Let’s go through and evaluate the differences between a Foreclosure vs. Short Sale. We encourage your comments, suggestions and opinions, which you can leave at the bottom of the page.
When you fall behind on payments and/or can no longer afford to pay your mortgage, or decide that you are too far underwater (property is worth less than what you owe), the bank will start the foreclosure procedures to recover the property. As the homeowners or mortgagee you know when you stopped making the payments, and should expect to receive a foreclosure notice along with several calls from the lender within the next three months. Normally on the fourth month, most banks file a foreclosure with the local county courts. Hopefully by this time you have made some sort of decision on what to do, and here are some of your options:
Do nothing about the foreclosure – The bank or lender will proceed with the foreclosure, win the case by default, recover the property, and evict anyone living on the grounds. This is the worst decision you can make!
Start a Short Sale – You come to our office and one of our short sale professionals can evaluate your case and collect the information required by the lenders for a short sale. Your property is then listed for sale at a discounted price, approve by the lender. In this situation the lender agrees to accept a discounted pay-off on the amount owed in lieu of not having to spend the money for a foreclosure proceeding, making repairs on the house, and then having to re-sell.
Foreclosure defense – You find a Real Estate attorney and defend the foreclosure in court. In many cases this can prolong and delay the foreclosure process for a while, but normally the result is still the same – the bank takes the property and evicts anyone on the property. The foreclosure can stay on your credit for up to 7-10 years, along with the possibility of a deficiency judgment.
Let’s take a look at some of the Pros and Cons of Foreclosure vs Short Sale
Doing nothing
The Pros – You did nothing, wasted no energy and the bank took the property back.
The Cons – You can and most likely will end up with a deficiency judgment. This can stay on your credit for up to 10 years.
Foreclosure Defense
The Pros of Foreclosure Defense – When you hire a real estate attorney to defend your foreclosure situation, normally this prolongs the foreclosure process, giving you some time to save up some money to get back on your feet. This process also forces the banks to provide proof they are the legal holders of the note, and have the right to foreclose on the property. During the prime real estate times, many notes were sold, and all kinds of things were done with them, making the true note holder undetermined. In some case, very rare, the real estate attorneys have been able to forgive some homeowners of their debt, due to the banks not having their paperwork in order.
The Cons of Foreclosure Defense – The outcome is normally always still a foreclosure on your credit, which can stay on your credit report for upto 7-10 years. This damage to your credit can prevent you from buying another property, and even prevent you from getting that job you wanted, as many employers now review credit reports when hiring new employees.
Short Sale
The Pros of a Short Sale – When you short sale your house, we negotiate with your lender(s) to sell the house for less than what you owe. A short sale creates less impact on your credit than a foreclosure, basically showing your late payments, and a short sale on the property. Lately, a short sale has become more acceptable as a huge amount of homeowners with a mortgage on their properties owe more than what the house is worth.
Cons of a Short Sale – When you short sale your house, you will normally receive a 1099-C from the IRS. This is a cancellation of debt, since the lender reduced the amount that was owed to them, they had to take this loss and file it with the IRS. If the property you did the short sale on, the amount is normally forgiven, but if it was an investment property you should consult with your CPA as you might owe taxes on the amount that was forgiven.
There are no real winners in either of these situation, it depends on the individual as to what decision they choose to make. We all have different values, and different goals.
In most situations, a short sale is the better answer, and it is more widely accepted.
Most banks prefer to accept a short sale on a property, as this reduces their expenses, costs and time the negative asset stays on their books. When a bank has to foreclose on a property, they have to spend money for the attorney to file the claim, then if it is fought with a real estate foreclosure defense attorney, this can become costly for the banks. During this time when they are trying to foreclose on the property, they are not just loosing out on interest on the loan, but also accruing debt on the property – such as association fees, taxes, and property insurance. Not just that, but normally when the lender receives the property back there is damage that must be repaired prior to re-selling the property. On top of the repairs, they also have to maintain the property and pay any homeowner or condo association fees. In most cases foreclosed properties sell below market value, further depreciating the real estate market value of other properties in the neighborhood, and further creating losses for lenders.
When a Bank or Lender accepts a short sale, they reduce their legal expenses, create less risk for the property as the homeowner normally takes care of the property until sold, and reduce the depreciation of the real estate market in a whole, as normally short sale properties can be sold for slightly more than a foreclose property – since the homeowner took better care of the property.
What is your opinion on Short sale vs Foreclosure? Let us know below in the comment box.
