Short Sales – The Force Driving Valley Home Prices

The term “short sale” has become a common term. Even Spanish-speaking home buyers use the phrase “short sale”. Yet, a surprising number of people are confused both about what it means and how it affects real estate markets.

A short sale refers simply to the sale of a property for less than the outstanding, unpaid balance of the loan (or loans) on it. For instance, if a borrower has a loan with a balance of $500,000, and the current value of the borrower’s home is $385,000, the property is considered to be in a “short” position, one of negative equity.  Another way to describe it is to say the house is “under water.”

A property could be in a short position for a number of reasons:

∙      The borrower was originally in an equity position, but as home values rose dramatically in the early 2000s, the owner borrowed against its current value. When the real estate market started bursting, the borrower’s equity fell much as the ocean recedes. Instead of leaving him with broken seashells and sand crabs, in this case, he was left with a negative equity position.
∙      The borrower purchased his home in the mid-2000s, near the top of the market, using little or no down-payment. In this scenario, there was no time to build equity and nowhere for the loan to go except into negative territory.
∙      Catastrophes such as earthquakes, hurricanes, tornadoes, floods and fires can also bring about a rapid change in a property’s value.

Once a borrower can no longer afford to pay his mortgage he has three options:

∙      Contact the bank about getting a loan modification; this fails more often than not for a variety of reasons;
∙      Allow the home to be foreclosed on by his lender;
∙      Do a short sale of his property

 What is unique about a short sale is that there are actually a minimum of two (2) parties that must consent to the sale of the property. First, the borrower must agree to accept an offer presented by a prospective buyer. Remember: the borrower, even if he is in default, is still the owner of record and the only bona fide seller. But if he wants to sell his property short, the borrower-now-seller must send any offer he accepts to the lender through his real estate agent. The lender must also approve the purchase price and terms. If there is a second or third loan against the property, those lenders must also approve, suffering what are even more substantial losses: up to 90% of the loan they extended the borrower.

Monique Bryher is a licensed real estate broker who is located in the San Fernando Valley. Her new e-book “How to Commit Short Sale Fraud . . . and Get Away with It” can be found on her blog www.CaliforniaRealEstateFraudReport.com. This post is an adaptation from her book.