Some of the properties on the market right now are considered distressed. This means the property is a potential short-sale, has been foreclosed on by the lender and will be auctioned in a trustee sale, or that at the trustee sale there was no acceptable offer and the property became an REO. REO is an acronym for “Real Estate Owned” which means that the property is now “owned” by the bank that had secured the mortgage—REO is a foreclosure where the property reverted back to the bank.
In general, California law requires lenders first look to foreclosure sale proceeds when borrowers default on loans secured by real property. Foreclosures in California are a lengthy process regulated by statute as to specific timelines and procedure. There are two types of foreclosures: judicial and non-judicial.
Judicial foreclosures require that the lender bring a lawsuit against the borrower. Non-judicial foreclosures are most common because they do not require the lender to bring a lawsuit, they generally take less time, and require lenders expend considerably less resources. A lender’s ability to proceed with a non-judicial foreclosure depends on whether there is a Power of Sale Clause in the Deed of Trust which secures the property for the lender. Almost all Deeds of Trust in California contain a Power of Sale Clause. Click here for a an in depth discussion of the foreclosure process in California.
A short-sale is a lender approved sales transaction initiated by owners of real estate to sell their property at a price that would create a deficiency between the amount of the liens on the property and the amount recovered by the sale of the property. This deficiency creates the “short.”
EXAMPLE: In 2006 Betty Borrower purchased a home for $400,000 with no money down. In 2008 Betty was laid off from her $30,000 a year job. She continued to make payments using her unemployment and savings. Although Betty searched diligently for a job, she is still unemployed in 2010. Betty’s unemployment has now run out. Having emptied her savings account she managed to pay down the original loan to $380,000. However, the market value of the home she purchased in 2006 has plummeted 30% and is now valued at less than $300,000. Although Betty has not missed a payment, she is at imminent risk of default and could negotiate a short-sale approval with her lender.
How does a short-sale work?
Under the conditions of the example above, Betty may have a chance at short-sale approval. To begin the short-sale process a borrower/seller will generally contact a Realtor or attempt to initiate the short-sale process directly with the lender. In either case, the borrower will have to have approval by the lender as to the terms of the short-sale.
Different lenders have different policies. Overall there are four main interrelated considerations in a short-sales approval—market value of the property, amount of the loans, number of lenders, and borrower’s circumstances. Lenders may also consider the level of cooperation of borrowers. For example, if they lived in the property for many months after defaulting without attempting to negotiate a short sale the lender may be less likely to negotiate. In general the process will begin when the borrower’s broker sends a short-sale package to the lender. The short-sale package can be hundreds of pages long. For the full article go to Short Sales.