Rick Smith Associate Broker, COO

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What is a Short Sale?

Many realtors have a way of loosely tossing around the term ‘short sale’. No surprises then, that it is often misunderstood. A short sale is an ‘arrangement’ between a person owning a property, which might be their residence or an investment property, and a lender who loaned the money to buy the property in the first place. The arrangement is a mutual agreement to sell the property for market value, a price that is less than the total amount due to the lender. The difference between the amount due to the lender and the amount the property is sold for (net) is the ‘deficiency’. This is what the arrangement is all about. These days in California, the lenders typically (but not always in the case of 2nd liens) agree to accept the proceeds as full payment on the note.

Many investors and realtors apply the term to any property sale at less than market value which is incorrect and cause for confusion. For example, a seller might accept a lower price because he or she is in urgent need of money. Or a senior citizen owner might decide to accept less to move to an assisted home facility. These are not ‘short sales’ because there is no lender involved. For it to be a short sale there has to be a lender who agrees to the ‘short’ or deficiency.

A short sale is an expedient way of avoiding foreclosure, where the lender uses the foreclosure process to recover their investment via the Trustee Sale. In California, once a lender has foreclosed on a property, that lender has no further rights to pursue the deficiency.  The down side is that a Foreclosure results in severe credit issues for the borrower, typically lasting for at least 7 years. Also, Foreclosure limits the sellers ability to get back on thier feet and purchase another home in the future; many government agencies who back loans will not loan to a person who has been foreclosed on for at least 5 years, while if they had done a short sale, they could loan again in 2 years.  In a short sale the lender has agreed to accept the ‘short’ under certain terms which makes a short sale a preferable option. Rick Smith is a Bay Area realtor who specializes in short sale negotiations. For further details please log into http://ricksmithrealtor.com/