SHORT SALE VS FORECLOSURE BANKRUPTCY
You posted with location in California. In CA, the foreclosure will occur through trustee sale at a local courthouse. If there is substantial equity in the property, an investor will purchase your property at this sale, and if their purchase price exceeds the amount the bank is legally owed on the loan, any excess will go to the homeowner.
If your property is not bought at the trustee sale, it returns to the beneficiary (the bank) at which point they own the property and can do what they please with it at that point. In this event you would not get any money back except maybe cash for keys when they come to evict you.
As already mentioned, if you are near foreclosure and you have equity, it is very much in your best interest to sell on the open market to recover as much equity as possible. The foreclosing liendholder (usually a bank) will often offer you an extension on your foreclosure if you can show them that your property is listed or even better in escrow for sale to a new buyer.
Short sale (real estate)
For short selling in the financial markets, see Short (finance). A short sale is a sale of real estate in which the net proceeds from selling the property will fall short of the debts secured by liens against the property. In this case, if all lien holders agree to accept less than the amount owed on the debt, a sale of the property can be accomplished. A Short Sale is not to be confused with a Short Settlement.
A short sale has two intrinsic and inseverable components. A Short Sale is successful when (1) The Lien holder(s) (aka Mortgage Company) is agreeable to net less than the amount owed on the note (debt) as the result of (2) an arms length sale at or below the Appraised Value for that property. The agreeable selling price is intrinsically defined to be at or less than the appraised value allowing the process to be attainable. A prudent buyer will not pay greater than the appraised value, and a Bank or Finance company will not provide a mortgage for greater than the appraised value, thus limiting the Short Sale proceeds to a maximum gross yield of the property's Appraised Value.
It's important to understand that a Lien holder is not bound to accept the Appraised value and can demand a greater selling price. In this case, a "Sale" with a prudent arms length buyer is no longer a reasonable or attainable expectation. Instead the demand for greater than the Appraised Value (but less than the amount owed on the debt) is called a "Short Settlement". Some Lien holders will agree to a Short Sale but not a Short Settlement while demanding greater than the Appraised Value. This is a paradox as neither is achievable and both predestined for failure.
Therefore a "Short Sale" can only be accomplished when a Lien Holder is willing to accept less than what is owed on the debt while also agreeing to accept a sales price that is at or below the appraised value for the property.
Creditors holding liens against real estate can include primary mortgages, second mortgages, home equity lines of credit (HELOC), homeowner association liens, mechanics liens, IRS and State Tax Liens, all of which will need to approve the sale in return for being paid less than the amount they are owed. The lien holders do not have to agree to accept less, but they often do since the alternative is to let the property go to foreclosure.
A short sale is a more beneficial alternative to foreclosure and has become commonplace in the United States since the 2007 real estate recession. Other countries have similar procedures. For instance, in the UK the process is called Assisted Voluntary Sale. [1] While both short sale and foreclosure result in negative credit reporting against the property owner, because the owner acted more responsibly and proactively by selling short, credit impact is less.
Requirements
In order for lenders to consider a short sale, homeowners in California must meet certain requirements. The homeowners must demonstrate ongoing and long-term financial hardship. In addition, they must be unable to refinance the mortgage in order to make it affordable. Some lenders ask sellers to put the property on the market as a normal sale first, to confirm that the market will not support the higher asking price. When all options have fallen through, primary lenders might acquiesce to the short sale. Rather than go through the headache of foreclosure and disposition of a potentially blighted property, they take the loss and move on.
Function
The main function of a short sale is to save the homeowner from foreclosure. It also serves to prevent repossessed vacant homes from causing blight in neighborhoods. Short sales provide an out for lenders already burdened with a glut of foreclosed properties. In order to encourage more short sales, California declared itself a nonrecourse state, meaning that once primary lenders sign off on a short sale transaction, they cannot sue the seller in order to collect money still owed on the loan.
Time Frame
Because sometimes multiple lenders approved loans on a short sale property, getting the necessary approval from all the respective lenders must occur before the sale can close. Getting multiple sign-offs takes time, so short sales are a contradiction in terms, often taking two to three times longer than standard real estate transactions.
Potential Liability
Because California is a nonrecourse state, sellers avoid lawsuits by the primary lenders. Second mortgages or loans taken out in on top of original principal for the purpose of debt consolidation might still have the right to sue. Consulting with an experienced real estate attorney in complicated cases is important. Sellers who lived in the short-sale property as a primary residence receive protection from tax liability through SB 401, the Conformity Act of 2010 passed by the State on April 12, 2010, as detailed on CA.gov. When a debtor with a $200,000 obligation, for example, receives relief from the lender, who accepts $120,000 as final payment, the difference of $80,000 is taxable income under standard debt-relief regulations. Rental or income properties do not fall under the protection of the Conformity Act.
Considerations
In order to succeed with short sale purchases, buyers need financial flexibility and patience. Some buyers run out of time and need to find a place to live before lenders accept the purchase agreement. Loans also tend to fall through when short sale negotiations stall for months. Secondary lenders might refuse short-sale transactions, hoping to get a better deal in a foreclosure, and kill the deal. Amidst rising debts and lender stalling, sometimes sellers just walk away from the home, literally handing over the keys to the lender, and then face long-term credit consequences because of their actions.
Can a Homeowner Sell a House While in the Foreclosure Process?
by Jann Seal
Short sale your house to beat the foreclosure timeline. Related Articles
• How to Sell a Property That's in Foreclosure
• Which is Worse, a Deed in Lieu of Foreclosure or a Foreclosure?
• Can I Sell a House After Receiving a Foreclosure Notice?
• A Seller's Short Sale Checklist
• The Best Way to Sell My House Before Foreclosure
• What Are My Options If My House Has Gone to Foreclosure?
Can a Homeowner Sell a House While in the Foreclosure Process?
Whether your home is valued for less than the amount owed on the mortgage, or equity has built beyond the mortgage amount, you own your home until the day it’s sold at auction by the lender. The fact that you’re behind in your mortgage payments triggers the lender to begin the action of repossessing its collateral. This may take months, and in some cases, years. A lender prefers a short sale to foreclosure, so contact it and start the sale process.
Missed Payment
You’re in a downward spiriling market and have missed at least two payments. Your lender has sent you a demand letter asking that the payments be brought up to date. When you’re 90 days behind is when the foreclosure clock starts ticking. The lender sends you an official notice of default and notifies its foreclosure department to put your home into its database. You have another 90 days to negotiate with the lender regarding the back payments and can ask for a loan modification. In the meantime, your real estate agent is actively marketing the house for sale. If you haven’t had any offers, lower the price and hope your lender will accept the reduced amount. Do what you can to make your home attractive to buyers. You’re working to beat the foreclosure clock at this point.
Positive Equity
Your house is worth more than the amount owed on the mortgage but you're facing a financial hardship and can't make the mortgage payments any longer. The lender has instituted a foreclosure. Act quickly and put your home on the market for sale as a "fair market" listing before the actual foreclosure sale takes place. You'll sell the house, the lender will be repaid and you'll walk away with a few dollars in your pocket and won't sustain any credit damage. It's a win-win situation for all.
Traditional Sale
You can sell your home after receiving a foreclosure notice as long as you find a buyer in time. Foreclosure lengths differ by area and foreclosure type. Judicial foreclosures, done through court, usually take longer than nonjudicial foreclosures. Since an active foreclosure creates a title issue, the legal professionals involved in your deal will contact your lender and arrange to take care of the foreclosure at closing. The lender may require proof of the buyer's ability to finance the transaction before closing because the buyer's money is what will cover your loan debt.
Bankruptcy
Filing for bankruptcy temporarily halts a foreclosure action because you get an automatic stay against actions from creditors, including your lender. You can sell your house while you're in bankruptcy as long as you apply for and get permission from the court. The court decides what happens to any money that doesn't belong to your lender after the sale. For example, the court may direct your portion of the proceeds to some of your other creditors because the money becomes part of your bankruptcy case.
When to Short Sell
When to Short Sell When you’ve determined that paying your mortgage is a hardship, you can’t afford it and the ancillary payments that go with it, that’s the time to investigate listing your home as a short sale – selling it for less than is owed on the mortgage. With your lender's approval based on your current financial distress, list the home with a certified short sale specialist from a local real estate brokerage. Do this even before missing your first payment.
Lender’s Preferences
Lenders prefer to work with an owner on a mortgage refinancing arrangement, and if necessary, a short sale. It costs them less than a foreclosure. Your job is to be in touch with your lender throughout the process, without putting your head in the sand. Your agent helps with pricing, your lender's asset manager works with your agent on vetting offers, and you work to keep your home in pristine condition. Don’t let your homeowners association – HOA – creep up and foreclose ahead of your lender. Pay your dues monthly.
Trustee Sale Notice
When you get the notice of trustee sale from your lender, you know your timeframe for selling is nearing a close. A minimum of three weeks will pass before the actual sale. You are still allowed to sign a purchase contract from a buyer at this point and have it submitted to your lender’s loss mitigation department’s asset manager handling your file. This is different from your lender’s foreclosure department.
Sale
Two things can happen simultaneously: you close on the short sale and a trustee’s sale, or auction, takes place. The short sale takes precedence and paperwork putting the short sale above the foreclosure is signed at the closing table.
