How a Short Sale Works in California

Short sales in California allow homeowners to avoid foreclosure by selling a home for less than they owe on it. Successful short-sale transactions transfer properties from the distressed seller to a qualified buyer. California short-sale transactions have certain safeguards in place to protect sellers from possible legal repercussions. Neither seller nor buyer is obligated to use real estate lawyers in the transaction, but seeking clarification in complicated sales is a good idea.


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.


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 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.


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.

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