Profile picture for Planet7

Is short sale really better than foreclosure?

I heard that in two years they have equal effect on credit. Also, with short sale, the bank's loss becomes your tax event. However with foreclosure of a very under water property the bank necessarily buys it from itself at the auction at full price, so there is no short fall and no 1099 of "income."
  • January 30 2011 - Point Reyes Station
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Answers (20)

I had to chime in here.  I do have a SFR.  I know how to put all the paperwork together and all the hoops to go through with the bank to get one approved.  Other than that - I know enough to be dangerous.

Every individual case is different. Before I take on a short sale I want the prospective client to consult with an attorney who specializes in short sales and foreclosures. If the attorney contacts me subsequently I work along with him/her to get the sale accomplished.

Too many agents misuse this designation.  The course did not teach us the law in its entirety, nor did it make us experts in determining qualification.  It does nothing more than recognize a specialized paper pusher.



  • March 23 2011
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Get legal advice. I am SFR short sale and foreclosure certified and I get conflicting information from different sources. Ideally Short Sale is suppose to be better for you and your credit.  That is one of the basis around the short sale is getting a home owner who is under some sort of stress like loss of job or health problems out of a home thats mortgage is higher than the current market value. However what it does to your credit depends on other external factors. Some banks forgive the difference owed after the short sale is closed others make you agree to pay the difference for years to come. Some many variables. Please get legal advice from an attorney specializing in short sales. Good luck to you!
  • March 23 2011
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It all depends on the circumstances.  If you have never refinanced the original loan amount or you don't have a second on your property then your answer would be correct. You would not have a short fall and no 1099. This must be your own personal residence.  Be sure and talk with Tax Professionals and Attorneys before proceeding with a short sale.
  • February 26 2011
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Yes a short sale is better than a forclosure why because the impact on your credit will be lesser than a foreclosure and if you intent to buy another pproperty in the future you will be able to do it in as little as 24 months .  If yyou let your house foreclose than you won't be able to buy in about 7 yrs which means you wouldn't have lost the opportunnity to buy in this great market. If additional questions you can email me directly.
  • February 26 2011
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Is short sale really better than foreclosure?

Is a settled debt better than Bankruptcy?
as for your comment about the 1099 you should receive one whether you foreclose or short sell.
Short sales are generally better.
Yes there are times a foreclosure is better ( like when people lied on their loan documents about income and nothing has changed like a loss of job income etc. ) 
I think the best thing to do is to round up
a Realtor who does short sales,
A real estate attorney who knows about all the processes ( Many dont )
and
A CPA who knows about foreclosure / short sales as well ( Many dont )
If you were able to get all three into a room together and they all knew about your situation you would get excellent help.

Usually if it is your primary residence, and you were honest when you purchased the property and any subsequent reif's.  A short sale is the best bet for you.  You do need a hardship of some sort ( money, medical, need to move, job transfer, need to help mom medically etc )to do a short sale.  Keep in mind it is up to the lender to grant you a short sale there are no guarantees.
  • February 25 2011
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You need advice from different professionals. the challenge is getting impartial advice! A short sale is almost always the better option. a deficiency judgement for the amount that the bank writes off after the foreclosure will also include the foreclosure expenses, so it will be a lot more than just the difference between what you owe and what they get. explainshortsales.com has some basic info that can help you to compare the different options. You will also have a better grasp of the questions you will need to ask the attorney, tax pro, Realtor etc...
Best of Luck!
A CDPE (Certified Distressed Property Expert designation) has additional training in short sales and the other options available.
  • February 24 2011
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Your question is best answered by a tax attorney.  As a Realtor, I see the everyday results of people who have gone through both scenarios but I and all Realtors are not qualified to give advice outside of our licensure.
  • February 06 2011
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don't know where you got your info...but no way are they the same... foreclosure is a full 7 years on your credit report and money will get harder to get before this market place recovers completely... short sales is a much better option to your credit report..all day long..
  • February 06 2011
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Profile picture for nealadler
Shasta Steve, is correct.  There are many well meaning, but misinformed agents giving advice they may not be qualified to give.  When it comes to a foreclosure vs. a short sale one should consult a tax or legal professional, discuss the options.  RE agents should be knowledgeable with regards to legal and tax implications  in  the sale of real estate, however, legal and or tax matters should always be referred to the appropriate professional.
  • February 05 2011
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I agree with Linda S. a short sale is better for the home owner and the neighborhood. When a homeowner walks away or lets the bank sell it as an REO the home is vacant and vandalism can occur.

Let's face it, either way foreclosure or short sale..your credit will take a hit. How you handle it afterward is what matters. A foreclosure requires a lot more time to recover and qualify for to buy a new home. However, if  you short sale your home....and really focus on your budget you can purchase a home (one that is affordable for you) in as little as 2 years and you may qualify for HAFA monies that will help you get a new start.

If you are upside down, consider your peace of mind and the well being of your family. Renting a home for 2 years will give you a new start. Do it if you can. Contact me if you are ready to take a step forwart to freedom and a brighter future.
  • February 05 2011
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a short sale is a better solution for the homeowner in crisis as it does not affect their credit as severely as a foreclosure...

a foreclosure is better for the lender and attorney who files the bankruptcy...

lenders prefer writing off bad loans vs writing down bad loans

do you need a certified short sale specialist in your area to help you avoid foreclosure? 
  • February 05 2011
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Profile picture for Dunes....
Kudos to shasta_steve...

Tax advice..Talk to someone who is qualified to give Tax Advice
Legal Advice...Talk to someone who is qualified to give Legal Advice..
Being a Realtor does NOT make a person qualified to give Tax or Legal Advice

A Realtor  with a Short Sale & Foreclosure Specialist designation SFR

Requirements for Designation
1. Belong to NAR
2. One full day class
3. 3 One hour webinars
4. Pay $175
Becoming SFR Certified
.
  • February 05 2011
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Profile picture for sunnyview
Thumbs to you shasta_steve. Owners considering short sale or foreclosure need to get tax and legal advice before they contact an agent. An agent may be able to help you short sale your home, but they cannot advise you on all the tax and legal consequences because that is outside of their professional scope. 

Get the facts, consider all your options and then call an agent if you decide to pursue a short sale.
  • February 05 2011
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I have never heard that a short sale , which is the same as a settlement is equal to a foreclosure on your credit report.   I have spoken to several lenders, and mortgage consultants, and they determine your credit on history and circumstances.  I have cases where people were able to sell their home thru a short sale process in Massahcusetts, and puchase a new home in Maryland. So...it really determines on the circumstances of the each individual.  In regards to giving full forgiveness for the first lien.  Yes, there may be circumstances that the forgiveness, which is considered as a gift, will be your tax burden.   You will have to pay the taxes on the gift.  Ex:  If the house is sold for 150k.  The loan was 200k.  The difference of the loss or forgivenss is 50k.  You would have to pay taxes on the 50k.   Of course you should go over this with your accountant.
Good luck

  • February 05 2011
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the deficiency judgement is erased thanks to IRS Mortgage Debt Relief Act of 2007 when it is due to a financial hardship

Simply not true. The taxes on the forgiven debt might be wiped out by the IRS act but not in every case.

A deficiency judgment is something entirely different.

http://www.irs.gov/individuals/article/0,,id=179414,00.html

And kudos to Steve for setting the record straight.
  • January 31 2011
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Profile picture for shasta_steve

There is a lot of RE  agent bashing that goes on on Zillow and sometimes it is over the top but the last three posts by agents are classic examples of why it happens.   Everyone was misleading or just outright wrong to help get business.   If you want to be taken seriously then you either need to get your facts strait or be treated like the average used car saleman. 

First comes Linda who says it is better for your credit when sites like My Fico and others say it is the same.  It is better for everyone but in my neighborhood you have agents knocking on doors trying to explain how a short sale may help get them out of underwater mortgages incouraging them.  Lastly she says  that the mortgage relief act has something to do with deficiency judgements.  I don't even know where to go with that one other than to say you have no business giving advice on the subject. 

Next come Sharon and her  paste the board posts about 2 AM.  Any agent who suggests the first person you should talk to, when facing a short sale or foreclose is another agent, is not worth giving your business to.  They are not financial advisors and are not qualified to give you advice reguarding dedficency judgements or taxes. 

Lastly Loretta chimes in saying a foreclosure is "at least" 7 years totally ignoring FHA requirements.  

Now there are some very good agents on Zillow who I would have no problem at all giving my business.  The problem is there are so many others who chime in on any subject without knowing the facts just trying to drum up business.  It really gives you all a bad name when others make misleading and flat out wrong comments on subjects they are not qualified to give. 

  • January 31 2011
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The difference, as Steve points out, is primarily in the time it will take to get another loan once either the short sale or the foreclosure is final. 
In order:
Short sale:  2-3 years (generally)
Bankruptcy:  5-7 years (sometimes less, again--a ballpark)
Foreclosure:  at least 7 years
  • January 31 2011
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Profile picture for shasta_steve
Planet a short sale and a foreclosure have almost identical effects on your credit as far as score.  The problem is you may have to wait longer to get another loan with a foreclosure.  

Now I see you are in California so your 1099 income form a short sale or foreclosure is a little complicated.  If it is your primary residence and you never refinanced then you will have no 1099 income on a short sale or foreclosure because the loan is non-recourse.   If you refinanced but did not take any money out of the house and it is your primary residence, most likely any debt would be foregiven from the mortgage relief act.  Now took money out of the house for personal use then you would most likely owe taxes on that money either way but may be able to get out of paying them if you are insolvent.  There are a few other options but hard for me to give you any advice unless I know your particular situation. 

Linda's answer is mostly wrong and misleading.  If you are in this situation I would not talk to an agent first either. 
  • January 31 2011
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To get a good answer, ask a short sale specialist in your area who can answer information pertinent to your situation, but do it quickly.
  • January 31 2011
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you are misinformed...a short sale is better for your credit, better for the neighborhood, better for property values, better for your neighbors and better for you...the deficiency judgement is erased thanks to IRS Mortgage Debt Relief Act of 2007 when it is due to a financial hardship.

In Forclosure, your bank doesn't really buy it...they have a lien on it for the amount you owe.  
  • January 31 2011
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