Understanding Short Sales

Understanding Short Sales



In a short sale, a seller facing the threat of foreclosure enters into an agreement with their mortgage lender to accept a price for the property that is less than the amount they actually owe. The seller makes no profit on the sale but avoids the many negative implications that a foreclosure brings.


With a short sale, sellers avoid  having to go through a lengthy foreclosure process and prevent the impact of a foreclosure on their credit score. Fundamentaly, a short sale is a bank authorized alternative to foreclosure. It is not an altrenative to a sale. The basic idea is that instead of geting foreclosed on, the seller is able to sell their property at a price and terms and conditions agreed upon by their lender. This can usually take place under the following conditions:

1. You are unable to continue making payments due to some hardship (divorce, death, loss of job, health, etc.)

2. The amount owed on your house is greater than what Buyers are willing to pay in this market

The bank is often more willing to take a reduced amount in a short sale rather than take the property back - remember the banks are in the lending business, not the property ownership business.


one of  the most commonly asked questions is whether or not a Seller needs to be behind in payments to do a Short Sale.

Because Short Sale considerations are always as a result of some kind of hardship, Lenders expect that the hardship results in an inability to pay the Lender because they can’t afford to. IF the Borrower is making regular monthly payments, it defeats logic that there is a hardship. The exceptions to this are Divorce, Death, Incarceration, Deportation or some other event that can’t be remedied and is date certain to take place.

Remember, a Short Sale is for someone who NEEDS to sell due to hardship, but CAN’T sell due to market conditions (property value). The following outlines a typical series of events that take place as a Borrower moves from Hardship to Trustee’s Sale (Foreclosure)

Hardship - Something changed that had effect on the financial health of their household. This could be something temporary (job loss, health need, increase of debt, decrease of income) or something permanent (divorce, death, ).

Soft Default - Due to the hardship, the borrower begins to fall behind in payments to the Lender. The missed payment will trigger a call from the Lender to remind the borrower that the payment is due.

Workout Solutions - When the Borrower informs the Lender of the hardship circumstances, the Lender may offer a variety of workout solutions aimed at helping the Borrower retain ownership of the house. These solutions can be a revised payment plan, refinance or other solution. If the Lender sees that the hardship is a permanent one, they often will advise the Borrower to pursue a Short Sale with a qualified Real Estate Agent.

Hard Default - After attempting some workout plan with the Lender and either defaulting from that plan or being denied the plan altogether, this will usually trigger more of a hard line relationship with the Lender. Unless and until the Borrower brings the account current, the Lender will turn the heat up with calls and letters demanding repayment and threatening foreclosure and judgments.

Foreclosure Department/Notice of Default - At some point the Lender will determine that the Borrower is not able to or not going to remedy their situation. The ONLY solution for the Lender at this point is to move the file into their foreclosure department and issue an official Notice of Default which informs of a coming Notice of Trustee’s Sale.

Notice of Trustee’s Sale - Once a Borrower receives a Notice of Trustee’s Sale, it will state a FIXED date of Auction. The Notice will come in the form of certified mail or even physically posted on to the front of the house. The name of the Trustee will be disclosed and the date and location of the sale. This date is 21 days from the notice as required by law. NOTHING changes that date except the account being brought current or the Lender postponing it because of a Short Sale they are evaluating.

Trustee’s Sale - SOLD - At the sale, the Lender (via the Trustee) attempts to sell the property for some price above their minimum opening bid price. This price is some percentage of value the Lender has determined they are willing to sell for instead of taking the property back for it to become Bank Owned.

Anywhere between Hardship and Trustee’s Sale is where a short sale offer can be negotiated with the bank. The steps for a Short Sale have the same basic steps for all real estate transactions. You List the property, you Contract with a Buyer and then you Close Escrow. The added dimension is the Bank/Lender Negotiations and Approval.




 CA Department of Real Estate #01313330