investment Property - Many people purchased rental properties with the knowledge that rents would not pay all the expenses. Banks willingly approved loans knowing that the investor would have to subsidize the rents. Many investors have shown that the drain of unprofitable properties is a hardship

Your Financial Situation and Hardship

Do you have to be completely broke to have a hardship? No. Banks do not require that you expend all your available funds before approving a hardship. Here's why:

Did the Federal government require banks to be broke before coming to their rescue? Heck no. For the same reasons, banks don't want you to completely fail before approving your hardship!

Short Sale vs. Foreclosure or Deed-in-Lieu

There are several ways to dispose of real estate during financial hardship:

• Short Sale - The big advantage of a short sale is to protect the credit rating of the homeowner. Short sales avoid foreclosure and the related damage to your credit rating, insurance costs, credit card interest rates, and your ability to rent a home.

  When a short-sale is in process most lenders will stop all foreclosure proceedings until the short sale possibility is exhausted. For this reason, short sales are the best way to avoid foreclosure if all other remedies have been explored.

• Foreclosure or Deed-in-Lieu - In each of these cases the lender(s) have to clean up the mess by taking possession of the property, winterizing it, and maintaining it, in addition to the sales costs. In exchange for taking on this burden, the lender(s) are happy to place the biggest black mark available - FORECLOSED - on your credit report. This makes you "radio-active" for the next 4-8 years to creditors because it says you walk away from debt when it becomes difficult. For all lenders, it is the lowest grade of credit-unworthiness.

  Banks find short sales superior to foreclosure

  Learn more about short sales

  Before deciding on a short sale, contact Carpenter Properties to discuss your situation. We will advise you on the alternatives to short sale, including how to approach your lender about a loan modification if lowering your payment would resolve the situation.