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The Short Sale - Part III*

As discussed in the previous "The Short Sale - Part I" and "The Short Sale - Part II", a short sale occurs when a seller's net proceeds from a sale will be less than what he needs to payoff his or hers outstanding mortgage amounts whether a first, second, or third note and any other lien holders.

Short sales are independent of the foreclosure process, however they are usually interrelated. They usually occur due to financial difficulties with the homeowner. But they could occur when someone needs to move due to a job change or other reasons, and the real estate market has changed with reduced value on the property. Thus short sales can occur when an owner is not in default of his mortgage, prior to the foreclosure process, or within the timeframe of a foreclosure process. The lenders willingness to accept a short sale usually depends on what stage it is in. Prior to initialing the foreclosure process, they usually play hardball and short sales are difficult to get approved. Within the foreclosure process, they are usually more agreeable.

Lenders do not want to own residential real estate. They cannot rent it and due to banking regulations they need to set up reserves, which ties up their capital which they can use to fund other qualified buyers.

When a homeowner is delinquent in making payments, the lender will usually allow a grace period for the homeowner to bring the payments up to date or renegotiate a payment plan. Late fees, interest, and other penalities continue to accrue in the meantime. Usually afer three months of delinquency, the lender will start the foreclosure process by issuing a NOD (Notice of Default). By law they need to allow a three month period for redemption. Then they need to advertise for three weeks about a foreclosure sale.

If it goes to a foreclosure auction, they have lost almost four months of interest on the loan. At the foreclosure auction they establish a minimum bid price. If they do not receive any bids it becomes a REO (Real Estate Owned). They now need to sell it on the open market. As you can see, time is money, so their loss mitigation people will usually accept a short sale early on to avoid the expenses and losses of foreclosure or REOs.

In part IV, I will go into the short sale process from the perspectives of the seller, buyer, investor, lender, and the real estate agent.

*It should be noted that lending and foreclosure practices and laws vary from state to state. This posting is based on the laws and practices of the State of California. Although they are similiar throughout the United States, there are differences. There are also differences between Trust Deeds and Mortgages, although we collectively all refer to them as mortgages. In California we use Trust Deeds and do not use Mortgages. Most of the western states use Trust Deeds, however the eastern states generally use Mortgages. The redemption period during a forclosure is different with Mortgages. Also the lenders ability to collect delinquencies varies with the type of loan and the choice of the foreclosure process. To collect delinquencies the lender must use a judicial foreclose. Few lenders do as this takes more time and involves additional legal expenses. Most use the non-judicial forclosure method. Also with purchase loans taken out at the time of purchase, delinquencies cannot be collected. They can be collected on refinance loans. On a short sale the delinquency is waived by the lender. Thus there are differences even in California. Please consult with a real estate attorney and CPA in your state for specific details.