I have been helping sellers avoid foreclosures by doing short sales where we convince the lender to accept less money than they are owed.  As I mentioned in a recent Rocklin & Roseville Column, “Short Sales are Going Mainstream” we will be seeing more short sales over the next three years.  With the recent passing of a 90-day moratorium on foreclosures in California there will be even more short sales in the Sacramento area. 

I believe in short sales.  They can be beneficial to the selling home owner and their lender.  In addition they often represent a bargain for the buyer. 

There are several short sale benefits to the selling homeowner.  If they qualify for a short sale they will be able to avoid a foreclosure.  Foreclosures are nasty and according to credit professionals have a more negative impact on your credit report than short falls.  We are currently being told a homeowner who completes a short sale will be able to qualify to buy a home in two years.   This is compared to a three year wait if they have a foreclosure on their record. 

Short sales are very much like a normal sale.  The homeowner negotiates t he purchase agreement, executes the contract and goes through a normal escrow and moves out at closing.  There are normally no notices posted on the house and no one shows up at your door with eviction papers.

Finally, there are some significant financial benefits associated with a short sale.   Most significant is the short selling homeowner can improve their net worth by the amount the mortgage exceeds the value of their home.  We recently completed a short sale where the home was worth $260,000 less than what the client owed.  At closing their net worth increased by over a quarter million dollars.   Yes, they lost their home but they are starting over in better financial condition than they were in or may have been over the next five years if they were able to keep their home.  In addition to getting out from the mortgage debt, the homeowner who is short selling their home will live in the home for many months without making mortgage and real estate tax payments.  We have encouraged our clients to use these funds to make sure they keep all other credit obligations current and to reduce other personal debt.

 If you bought your Sacramento home at the top of the market in 2005 and used even a conventional mortgage with 20 percent down, your home is more than likely worth less than what you owe.  Add to that a spouse who was making great money in the construction industry and you have a simple recipe for a “financially struggling” homeowner who may be able to use the benefits of a short sale.

When you start over, why not do it in the best financial and credit condition possible.  In the next two to five years these clients who we have been helping to short sale their homes will be our best buyers and they will be better prepared to be a homeowner.  In most cases these homeowners did absolutely nothing wrong except purchase or refinance their home at the wrong time and have now suffered some sort of financial setback. 

For lenders, the benefits of accepting a short sale are obvious.  They avoid the hassle and enormous expense having to foreclose and sell a home.  Estimates on the cost to foreclose and dispose of a house range from $50,000 to over $100,000.  These are costs in excess of what they lose on the loan.  For example a lender who forecloses on a house with a $300,000 mortgage but with a current value of $200,000 could end up with losses and costs in excess of $200,000.  They have loan loss of $300,000, costs associated with reserve requirements, foreclosure costs, holding costs, sales and employees’ costs.  No wonder when a short sale request comes to them to accept $175,000 as payment of the mortgage, they agree.

A short sale can be a win of the homeowner by improving their financial condition and giving them a fresh start.  The lender avoids the cost of foreclosure and reduces their overall loss.  The buyer often gets a bargain for their willingness to wait while the short sale request is processed and it helps the overall real estate market and community by increasing the number of homeowners who have equity in their homes.

If you or someone you know is thinking about a short sale of if you just want more information on the process, please give me, Julie Jalone, a call at 916 290-9339 or send me an email to juliej@jalone.com.  We have been doing this successfully for the past three years and are willing to share our experience.