How Does a Short Sale Work in California?

Who a short sale is for

A short sale fits when two things are true: you owe more on the home than it would sell for, and you can't keep making the payments. California's Department of Real Estate describes short sales as an option when your finances challenge your ability to make your mortgage payment, and notes that the sale requires your lender's approval.

If you still have equity, you don't need a short sale. And if you are only starting to fall behind, read what to do first before you decide. A regular sale, or an off-market sale to verified cash buyers, pays the loan in full and puts the rest in your pocket.

The short sale process, step by step

1. Get a clear picture. Payoff figures for every loan on the property, any liens, and a realistic market value.
2. Document the hardship. Lenders typically want a hardship letter, income and expense information, bank statements and tax returns.
3. List with a licensed agent. The home is marketed like any other listing, with the short sale disclosed to buyers.
4. Accept an offer subject to lender approval. The buyer knows the lender has the final say.
5. Submit the package. The offer, your hardship file and the settlement figures go to the lender, and to any second lender.
6. Negotiate. The lender orders its own valuation and may counter on price or terms.
7. Get written approval and close. Escrow closes on the approved terms and the loan is released.

The lender's review is the slow part. Plan on months, not weeks, and keep every document current, because lenders often ask for updates.

What about a second mortgage or HELOC?

Every lender with a lien on the house has to agree, because each one has to release its lien for the buyer to get clean title. Each lender will want to know what it receives in exchange for releasing its lien, and that negotiation is part of the process.

California's anti-deficiency rule for short sales, Code of Civil Procedure section 580e, covers junior lienholders that consent to the sale, and a lender generally cannot require you to pay extra money or sign a new promissory note as a condition of approving it. Read every approval letter carefully, and have an attorney review anything that asks you to pay or sign more.

Deficiency, taxes and credit

• Deficiency: After an approved short sale of a one to four unit residence, the lender generally can't pursue the shortfall. Exceptions include fraud or waste, and the protection doesn't apply to corporations, LLCs or limited partnerships.
• Taxes: The Department of Real Estate warns that forgiven debt may be taxed. A CPA can tell you whether an exclusion applies to you.
• Your next home: Fannie Mae guidelines generally call for a 4 year wait after a short sale before a new conventional loan, compared with 7 years after a foreclosure.

This is general information, not legal or tax advice. Talk to a California attorney, a CPA, or a HUD-approved housing counselor about your situation.

Short sale and the foreclosure clock

A short sale does not automatically stop a scheduled foreclosure. If the lender has recorded a Notice of Default, keep the timeline in front of you. Our California foreclosure timeline shows roughly how much time you have, and California AB 2424 can postpone a sale in some cases when the home is listed. Ask the lender in writing to postpone any sale date while the short sale is reviewed.

Also be careful with fees. The Department of Real Estate requires agents who want to collect advance fees for short sale services to have their agreement reviewed first. A licensed listing agent is typically paid at closing, not upfront.

Why the agent matters

A short sale is part real estate and part lender negotiation. Joe Hall started in banking with Bank of America and worked as a licensed lending broker before he became a Realtor. As owner of Venco Realtors, Inc., he guided more than 1,000 clients through loan modifications and short sales. He knows what a lender's file needs to look like before it gets approved.