What is a Short Sale in California

What is a Short Sale in California ?

Summary: As an attorney this is the shortest definition I could write which explains the essence of a short sale.

A short sale is a real estate transaction where the purchase price is insufficient to pay off the existing debt. To facilitate a transfer of free and clear title, the lender must agree to release their lien in exchange for a payoff that is “short” of the total balance owed.

The California Association or Realtors Short Sale Listing Addendum explains:

“a short sale is in California what is a short sale calling a short sale is the name used to describe a real estate transaction where the sellers on their agrees to allow the property owner to sell the property for less than the amount of the loans secured by the property the consent of a seller’s lender is necessary because without it there would not be enough money from the sale to pay off the lenders in full and to pay other costs of the sale as a result the lenders lean would remain on title and the seller would be unable to transfer title to a buyer free of monetary liens.

The California Short Sale Law is CCP 580e:

(A short sale is when a homeowner sells their) “dwelling for a sale price less than the remaining amount of the indebtedness… provided that both of the following occur:

(A) Title has been voluntarily transferred to a buyer…
(B) The proceeds of the sale have been tendered to the mortgagee, beneficiary, or agent… in accordance with the parties’ agreement.

California Code of Civil Procedure

Section 580e

(a)(1) No deficiency shall be owed or collected, and no deficiency judgment shall be requested or rendered for any deficiency upon a note secured solely by a deed of trust or mortgage for a dwelling of not more than four units, in any case in which the trustor or mortgagor sells the dwelling for a sale price less than the remaining amount of the indebtedness outstanding at the time of sale, in accordance with the written consent of the holder of the deed of trust or mortgage, provided that both of the following have occurred:

(A) Title has been voluntarily transferred to a buyer by grant deed or by other document of conveyance that has been recorded in the county where all or part of the real property is located.
(B) The proceeds of the sale have been tendered to the mortgagee, beneficiary, or the agent of the mortgagee or beneficiary, in accordance with the parties’ agreement.

(a)(2) In circumstances not described in paragraph (1), when a note is not secured solely by a deed of trust or mortgage for a dwelling of not more than four units, no judgment shall be rendered for any deficiency upon a note secured by a deed of trust or mortgage for a dwelling of not more than four units, if the trustor or mortgagor sells the dwelling for a sale price less than the remaining amount of the indebtedness outstanding at the time of sale, in accordance with the written consent of the holder of the deed of trust or mortgage. Following the sale, in accordance with the holder’s written consent, the voluntary transfer of title to a buyer by grant deed or by other document of conveyance recorded in the county where all or part of the real property is located, and the tender to the mortgagee, beneficiary, or the agent of the mortgagee or beneficiary of the sale proceeds, as agreed, the rights, remedies, and obligations of any holder, beneficiary, mortgagee, trustor, mortgagor, obligor, obligee, or guarantor of the note, deed of trust, or mortgage, and with respect to any other property that secures the note, shall be treated and determined as if the dwelling had been sold through foreclosure under a power of sale contained in the deed of trust or mortgage for a price equal to the sale proceeds received by the holder, in the manner contemplated by Section 580d.

(b) A holder of a note shall not require the trustor, mortgagor, or maker of the note to pay any additional compensation, aside from the proceeds of the sale, in exchange for the written consent to the sale.

(c) If the trustor or mortgagor commits either fraud with respect to the sale of, or waste with respect to, the real property that secures the deed of trust or mortgage, this section shall not limit the ability of the holder of the deed of trust or mortgage to seek damages and use existing rights and remedies against the trustor or mortgagor or any third party for fraud or waste.

(d)(1) This section shall not apply if the trustor or mortgagor is a corporation, limited liability company, limited partnership, or political subdivision of the state.

(d)(2) This section shall not apply to any deed of trust, mortgage, or other lien given to secure the payment of bonds or other evidence of indebtedness authorized, or permitted to be issued, by the Commissioner of Financial Protection and Innovation, or that is made by a public utility subject to the Public Utilities Act (Part 1 (commencing with Section 201) of Division 1 of the Public Utilities Code).

The Two Halves of a Short Sale: Property vs. Person

A common misunderstanding in the real estate industry is the belief that a short sale is a single event – getting permission to sell the home and selling it. In reality, it is a two-part process that requires two distinct legal actions to be successful.

The Release of the Lien (The Property): To sell an upside-down home, the lender must first agree to release their legal claim (the lien) on the house. This is what allows you to deliver a “free and clear” title to a buyer, enabling them to get title insurance and their own mortgage. Without this, the property cannot be sold to a traditional buyer.
The Release of the Debt (The Homeowner): This is where many “debt-trapped” homeowners were left exposed in the past and why, today, some are dealing with zombie 2nds. In the past, simply removing the lien from the house (to get it sold) did not automatically mean you were released from your liability to pay the loan. Historically, many homeowners sold their homes during a short only to find out months later that the bank was still pursuing them for the unpaid balance (the deficiency).

Why California Law (CCP 580e) Changed the Game

While this two-part distinction used to be a major trap, California law now bridges the gap. Under CCP 580e, when a lender provides written consent to a short sale on a residential property (1–4 units), they are legally required to accept the proceeds as full satisfaction of the debt.

However, the “automatic” nature of this law is not automatically reflected in a lenders Short Sale Approval Letter. You don’t want to sign a document that attempts to circumvent your statutory rights or mischaracterize your debt. “We believe it is critical that your lender understands, at just the right time. that you require a short sale approval letter which explicitly mirrors CCP 580e, ensuring that the closing of escrow acts as a full legal satisfaction of the debt.” This should minimize the risk of zombie debt in the future.