The California Short Sale Process:

According to a survey conducted by the National Association of Realtors® (www.realtor.org), the short sale process is broken, leaving many homeowners locked in foreclosure proceedings, despite the promises of lenders to improve the process.

The California Association of Realtors® (CAR) reports that more than 50% of short-sales in the Central Valley area of California were described as being “difficult” or “extremely difficult,” by realtors in the area. The “onerous” procedures are one of the main obstacles that struggling homeowners deal with when trying to get out from their under undervalued, over-financed homes.

According to distressed housing market data, short sales in California have decreased only slightly from last year – from 21 percent to 19 percent (June, 2010 – June 2011). However, that figure may be due to the number of failures in the short sale process more than any improvement in the financial outlook.

What is a Short Sale?

A short sale (also called a short-pay transaction) is an agreement between the homeowner and the lender to sell a given property for less than what is owed, forgiving the balance. Although it is not a requirement to be in foreclosure to conduct a short sale, they are mainly conducted in order to avoid foreclosure, and the homeowner must prove financial hardship.

Short sale procedures in California vary by individual case, but generally follow this process, as defined by CAR Model MLS Rules. A real estate agent or attorney can be helpful here:

• The homeowner contacts the lender to begin the process. This is usually a letter explaining the hardship of the homeowner and the reasons for initiating discussions into a short sale. Each lender has specific and unique requirements so the process may differ slightly from another lender.

• The homeowner (seller) signs a release of personal information concerning the property and loan to interested parties, usually the buyer or an escrow agency.

• A settlement statement is drafted and is reviewed by the lender, listing the proposed sale price, the loan balance after the sale, along with an itemized list of expenses, including closing costs, agent commissions, etc.

• The seller drafts a letter of hardship. This ‘hardship letter’ is a detailed summary of all financial challenges the seller is facing. This is validated by supporting documents, such as bank statements, paystubs, investments and other financial records.

• The broker will report to the lender the price that he or she believes the house may sell for, considering comparable market value, house condition, etc.

• A purchase agreement is drafted, the lender reviews it and agrees to the figures or will send back for revision.

• If the lender approves, the sale can follow through to closure.

Potential Tax Implications

According to the Mortgage Forgiveness Debt Relief Act and Debt Cancellation, the amount of the loan that was forgiven by the lender is generally not taxable under certain conditions. The lender will issue a 1099C, as this allows the lender to write off the loss. California passed a similar bill that added to the seller’s tax burden, but is no longer in effect. Your tax accountant or CPA will help you determine factors that will influence your tax liability.

More Information About Short Sales:
Short Sale Process – Steps in a Short Sale Process – Wachovia Short Sale Package – Pros and Cons of Short Sale