Until till the last three years, many real estate agents did not really know what was involved in a short sale. In the last several years, short sales have become very common in the residential real estate market and now represent approximately 25% of the residential real estate in San Diego County. If we combine the bank foreclosures and short sales together, the distressed sales account for over fifty percent of the residential transactions. My transactions are focused on commercial sales and leasing, but I expect to see the short sale activity increase in commercial property sales.
I will take a few lines to define a short sale: When the owner of a property owes more than the current market value and the owner is unable to make the monthly mortgage payments, the owner can request the lenders to sell short, or sell for an amount less than what is owed on the loan. The definition of a short sale is much easier to understand than to negotiate with the mortgage holder. It is important to note, that the owner of the property should request the lender to not seek a deficiency judgment from the owner. A deficiency is the amount of the loan balance less the money brought in from the short sale.
Now, you may ask, what impact does this have on commercial property sales? We have seen the impact of the short sale and REO (bank foreclosures) on the residential market sales. This market downturn is having a similar impact in the commercial market. We will see more of the same for the next several years.
It is important to understand that there are advantages to the lender and the distressed owner to cooperate on selling the property as a short sale. The property owner is unable to make the loan payments and will lose the property as a result. It is more costly for a lender to foreclose and it takes longer to foreclose than a short sale. If the lender agrees not to seek a deficiency judgment against the failing property owner, both the owner and the lender will lose less time and money.