This article is written with Florida residents in mind. Laws vary from state to state and it is highly advised that you consult an attorney and CPA regarding how the following options can affect you.
Short sales vs. foreclosures: A lot of consumers don't understand the difference between a short sale and a foreclosure. This article is intended to help shed some light about the difference between the two and answer questions you might have about the process.
SHORT SALE: With a short sale a settlement is negotiated between the parties involved, like a "regular" sale. The liens on the property are negotiated with the 1st lien holder taking precedence. When doing a short sale, the seller's credit is typically bruised versus totally destroyed, at which point the seller may be able to buy again in as little as 2 years. There is debate about how a short sale vs. foreclosure affects the FICO (credit) score, but this is simply my understanding.
As a seller, listing your property in a short sale capacity can actually be beneficial in a number of ways. If you have a real estate professional that can facilitate the short sale with and for you, you may experience less worry, avoid bankruptcy, have a transaction that is relatively smooth and be able to stay in the property longer while sorting things out. You will not have any proceeds, but in most cases you won't have any deficiency judgments either, which should be a huge weight off your shoulders.
"Why would a lender want to negotiate a short sale?"
- It costs the lender a lot of money to go through the full blown foreclosure process. It also takes a lot of time, and as you know, time is money as well. The lender will ultimately list the property after getting a broker price opinion (BPO) after the foreclosure anyway. Also, it is extremely distressing for the seller to face foreclosure and sometimes that distress manifests into anger to which the result amounts in thousands in property damage. The lender will usually spend some money on repairing anything necessary to get the home in saleable condition as well, which is just an additional expense. Attorney's fees are also typically accrued. Doing a short sale reduces the lender's non performing asset inventory and nets the lender the same or more $$ than foreclosure.
Essentially, a short sale saves the lender the time and expense of completing a time consuming and expensive foreclosure. Hopefully the real estate representative has talked with the seller about the benefits of choosing to go through a short sale versus being foreclosed on and the seller keeps their home in a clean and marketable condition to help facilitate a transaction as well. The lender prefers the property to be listed, clean, marketed and sold and as long as the real estate rep has prepared the file properly for the lender, the process should be very smooth. It does take some time to a)get a buyer and b)negotiate the sale, but lenders much prefer this method.
"But I can't afford to pay a commission."
- You will not be responsible for paying a commission. With a short sale, the bank will decide how much they are willing to lose. You will not be receiving any proceeds from the sale or we would not be doing a short sale.
"I'm not yet behind in my mortgage payments. Can I do a short sale?"
- Yes, yes and yes! If you can prove a coming hardship/compromised financial position, you can list your property as a short sale. Your Realtor will help you determine if you will have the ability to list the property "normally" and avoid a short sale, but if the threshold to which you will need to do a short sale is close to your listing price/market value, you may need to do a short sale. (Ex. you owe $265,000 but your market value is only $270,000 and you cannot pay the commission + closing costs as you don't have access to additional monies, it may be good to do a short sale.)
"Why don't I just let them foreclose on me?"
- There is speculation that when you choose foreclosure over short sale, your credit is ruined. You most likely won't be able to buy again for at least 7 years. You will have to deal with attorney's fees. There will be a court settlement versus a negotiated settlement. If you have additional lien holders, they may sue to garnish your wages so they can get their money. In a short sale the additional liens are negotiated.
If you currently have your home listed as a short sale DO NOT FILE BANKRUPTCY, doing so halts the entire process!
Feel free to ask any questions you may have here!
**It is always advised that you seek the advice of your CPA or attorney when it comes to the tax implications of doing a short sale or foreclosure. Also read this article about mortgage debt forgiveness off the IRS website, which should provide some additional clarification on the taxes (or lack thereof).
Having the assistance of an attorney during this procedure is absolutely paramount. Aside from a full hardship package which will include things like your financials, pay stubs, a hardship letter written by you as to why you can no longer make your payments, etc., the bank will also want to see not only an offer and buyer pre-approval letter, but they will want to see a pre-HUD submitted with the offer. The attorney can prepare this. Some attorney's will agree to be paid by the lender at closing.
Angela Elliott is a licensed Florida REALTOR® with Century 21 Classic Properties in Gainesville, FL. Please visit my profile for more about me and browse my Gainesville, FL real estate website for additional Alachua County information and listings. Your phone calls are always welcome at (352) 256-7038 as are your e-mails to firstname.lastname@example.org. A portion of all my closed sales will be donated to the Alachua Co. Humane Society (View my mission statement).