A short sale occurs when a homeowner sells his or her property for less money than the remaining balance owed on their mortgage. As home values continue to decrease nationwide, a short sale is now a popular “out” for a homeowner who cannot make his or her mortgage payment and currently owes more on the home than it’s worth.

Short sales present opportunities for the buyer, seller, and lender. The buyer is able to purchase the short sale home at a discounted price, while the seller is able to sell their “underwater” home (a home that has a higher outstanding loan balance than the actual market value of the property) and avoid foreclosure. Avoiding foreclosure saves the lender lots of money in the long run. In major cities facing foreclosure situations, a short sale is put into place to offset the legal proceedings, just like in the Los Angeles foreclosure cases that do so.

A short sale in Los Angeles uses the standard procedure that any foreclosure transaction does. The standard contract includes a contingency where the bank must approve the sale. If the bank persuades the seller to refinance the house, the bank doesn’t approve the short sale and the buyer gets their deposit back. In this situation the bank has tied up several months of the buyer’s time and now the buyer must start the buying process over again.

People are taking advantage of the weak real estate market by buying short sale properties in Los Angeles. Historically, California has had one of the most active housing markets, and when housing is good in California, it is really, really good. When it’s bad, it’s pretty dreadful, as the conditions are right now.

Los Angeles foreclosures popped up in neighborhoods all across the city, which lowered other property values in the area. Recently, the national housing crisis hit the city of Los Angeles hard. With the average number of short sales growing nationwide, more and more Los Angeles homeowners are considering a short sale of their property. Many Los Angeles homeowners fell behind on their mortgage payments and have an underwater home.

Even though the bank dismisses the debt and calls it even, before 2007, borrowers had to pay government income taxes on the debt they owed. This changed, however, when the government passed the Mortgage Debt Relief Act of 2007. An example for a short sale in Los Angeles starts with a borrower owing more to the bank than what they can sell the home for. The borrower works out a deal with the bank to sell the property for less than what they owe.

Under this program, borrowers do not have to pay taxes on short sales that occur from January 1, 2007 to December 31, 2009. In 2010, however, it is speculated that borrowers will have to pay taxes on the debt. Shorts sales on vacation or investment homes may also receive tax breaks.

A short sale does adversely affect a person’s credit report, though the negative isn’t as bad as a foreclosure. Short sales are a type of settlement. Like all entries except for bankruptcy, short sales remain on a credit report for seven years. Depending upon other credit information it is typically possible to obtain another mortgage one to three years after a short sale.

It is shocking how many Los Angeles foreclosures are up for sale now. One only has to drive around a while to see all the Los Angeles short sales that are a sign of the housing downturn.

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