What Is a Short Sale?

Can Short Sales Help Homeowners Who Owe More Than Their Homes Are Worth?

Silicon Valley Mansions Linger on Market in Real Estate Slowdown
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A short sale, sometimes called a shorted sale, is when you sell your home or property for less than you owe on the mortgage, and your lender agrees to accept less money than is actually owed. Ideally, your lender will release the lien that is secured to the property upon receipt of the discounted payoff. A short sale is a way you can avoid foreclosure on your home if you can’t make payments and your home’s value is underwater, meaning it’s worth less than the balance on the mortgage.

For example, if the unpaid balance of your mortgage is, say, $100,000, but your property sells for $90,000, under a short sale the lender might agree to accept that $90,000 as payment in full. It is possible to have a short sale even if the sales price is enough to pay off the existing mortgage (in our example, you sell the house for the full $100,000), because additional closing costs and commissions can put the sale underwater. It is also possible to have a short sale when the first mortgage is paid in full but the second or third mortgage is shorted.

A common misconception is that a short sale means short in length of time, for example, the whole process of the sale, escrow included, takes one week instead of the typical 30 to 45 days.

How to Negotiate a Short Sale

Your main challenge is to convince your lender to accept a discounted payoff. This usually involves writing a hardship letter to your lender, demonstrating that you are in a dire situation and have no way to pay the full amount of the mortgage.

Be honest and completely open, and provide documents to prove your hardship. These can include tax returns, bank statements, divorce papers, car repossession receipts and shutoff notices for your utilities. Explain other factors that contributed to your hardship, such as medical expenses, military service or natural disasters.

Don’t expect the lender to agree if you have other assets that can be converted to cash, such as jewelry, stock investments, boats or expensive cars and second homes, even retirement plans. The lender will only consider making a settlement if it sees that you are completely tapped out. Your lender will also require an appraisal and a formal purchase offer from the potential buyer.

Avoiding a Deficiency Judgment

It is important that you negotiate the short sale with your lender and get full agreement that the lender will accept the reduced price in exchange for release of the lien. Otherwise, you might face a deficiency judgment, which is a personal judgment against you that allows the lender to collect the deficient amount. For example, after the short sale, the lender can sue for the deficient balance amount and get permission to garnish your wages, take your tax refunds or levy other assets you might have, such as bank accounts.

To prevent a deficiency judgment, ask your lender to waive its right to get a deficiency judgment against you. If the lender won’t do that, negotiate a settlement offer, in which you agree to make payments to pay off what you owe the bank. Either way, make sure you have the agreement in writing.

Another factor in deficiency judgments is the state you live in. Many states don’t allow banks to collect deficiencies after a foreclosure, but they do allow personal judgments in a short sale without foreclosure. A handful of states have enacted laws that prohibit lenders from collecting deficiencies after short sales. Check your state’s laws to know where you stand.

At the time of writing, Elizabeth Weintraub, BRE # 00697006, is a Broker-Associate at Lyon Real Estate in Sacramento, California.