SHORT SALES AND FORECLOSURES
A short sale is one in which the seller sells a property for less than what is owed on it, and does not completely pay off the holders of notes on the property. The proceeds come up “short” in paying off the creditors. This can only occur if the mortgage holders agree to take less than what is owed them. The process can be lengthy, depending on the number of note holders, and how short they will be after the sale. The tax and credit score consequences to the seller will vary with every situation.
Just because a property is “underwater” does not mean that a short sale must occur. An owner that owes more on a property than the property will sell for on the open market can choose from several options.
If the owner wants to stay in the home, and can afford the payments on the loans, no action is necessary.
If the owner wants to stay in the home, but is experiencing a hardship in making the required payments, the owner can seek a loan modification(s) from the mortgage holder(s) on the property. The modification can take the form of a lower interest rate, a temporary lower payment, or other terms.
If the owner wants to sell the home, and has assets to make up the difference between the sale price and the mortgage(s) owed, then a standard sale can occur. If the owner is current on the mortgage payments, there will likely be little impact on the seller’s credit score.
If the owner wants to sell the home, but has no assets to make up the difference, and is experiencing a hardship, then a short sale can be attempted.
If the short sale is unsuccessful, then the seller can request the noteholder of the first mortgage to accept a “deed in lieu” of foreclosure. This usually cannot occur until the property has been on the market for several months and a short sale has been attempted. There can be tax and credit score consequences, particularly if multiple mortgage holders are involved.
Finally, if a deed-in-lieu is not accepted, and a notice-of-default (NOD) is recorded, then the mortgage holder may foreclose on the property. This has the most impact on the owner’s credit score and financial well-being, and should usually be considered as a last resort.
In California, the foreclosure usually takes the form of a trustee sale, in which the noteholder (the trustee) attempts to sell the property at a specified date and time at the county courthouse. The property may be purchased by someone who intends to keep it, or by an investor who plans to resell it. If the property does not sell, it reverts back to the noteholder, and becomes a bank-owned property, or REO (“real-estate owned” by the bank.) Such properties may become available for sale again immediately, or may be sold in lots to other investor groups, and become available for sale later.
If you or any of your friends or relatives are wondering if a short sale would be the best option for you, please feel free to contact me for a confidential conversation. Every situation is different, and I can help you ask the right questions to get the answers you need.
If you are interested in pursuing the purchase of a short sale or a foreclosed property, let’s talk. There are many such properties for sale in our area, and there are advantages and pitfalls you need to be aware of before you begin to search in that market.
