How To Sell a Home Using A Short Sale

[UPDATED 10/7/2010]: Gov. Arnold Schwarzenegger has signed SB 931, which would prohibit a deficiency judgment under a note secured by a first deed of trust after a short sale. In other words, if a first mortgage lender agrees to allow a homeowner to complete a short sale, the lender will not be able to turn around and later file a lawsuit against that former owner for the difference between the amount owed and the amount the property sold for.  The bill did not protect homeowners engaging in short sales from attempts by second mortgage holders to seek a deficiency judgment.

For more information on SB 931, here is the text of the bill and a little analysis. ]


Just a few years ago, short sales were almost nonexistent. With a red-hot real estate market, homeowners who needed to sell their property for financial reasons were usually able to break even or make a small profit. As the real estate market declined, homeowners who hit a rough patch through a job loss or health problem became less likely to be able to break even, and were forced to sell their home using the short sale process.

A short sale occurs when a homeowner’s property is worth less than the amount owed on its mortgages, and the homeowner must sell the property for less than is owed. After deducting for sale costs and real estate agent commissions, there is not enough money to completely pay off the amounts owed to the lenders.

Currently, short sales are coming occurring across all price levels of the real estate market, with a surprising number of short sales occurring among properties valued at more than $1 million.

Because the lender must accept less than the amount owed, the home seller must get the lender’s approval in order to complete the sale.

Process of Obtaining Lender Approval for a Short Sale

The process of getting lender approval usually takes at least 90 days and can, in some cases, take as long as six months or more.  After the Seller and Buyer have agreed upon a price and have a fully executed the Purchase Agreement, the Seller must submit this offer, with additional other financial information, to the Lender or Lenders for their review and approval.  The Lender review process may require multiple appraisals, or BPO (Broker Price Opinions), and involve multiple levels of review and approvals.

In order to keep the process moving along, the Seller or the Seller’s representatives need to follow up frequently with the Lenders. And then, on the buyer’s side, there are those Services for commercial property to overlook, so this process takes some time.

What Documents Need to Be Submitted to the Lenders?

The Lender will usually request copies of the borrower’s tax returns, bank statements, proof of income, hardship letter and financial statements.  They may ask for further documentation pending their review.  Unfortunately, we have heard rampant stories of Lenders “losing” the Seller’s submitted paperwork, requiring the Seller to re-submit their paperwork numerous times and essentially start the process back over again after weeks or months of delay.

Short Sale Approval is Not Guaranteed

There is no guarantee that the Lenders will accept the short sale offer, and determining whether the Lenders will accept the short sale offer is more of an art than a science.  Some lenders may request additional money from the Sellers, a secured or unsecured Promissory Note from the Sellers, reductions in commissions, or a higher purchase price from the buyers.  Often the Lenders will not submit anything in writing until the day or so before closing, and they may not counter if the Purchase Price is too low.  They will simply state that the price is too low and close their file.  The process must then start over from the beginning.


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John Corcoran is an attorney with Plastiras & Terrizzi in San Rafael, California (Marin County).  He advises clients about real estate/land use, general civil litigation, and small business matters.  He can be reached at (415) 250-8131 or [email protected]

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