Your mortgage balance is $650,000. Your Los Angeles house is worth $580,000. You’re $70,000 underwater and can’t make payments anymore. The bank representative on the phone keeps saying “short sale” like it’s some magical solution. But what does that actually mean, and is it your best option?
Here’s everything Southern California homeowners need to understand about short sales—including why they’re harder than your lender admits and what alternatives exist.
Short Sale Basics: What Happens When You Owe More Than Your House Is Worth
A short sale means selling your house for less than you owe the bank. The lender agrees to accept less than the full mortgage balance and forgive the difference. In theory, everyone wins: you avoid foreclosure, the bank recovers more than they would at auction, and a buyer gets a property at below-market price.
In practice, short sales are complicated, frustrating, and frequently fail.
Your Southern California house is worth $580,000. You owe $650,000. A buyer offers $580,000. You ask your lender to approve the short sale—accepting $580,000 instead of the full $650,000 owed. The lender either approves (forgiving the $70,000 difference) or denies the request.
That approval process? It’s where most short sales die.
Why Short Sales Fail (And Your Lender Won’t Admit It)
Banks are incentivized to deny short sales. Here’s why:
Mortgage servicers get paid fees to manage loans. When loans pay off early through short sales, servicers lose that revenue stream. They’d rather string you along, collect late fees, and eventually foreclose—generating more fees throughout the process.
Additionally, banks must account for losses on their balance sheets. Approving short sales means recognizing losses immediately. Foreclosing later allows them to delay recognizing those losses, which looks better in quarterly reports.
The result? Banks say they’ll consider short sales but throw up obstacles:
Endless documentation requests – Bank of America wants three months of bank statements. You provide them. Two weeks later, they request updated statements. You provide those. Then they want pay stubs, tax returns, hardship letters, repair estimates, and comparative market analyses. Each request comes with two-week response deadlines. Miss one deadline by a day? Start over.
Black hole communication – Your short sale package goes to “loss mitigation departments” where files disappear for months. Your calls reach different representatives each time, none of whom can locate your file. You’re told to submit documents you’ve already submitted three times.
Dual tracking – While your short sale application sits in limbo, foreclosure proceedings continue. You think you’re negotiating a solution, then receive a Notice of Trustee Sale scheduling your house for auction in 30 days.
Lowball approval amounts – Buyer offers $580,000. Bank says they’ll only approve $610,000—more than the house is worth. Deal dies.
Timeline manipulation – Banks take 4-6 months to review short sale requests. By then, buyers have moved on, circumstances have changed, and you’re deeper in default.
Real Short Sale Timeline in Southern California
Month 1-2: Submit initial short sale package with complete documentation. Bank acknowledges receipt.
Month 3: Bank requests additional documentation. You provide it.
Month 4: Bank requests updated documentation because previous submissions are “too old.” You provide updates.
Month 5: Bank assigns negotiator to your file. Negotiator requests property valuation, repair estimates, title report.
Month 6: Bank makes counteroffer—usually for more than property is worth or with terms buyer won’t accept.
Month 7: More back-and-forth negotiation, if buyer hasn’t already walked away.
Month 8-9: Bank finally approves… maybe. Many banks deny short sales at this stage after stringing sellers along for months.
Success rate? About 40% of short sale applications get approved. The other 60% end in denial or buyers withdrawing.
Meanwhile, you’ve gone 9 months without making mortgage payments. Your credit is destroyed. Foreclosure may be days away.
The Credit Score Damage Nobody Mentions
Your lender frames short sales as “better than foreclosure” for your credit. Technically true—but not by much.
Short sale credit impact:
- Credit score drops: 150-200 points
- Remains on credit report: 7 years
- Marked as “settled for less than owed”
- Future mortgage denials: 2-4 years minimum
Foreclosure credit impact:
- Credit score drops: 200-300 points
- Remains on credit report: 7 years
- Marked as “foreclosure”
- Future mortgage denials: 3-7 years minimum
The difference isn’t night and day. Both options devastate your credit for years.
Tax Consequences of Short Sales
When your lender forgives $70,000 in debt, the IRS might treat that as taxable income. You could owe taxes on money you never received.
Example: Your LA house sells short for $580,000. Bank forgives $70,000. IRS sends you a 1099-C form reporting $70,000 in “cancellation of debt income.” At 25% tax rate, you owe $17,500 in taxes.
Some homeowners qualify for exclusions:
- Primary residence exclusion (lived there 2 of last 5 years)
- Insolvency exclusion (debts exceeded assets)
- California Mortgage Forgiveness Debt Relief Act provisions
Consult a tax professional—but know that short sales create tax complications many homeowners don’t anticipate.
When Short Sales Make Sense
Despite all the problems, short sales work for some Southern California homeowners:
You’re underwater but not yet in default – If you’re current on payments but know you can’t continue, starting a short sale before missing payments gives you more time and negotiating leverage.
You have cooperative lenders – Some banks, particularly smaller regional lenders, process short sales more reasonably than mega-banks. Credit unions sometimes work better than Bank of America or Wells Fargo.
You qualify for HAFA – The Home Affordable Foreclosure Alternatives program through government-backed loans (FHA, VA) provides streamlined short sales with defined timelines and relocation assistance up to $10,000.
You have time and patience – If you can handle 6-12 months of uncertainty, endless paperwork, and no guarantee of approval, short sales might eventually work.
You found a patient buyer – Most buyers won’t wait 8 months. If you find one willing to stick through the process, your odds improve.
The Better Alternative: Sell to a Cash Buyer Before Starting Short Sales
Here’s what most Southern California homeowners don’t realize: you can often avoid short sales entirely by selling to a cash buyer.
Scenario: You’re $50,000 underwater
Short Sale Attempt:
- 6-9 months negotiating with bank
- 60% chance of denial
- Massive credit damage either way
- Potential $10,000+ tax bill
- Foreclosure proceeds in parallel
Cash Sale Alternative:
- Contact cash buyer today
- Cash offer in 24 hours
- Close in 14-21 days
- Bring $50,000 to closing to pay off loan
- Avoid foreclosure and short sale credit damage
- Start rebuilding credit immediately
“But I don’t have $50,000 to bring to closing!” Many don’t. Here’s where it gets interesting:
Some Southern California homeowners negotiate with relatives for loans, withdraw from retirement accounts (despite penalties), or use proceeds from selling other assets. Why? Because preserving credit is worth it. Credit damage from short sales or foreclosure costs you much more than $50,000 over the next decade in higher interest rates, insurance premiums, and employment issues.
Alternative: Negotiate with Your Lender Directly
Before trying a short sale, attempt these strategies:
Loan Modification – Request modified terms: lower interest rate, extended repayment period, or principal forbearance. Success rates are low but better than short sale success rates.
Deed in Lieu of Foreclosure – Voluntarily transfer the property to the lender. Similar credit impact to short sales but faster resolution. Some lenders offer “cash for keys” ($5,000-$15,000) to leave peacefully.
Forbearance – Temporarily pause payments while you resolve your situation. Doesn’t solve underwater problems but buys time.
Deficiency Waiver Negotiation – If foreclosure is inevitable, negotiate to prevent deficiency judgment. In California, purchase money mortgages (loans to buy the property) are non-recourse—lenders can’t pursue deficiency. Refinances and HELOCs are recourse debt and allow deficiency judgments.
Short Sales for Southern California Investment Properties
Short sales on rental properties and apartment buildings create additional complications:
Lenders are less sympathetic – Investment property short sales get denied more often than primary residence short sales.
Tenants complicate everything – Occupied properties with tenants, especially problematic tenants, make short sales even harder.
No tax exclusions – Investment property debt forgiveness is taxable income without the primary residence exclusions.
Higher deficiency risk – Lenders more aggressively pursue deficiency judgments on investment properties.
Cash buyers who purchase tenant-occupied apartments offer better solutions than short sales for Southern California rental property owners.
The Cash Buyer Advantage for Underwater Properties
If you’re not deeply underwater, cash buyers offer the cleanest exit:
You’re $30,000 underwater:
- Cash buyer offers $550,000
- Your loan balance: $580,000
- You bring $30,000 to closing
- Walk away with clean credit
- Avoid 9-month short sale nightmare
You’re $100,000+ underwater:
- Short sale might be your only option
- Or explore deed in lieu
- Or let foreclosure proceed
- Cash sales can’t bridge $100,000+ gaps for most sellers
Urban Street Ventures’ Approach to Underwater Properties
We work with underwater property owners throughout Southern California in several ways:
Small deficiency properties ($10,000-$50,000 underwater): We make cash offers and work with you to bring the deficiency to closing. This preserves your credit and avoids short sale complications.
Moderate deficiency properties ($50,000-$100,000 underwater): We evaluate on a case-by-case basis. Sometimes we can negotiate with your lender for reduced payoffs. Sometimes short sales are necessary.
Large deficiency properties ($100,000+ underwater): We can serve as the buyer if you pursue a short sale, or we can connect you with resources for deed in lieu or foreclosure alternatives.
We’ve purchased properties throughout LA, Orange, Riverside, San Bernardino, Ventura, and San Diego counties with every imaginable equity situation.
Steps to Take Right Now
If you’re current on payments but underwater:
- Get your property valued by 2-3 local agents
- Calculate exact loan payoff amount
- Determine how underwater you actually are
- Contact cash buyers for offers
- Evaluate bringing cash to closing vs. short sale
If you’re behind on payments and underwater:
- Contact your lender about loan modification
- Get cash buyer offers immediately
- Explore deed in lieu if short sale fails
- Consider strategic default and foreclosure as last resort
If you’re committed to attempting a short sale:
- Contact your lender’s loss mitigation department
- Hire a real estate agent experienced with short sales
- Prepare complete financial documentation
- Find a committed buyer (ideally a cash buyer willing to wait)
- Stay on top of foreclosure timeline in parallel
- Have a backup plan when short sale fails
Get Your Options Evaluated
If you’re underwater on your Southern California house or apartment, contact Urban Street Ventures for a straightforward assessment. We’ll:
- Make a cash offer within 24 hours
- Calculate your exact deficiency amount
- Explain your realistic options
- Connect you with resources if short sale is necessary
- Provide honest guidance on which path makes sense
We buy properties throughout LA, Orange, Riverside, San Bernardino, Ventura, and San Diego counties—including underwater properties where you can bridge the gap.
Call 1-800-500-2601 or request your evaluation.