Big Town Real Estate

Big Town Real Estate

Real Estate Short Sale in Los Angeles

Real Estate Short sale in Los Angeles

Engaging in a short sale can offer several benefits for all parties involved in a real estate transaction. For the borrower, it can be a viable option to avoid foreclosure, which can have a devastating impact on one’s credit score. By choosing to sell their property for less than what is owed on the mortgage, the borrower can escape the damaging foreclosure process and potentially negotiate how the mortgage lender will report the sale to credit bureau agencies. The buyer, on the other hand, can acquire property at a reduced price, often lower than market value, which could translate into significant savings.

The short sale process is time consuming often, and involves quite a bit of “red tape” as the real estate agents are, many times, having to deal with the foreclosure/distressed asset department of a big bank.  These banks can require all sorts of documentation over and above the norm, to convince the bank that the borrower is unable to complete mortgage payments and that the money received from the sale is more beneficial than enforcing the mortgage through the foreclosure process. This is where real estate agents with expertise in short sales come into play. They can guide buyers and borrowers through the necessary steps, assist in compiling the required documents, and communicate effectively with the mortgage lender. Often, the banks will not respond for months, and then, after all that time and document demands, simply deny the short sale.

Short sales are not for the faint of heart, but that can be a good thing. Why? Because many agents will shy away from a short-sale, and if you have an agent who is familiar with them, you will have a major competitive advantage over everyone else.  In fact, if there is a short sale property you are looking at, chances are that 90% of everyone else is glossing over it- and if the buyers are finding it, their agent is telling them “oh no, you don’t want to deal with a short sale thats a mess” (Which really means, the agent does not know how to deal with it/does not want to try to deal with it.) This of course, will benefit the determined buyer who has the strong agent, who is capable of dealing with short sales. 

What is a short sale in real estate?

real estate short sale in Los Angeles is a unique type of transaction that happens when a property owner is in financial trouble. The owner, facing a scenario where the sale price of the property won’t cover the remaining balance on the mortgage, attempts to negotiate a deal with the mortgage lender to sell the property for less than the owed amount. This might happen due to a variety of reasons, including drastic drops in market value or severe financial hardship on part of the owner. In order to start this process, the owner usually writes a ‘hardship letter’ explaining their financial situation to the lender and seeks the help of a realtor experienced in short sales.

It’s important to understand the potential ramifications of a short sale on the property owner’s credit. A short sale is often in a better condition on a credit report than a foreclosure, but it is still not a walk in the part fo have it on there. The final decision about opting for a short sale mostly lies with the owner, who must evaluate their financial circumstances and the market conditions before proceeding. 

What are the benefits of a short sale in real estate?

Engaging in a short sale in real estate often presents a range of benefits to buyers mostly (and sellers slightly). For the seller, a short sale is potentially advantageous over a foreclosure, duye to credit implications of a foreclosure, and, the potential of a deficiency judgment against the borrower in the event of a foreclosure (that is a judgment for the shortfall amount, when the foreclosure proceeds to not cover the loan amount– in some states, banks take judgments for that shortfall amount, called a deficiency judgment).

As an advantage to potential buyers, short sale properties often come at a lower purchase price than homes sold through traditional means, and they are often not attractive to many buyers and agents, due to how much extra work they are, and their unpredictable outcome. As stated above, banks can just call of the short sale process midstream, after wasting everyone’s time for months- many real estate agents are not even willing to transact short sales.  However, it’s important to note, while short sales offer numerous benefits, they also require extensive documentations like tax returns, bank statements, and in some cases, medical bills to substantiate the seller’s hardship.

What are the pros and cons of a short sale?

In the real estate market, short sale transactions possess their own pros and cons that distinguish them from regular sales. Prospective buyers often want short sales for mid term rental investment strategies, due their typically lower prices as opposed to a traditional home sale. In a short sale, creditors, usually the mortgage holders, agree to accept less than the full outstanding mortgage amount. This lucrative aspect can attract real estate investors seeking to maximize profit while minimizing the initial investment. A comparative market analysis may also reveal that short sale homes can potentially offer good return.

However, despite the tempting allure of a potential bargain, the drawbacks of a short sale should not be overlooked. The process can often be lengthier and more complex than a conventional sale. A typical short sale transaction involves negotiating with multiple parties, including the seller, their mortgage holder, and a title company, which could prolong the process. Additionally, lenders must approve the sale price and the terms of the sale. This usually means that they will scrutinize the real estate agent’s listing agreement and the prospective buyer’s offer. They can delay for weeks or months, and then renege on everything they said they would do in the first place. Shortsales are notorious for blowing up, for no rhyme or reason. Relying on professionals who are familiar with short sales is essential to navigate through these things. Thus, whether to engage in a short sale ultimately depends on one’s tolerance for potential delays and complications.

How does a short sale work in real estate?

A short sale in real estate occurs when a homeowner in financial distress sells their property for less than the amount due on their outstanding mortgage balance. The lending institution, typically a bank, must give sale approval before the transaction can take place. A major advantage of short sales is that they provide opportunities for buyers to secure properties at below-market value prices.

Despite this, such distressed properties often appear on sale listings and generate significant interest. The sale proceeds are used to pay off the outstanding mortgage and any applicable real estate commissions. Despite this, short sales can provide unique opportunities for the discerning buyer.

What are the steps in a short sale process?

The short sale process initiates with an evaluation of the financial status of the homeowner. Predominantly, this is vested upon the outstanding debt for the property and a projection of potential financial consequences that the homeowner could face if the property heads towards foreclosure. Together with this, a look into the value of similar properties within the housing markets or areas is conducted. The procedure also involves validating the title of the property using a title search to ensure there are no liens or other issues. Each lender/bank has different requirements, many of them seemingly illogical, for approving a short sale.

After the primary scrutiny, the homeowner contacts their lender or Freddie Mac to negotiate a loan modification or to approve the short sale. Every supporting document, including the financial statements, is submitted for review. Subsequently, the short-sale property is listed on a listing service, modeling a traditional home sale. Unlike foreclosed homes, this allows sellers to have a somewhat direct hand in the process and potential buyers may regard this as a less risky prospect. Each step is meticulously taken to filter through the implications and mitigate financial consequences.

How long does a short sale typically take?

A short sale in real estate is a complex process that often takes longer than a typical home sale or regular home sale. The time range is usually between four to nine months, depending on several factors. This long duration is mainly because the mortgage servicer, who has to agree to the short sale, has to review the financial package from the homeowner. The package includes information about the homeowner’s financial situation and the reason for the short sale. 


Comparatively, sale houses or homes for sale on foreclosure sale take less time owing to their distinct advantages. In a short sale, an array of professionals including tax professionals, real estate brokers, and other estate professional play a crucial role, thereby extending the duration. The role of a mortgage loan in a regular home sale or normal sale is straightforward and as such, does not require the lengthy evaluations that are essential to a short sale. Therefore, for buyers or sellers who are not time-constrained or who are navigating a challenging mortgage scenario, a short sale could be an appealing alternative to the regular sale or typical home sale.

What documents are needed for a short sale?

Navigating the landscape of real estate investing, particularly when it comes to short sales, necessitates substantial paperwork. This is primarily intended to substantiate the property owner’s financial distress and justify the transaction to the lender’s loss mitigation department. Essential documents include a letter of authorization, granting real estate professionals access to details about the current owner’s mortgage information. Another is a purchase contract that outlines proposed terms, including the price the potential buyer, perhaps a first-time buyer, is willing to pay.

A critical element in the documentation for a short sale is an evidence of the property’s poor condition; if the property is in worse condition than average, it bolsters the case for a short sale. The presentation of personal financials, including proof of income, loss of job, other assets, and liabilities, highlights the owner’s inability to meet mortgage obligations, further underlining the urgency of a short sale. The inclusion of an earnest money check or earnest money deposit in the paperwork demonstrates the seriousness of the buyer’s intent. Finally, a concise hardship letter detailing the credit implications of the situation and reasons for financial hardship helps paint a clear picture of the property owner’s predicament.

What is a deficiency judgment in a short sale?

A deficiency judgment in a short sale is a significant factor that often complicates the entire loan process. This term relates to the instance when the sales price of a property falls short of covering the outstanding balance on a borrower’s mortgage during a short sale. These types of transactions are complex and demand keen attention to detail to mitigate potential risks. It is essential for a seller to have initial approval or pre-approval from their lender, which means the lender has consented to accept less than the full balance of the loan due to a challenging situation such as financial hardship.

However, the lender has the legal right to pursue the difference or ‘deficiency’ between the sales price and the outstanding loan balance from the seller. These measures can make a bad situation worse for a seller who is already struggling with monthly payments. Hence, transparency about the possibility of a deficiency judgment is a crucial part of the typical disclosures during the original loan application process. Originators and brokers must provide these legal disclosures to ensure borrowers are fully aware of the potential outcomes. These include the possibility of a deficiency judgment in complex short sale transactions where the market price falls short.

For more information on Real estate Short Sales in Los Angeles contact Big Town Real Estate today.

Sources

Calem, P., Gillen, K., & Wachter, S. (2013). “An Alternative Approach to Estimating Foreclosure and Short Sale Discounts”. Retrieved from: https://www.sciencedirect.com/science/article/pii/S0094119023000153

McGavin, K. (2010). “Short Selling in a Financial Crisis: The Regulation of Short Sales in the United Kingdom and the United States”. Retrieved from: https://elischolar.library.yale.edu/ypfs-documents/1869

Madison Buccola. (2020). “Price Discounts Associated with Foreclosures and Short Sales in Real Estate” Retrieved from: https://scholars.csus.edu/esploro/outputs/graduate/Price-discounts-associated-with-foreclosures-and/99257831238001671

Accessibility
Big Town Real Estate footer logo

Learn More About Rental Property Investing Hacks

X Close