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11 Comments on Foreclosure vs. short sale.. What are the pros and cons...?
A short sale means the seller owes more on the property than he can sell it for. Coming to the table with money as a seller isn't fun but it beats letting the home go into foreclosure. Especially if the seller wants to purchase another home.
The bank holding the mortgage on his home shouldn't have a say in whether or not he can sell it "short". As long as they get the required payoff in the end.
Michael, I dont' understand.. if it is a short sale, by definition the pay off will be less than what is owed...
Short sales can bring with it a tax liability.. the IRS may consider the forgiveness of debt, income... I've heard of some going thru the rigors of short sale, only to claim bankruptcy the next year when they couldn't afford the tax liability...
I would love to get a really good clear pro and con list of foreclosure vs. short sale though... as they both are on credit and I'm just not sure how much better a short sale is.
I may be wrong, but that wouldn't be a short sale then... if you pay the bank what is owed that is not a short sale. A short sale is asking the bank to accept less than what is owed. I don't think its called anything if you are able to pay them. Selling it for less than is owed isn't called anything either unless you're asking the bank to accept less. Most short sales I see do not have any equity, or any assets to bring any money to the table so they are asking the bank to accept less than what is owed.
If that is the case, It's up to the bank, and I have been in that position with a buyer before. The bank however, will drag their feet because they want the full amount owed. I can see why they won't go for it if the seller is still making the payments. They have nothing to gain by selling it "short".
I still have no idea why short sales are so popular....if they are as detrimental to your credit, and seems to be more of a hassle....what's the point...why not just walk away from the whole deal. I have a contract in on a short sale...and it has been sitting on a desk somewhere for 7 weeks....and these sellers are still dealing with it..wouldn't it be less stress (because I can imagine losing your house is stressful enough) to just drop the keys off to the bank...
Konnie, I think they named these wrong they should not be called short sales but long sales. I have done two of them both my listings. Both of them took an extremly long time to get through. You have to have a really flexible buyer to make it through the transaction. My most recent one happened this last Spring and it took so long we lost 2 buyers along the way. A third buyer showed up at the very end right before it went in to foreclosure and we closed in a week and a half.
Like you I was thinking, why not just go to foreclosure but I talked to a friend who is a lender and she told me it is soooooooo much better for the person's credit to take the short sale hit rather than the foreclosure hit. My first short sale was over three years ago with a friend who was recently widowed with 3 kids and upside down on her payment. She has spent the last few years working on her credit and getting back on her feet and was able to buy a home this Spring.
Personally I don't go looking for these; the two that I did were both past clients and friends but I'm glad I know how to do them should the need ever arise again.
I found an internet article that had some good information about this:
http://homebuying.about.com/od/4closureshortsales/qt/060907SScredit.htm
Read the link for information about when you'd be able to buy another house, and very importantly deficiency judgements if this it is not their purchase money loan.
One thing it says is so true a short sale is not for the faint at heart. It is a tough process. Plus if you did any funny business on your original loan application you run the risk of some consequences, i.e. I was involved in one whereas the buyers had committed downright fraud on their loan app. The lender wants tax returns, pay check stubs, asset statements and more.. not an easy or short process.
The affect of a short sale on a seller's credit report is much less damaging. The ding on credit will show up as a pre-foreclosure in redemption status, Steep says, which will result in a loss of 80 to 100 points. This means a short sale with a previous FICO of 680 will see it fall to 580 to 600.
Brilliant...thanks for the resource. You know I had a client, I could not figure out what she was doing, but she was a school teacher, I was showing her $350K homes, and she was looking at $600K homes..she was getting frustrated with me because I was trying to keep her on track...anyway she told me she qualified for a loan for a $680K home...she bought it..it is getting forclosed on...and I wonder what that lender did to get her in the door. (I never liked the guy, it was someone she had) All this is interesting...hopefully they will start handing out fines to all these knuckle head lenders who jumped into the game when the gettin' was good....they messed alot of people up...
Konnie- I agree, it seems to me that the lenders would do everything possible to get the short sale through rather than having the foreclosure but that's not the way they work.
The second buyer's agent on my second transaction thought I was not telling her the truth and I wanted to let her call the lender directly and they would not allow it. I told the gal at the bank that the buyer was threatening to pull out and she told me that did not make any difference. It was in the pile to get looked at and it did not matter it would be looked at in the order that it was in the pile. I guess they just are doing so many that we have to play the game to get it through. If I have the buyer and they are looking at a home that says short sale I have been relating my experience and so far my buyers have decided that there were other homes they liked just as well.
I also just recently found out that it does not have to be the listing agent who is the point of contact for the bank. I have a friend who is a buyer's agent who is working as the point of contact. The bank will usually only work with one person and I just assumed it was the listing agent. My friend has been calling me with all kinds of questions as he knows I have done a couple of these.