SHORT SALE VS. FORECLOSURE: If you're in trouble, KNOW your options!

By
Real Estate Agent with Classic Properties

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.)


FORECLOSURE:                                                                                                                                            

 

"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 angela.elliott1@century21.com.  A portion of all my closed sales will be donated to the Alachua Co. Humane Society (View my mission statement).

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Angela Elliott is a licensed Florida REALTOR® with Classic Properties Realty Services 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 GainesvillePro@yahoo.com.  A portion of all my closed transactions will be donated to Second Chance Rescue and Rehoming: http://secondchancerescueandrehoming.org/

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Rainer
75,644
Frank Schulte-Ladbeck
Frank Schulte-Ladbeck Professional Real Estate Inspections - Houston, TX
Angela, this is a very good overview of the topic.
Apr 25, 2008 11:52 PM #1
Rainmaker
68,515
Angela St. John
Classic Properties - Gainesville, FL
REALTOR Classic , Properties ~ Gainesville, FL Re
Thanks for stopping by Frank. ;)
Apr 26, 2008 01:38 AM #2
Rainer
25,418
Jeremy Butts
Real Estate Entrepreneur - Louisville, KY
Investor

Angela - this is an important and very relevant topic! I think you have made some excellent points.I would like to respond to some of your info based on my personal understanding and experience:

You wrote: "but in most cases you won't have any deficiency judgments either, which should be a huge weight off your shoulders."
I believe: It's just as likely for the seller to get a definciency judgement from a short sale as it is from a foreclosure. That being said, many lenders are accepting short sale offers subject to the seller signing a promissory note for the deficiency, or part of.

You wrote: "Yes, Yes, Yes!  If you can prove a coming hardship/compromised financial position, you can list your property as a short sale."
I believe: You might be able to "list" it as a short sale, but I bet VERY, VERY, VERY FEW lenders will accept a discounted offer while the payments are current. It is hard to explain a "hardship" while payments are current. Why would a lender care if you can't sell the property as long as they are receiving payment?

You wrote: DO NOT FILE BANKRUPTCY , doing so halts the entire process!
I believe: Sometimes delaying the process is the point of bankruptcy! Owners can stay in their house longer.

Great topic! Keep em' coming!
Apr 28, 2008 06:04 AM #3
Rainmaker
68,515
Angela St. John
Classic Properties - Gainesville, FL
REALTOR Classic , Properties ~ Gainesville, FL Re

Jeremy -  Thank you so much for your feedback on my article.  You have some absolutely valid points.  Let me address:

You wrote: It's just as likely for the seller to get a definciency judgement from a short sale as it is from a foreclosure. That being said, many lenders are accepting short sale offers subject to the seller signing a promissory note for the deficiency, or part of.
My response: I have read and heard both ways.  I've also read "Submit the hardship package, listing, etc. IMMEDIATELY" and "DON'T submit the package UNTIL you have an executed contract for purchase!".  Crazy crazy.  That's why I put "most cases" as that is my understanding, BUT  it's really going to depend on the lender.  The bottom line is:  If they receive a definiciency judgment going through foreclosure anyway, perhaps they can avoid that route and take their chances on a short sale?  Worst case scenario they'll get one and BEST case scenario is they can avoid it.
 

You wrote:   You might be able to "list" it as a short sale, but I bet VERY, VERY, VERY FEW lenders will accept a discounted offer while the payments are current. It is hard to explain a "hardship" while payments are current. Why would a lender care if you can't sell the property as long as they are receiving payment?

My Response:  I completely agree.  It will be harder to prove a hardship while payments are current, but I understand if your customer can truly prove they are going to have a substantial financial downfall, then it is in the banks hands to allow it or not.  I think where I wasn't clear enough in this statement is to showcase the situation where the seller is upsidedown in their mortgage and a substantial amount of $$$ is owed on the house, relative to what the market will bear for a listing price.  If they are struggling on their payments and selling the home is their only option, yet they are faced with bringing 40k to the table at closing (and they don't have a dime to their name), this may be a short sale candidate.  

The flipside is that if the seller's payments are current, but they are strapped, they could talk to their lender and see if there are any options that might work for them.   If the lender is unwilling to work with the seller, than the seller needs to get it on the market immediately and try to keep making their payments, and hopefully we can get the home sold BEFORE they have to go through a short sale.

You wrote:  Sometimes delaying the process is the point of bankruptcy! Owners can stay in their house longer

My response:  I see your point.  However, bankruptcy ruins credit and affects the ability for future credit lines/purchases.  {As a side note: I know FHA will loan as long as a customer is 2 years out of bankruptcy (INCREDIBLE)}.  When I said "Don't file bankruptcy!", I meant not to only if the seller CHOSE to do a short sale and listed it as one.  Some seller's will file bankruptcy and not realize it will affect the short sale situation and essentially delay the short sale and potentially jeopardize the ability to do one!  It was just a word of warning for those who didn't know.  I guess it all depends on what their plan is as every situation is different, but filing bankruptcy AND actually being foreclosed upon is a mess.

 

I think your comments are great.  They really highlight how intricate this whole situation is and showcase that each situation is totally different and certain things will be better for certain people to do! 

Apr 30, 2008 02:38 AM #4
Anonymous
Deirdre

I had heard that there is no definciency judgement when doing a short sale in the state of Florida but rather a 1099 is issued for taxes on the definciency amount. And if the property is your primary residence you're exempt from the 1099 taxes.  Can you shed any light on that?  Or is it just totally untrue?

Feb 24, 2009 12:44 AM #5
Anonymous
Anne

Is it harder for the mortgage company to collect a definciency when you foreclose vs. short sale?  My house is listed as a short sale and the mortgage co. will not give me an answer on debt forgiveness until there's an official offer.  I've had UNofficial offers at almost $150k less than what I owe.  There's no way I can pay back the difference.  Is it smarter for me to just let them foreclose?

Feb 26, 2009 03:25 AM #6
Anonymous
Alqamar

Great info...I'll be using BOTH of your responses for future listing presentations, thanks!

Mar 23, 2009 08:26 AM #7
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Rainmaker
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Angela St. John

REALTOR Classic , Properties ~ Gainesville, FL Re
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