Foreclosure vs. Short Sale. Which is better ??

If the buyer is in a time crunch then REO may seem more convenient, but those who do not mind waiting for a good deal then short sale would be the better alternative. This is a general approach and everything depends on who is managing the REO or the short sale.
 
It s a fact that some companies are more efficient than others and every situation is different. The best way to sort this out is to sit down with your realtor and together discuss the current inventory and options in your particular area.

Nietzen, I enjoy reading your responses.  You have a very refreshing style that I don't read in these blog sites very often.  Thank you for that.  

It is a tragedy in the eyes of many including myself to hear of situations such as the one regarding your aunt.  Personally, I see her credit "life" as a sad and preventable fate, if only…. I believe there is life after death as we are continually regenerated ourselves as well as witnessing life's ongoing cycles occurring all around us.  But I must stop myself when I know that there are those firm believers that a negative stigma is associated with bankruptcy, foreclosure, unpaid debts or any "get out of jail free card".  You have to have a fantastic respect for these individuals who dare to think of utilizing a viable solution to a problem because of their faith and belief that it is less than honorable.  It goes along with the mentality behind those who feel that owning their homes with no mortgage is the only way.  Even when they file their tax returns each year with no mortgage interest deduction and their cash used to purchase the home sits with the home riding through the storm of today's volatile real estate market.

Yet, with no mortgage, you have no worries that your beloved home could be taken from you no matter how much you paid for it compared to its current value.  No stigma, no stereotype, no embarrassment.   There must be value in that!  

Kenny, it all comes down to how much value one places on pride, honor and emotional well-being.  I cannot make that determination for anyone but myself.  We are all unique individuals with different belief systems that should never suffer the judgment of another no matter what side of the fence we are on.  Unless our choices are made to intentionally harm another then we should all learn to respect and tolerate our individual differences – sort of agree to disagree.

Just as I still do not agree that a short sale is better for the homeowner than foreclosure.  But I'm still listening.

In bankruptcy your tax liability for debts is wiped out. Therefore, the answer to your question is a bit more complex, depending on the course of action the borrower takes.

If a borrower is over-extended they're "dead" to creditors no matter how pristine their payment history, and no matter how stratospheric their income. Bankruptcy in the spirit of the law is intended as truly a fresh start in this democracy. The bankrupt are "dead" for 7-10 years, during which time they are slowly "resurrected" by the system to financially rise like a Phoenix from the ashes of otherwise hopeless indebtedness.

Those who are too proud and righteous to pursue bankruptcy when it is a foregone conclusion based on the reality of their situation, remain "dead" to creditors for life. Case in point: My aunt believes bankruptcy is immoral and proudly continues to make minimum payments on debt which includes meals at Denny's Restaurants in the 1960's. She is an "asset" to her financial institutions who consider her their lifetime annuity that will payout until she "expires" in death... after which the gravy of her remaining balance will provide a tasty tax write-off to these amoral institutions. In the interim, they will positively not extend her one dollar more of credit during her lifetime. She is in effect a financial zombie to them, a living money receptacle in their eyes. To those who ask what kind of human being could possibly work at these institutions, I posit the possibility that maybe none work there. Maybe they're hostile insect-like aliens who are simply using the credit system to harvest money they convert to real resources for their own species (big grin).

In all seriousness, perhaps "spite" was an emotionally charged word. Do serial killers who are certifiably insane by current psychiatric standards kill out of "spite" or rather are their actions based on amoral indifference? Bernie Madoff didn't rob his investors out of spite. To paraphrase your comment, I would characterize it more out of "could care less" perspective, so you are absolutely right. Does a callous rich person step over a beggar blocking the way to their Mercedes after they are leaving an expensive restaurant in Manhattan out of spite, or is because they "could care less" after one too many drinks? I think we all know the answer to that no-brainer.

I hope you find a more concise answer to your question.

Thank you for your varied yet well thought out answers to this ever present argument. 

Netizen, I have to hand it to you.  Your analogy could not have spelled it out better if I had said it myself.  I am not sure about the "sure spite" portion of your response however.  I would characterize it more out of "could care less" perspective.

Pat, I would enjoy reading more about the theory behind your statement.

Kenny, Your comprehensive explanation rings very similar to my understanding of the issues involved with a short sale vs. foreclosure scenario; however I still believe that short-sales are often not a preferred solution.

A short-sale will cause severe harm to the borrower's credit rating for the next 2 years; 2 years for a foreclosure if it was an FHA loan; and 2-3 years if the foreclosure was a Fannie or Freddie with documented extenuating circumstances such as hardship – not much difference.

If the borrower is not at risk of owing a deficiency after foreclosure, it is not always the case that a short sale is a better option than foreclosure. The seller of a property owes certain obligations to the buyer: These obligations are imposed by the disclosure statutes, other statutes and the contract of sale.

A defaulted borrower, in contrast, does not owe these obligations to his foreclosing lender. Moreover, if a borrower must default on his loan and lose his property, perhaps it is easier for him to surrender the deed or simply allow a foreclosure to occur, than pursue a short sale.  

The only benefit to the borrower is when the lender agrees to accept the sale proceeds and not seek the remainder of the debt from the borrower.  By law, this is all the lender would obtain anyway from a surrendered deed, a foreclosure on a purchase-money loan, or a foreclosure done by trustee sale.  

So I ask again, what's the dif?

I hate to say it, but I don't think it matters. The banks are going to exact their revenge and stab you in the back just the same, regardless of whether you short sale or just walk away and let it foreclose.

It's a sad reality the financial system is set up where you are asked to "do the right thing" out of the goodness of your heart. It's like in the Middle Ages where the King's henchman forces you to kneel before the chopping block. Immediately before your execution some high mucky muck in the church pecking order says with a sanctimonious tone: "You have one final chance to save your soul from eternal damnation after you are beheaded. Confess your sins, my son."

What about if we strike a deal, Father, and I confess without you executing me? No can do. Creditors are going to ruin your credit, knowing it will make it difficult for some to get employment and ever pay them back, out of sheer spite. If you do the math, the tax write-off from charged off debts that go to bankruptcy is a tax shelter from other interest income from other "assets" (people) who are sweating blood to pay their debts, hoping the bank will have mercy on them. There is no mercy.

The world is changing. HopeNow.com provides guidance for loan modification, short sales - foreclosure avoidance. Regulation and legislation are changing to resolve the topsy-turvy situation increasingly common among pre-bust buyers.

Caveat venditor! Do not pay "up front" for service or information, call 888-995-4673(HOPE).