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Foreclosures and short sales are sought after by sellers seeking a way out of a loan beyond their means. This can be because of a layoff, an incapacity, changing business climate and so forth.

The Foreclosure

A foreclosure home is one where the lender has taken over the home because the borrower has stopped making payments. California is a non-judicial foreclosure state. This means that foreclosures can move along much faster and are not subject to the long redemption period of a judicial foreclosure state.

The process

The minimum timeline involved is 1) Once a loan is in default (i.e. is not being paid each and every month), the lender issues a Notice of Default 2) After 90 days have passed, the lender can then move on to issuing a Notice of Sale. This notice states that the home will be sold at public auction on a certain day, time and location. For three weeks, the lender is required to advertise their intent to sell the property. 3) After 3 weeks the home can be sold by the lender. The borrower has up to 5 days before the sale date to bring their loan current. Catching up the missed payments avoids the sale.

The Short Sale

When a borrower loses their source of income and the housing market is losing value, it might be possible to do a short sale. The borrower approaches the lender and shows that the payments have become unaffordable. In a declining market, selling the home will not recoup the full amount owed. Thus, a Short Sale might be the solution. The lender recovers the amount the home sells for but it is short of what is owed.

The Downside

Once the borrower has given up the home, there will likely not be enough to cover all the associated fees. The difference between what was owed and what was recovered after all the fees, is considered borrower’s profit by the IRS. So if they owed $500,000 and the net recovery by the lender is $400,000, the borrower can expect a notice of taxes owed on the difference ($100,000 in this example).

As you can see, foreclosures and short sales are not always the boon they might seem. In some cases they may leave the borrower even worse off. If you’d like to discuss this in depth and see about other alternatives, contact me at 760 622 5087 or [email protected]

foreclosures and short sales