Diane Wheatley of MoveUpProperties asks in Zillow Advice:
Foreclosure. vs Short Sale. Which is Better?
When you consider the tax consequences, future ability to purchase a home and the length of time involved for all, is there a true benefit to a short sale vs. a foreclosure sale?
Do you think you know the answer?
I think the best advice comes from an attorney. I do not believe real estate agents should answer this question for consumers. The answer is not one-size-fits-all. There are numerous factors to weigh in the decision. An attorney is best qualified to help homeowners make this choice. In some cases, bankruptcy is the best choice.
If you want to stay in your home and could just get by with a lower monthly payment. I may have a great answer, email me through my profile. If you do not want the house and you are wanting to walk away. Short sale is your best option. I run an attorney backed loan modification company and could see if you qualify for free, in 3-7 minutes.
If you go to website enter Jeffrey Luther as referring agent I am rated #1 at the office last month.
We successfully completed a short sale in 2008 and are very happy we did. Our credit scores took a hit for a while but are now going back up. For us, a bankruptcy was out of the question. Recommended reading: myshortsalesuccess.com. It really depends upon how much other debt there is. You might need to consult with a CPA and or an attorney. A short sale affects your credit for about 2 years or so and a bankruptcy is at least five years.
I believe anyone considering a short sale vs a foreclosure should first call their lenders’ modification department, and discuss the situation with them.
Try to get the payment modified. Try to hold onto your home if you can.
However, if you cannot find a way, then call a real estate attorney (not just any attorney, find one that handles real estate matters), and get some professional advice for your own situation. Sure, you might spend an hour or so of attorney billing time – but this is a big financial decision, so it will be something you want to get best advice.
Please don’t take advice from internet writers like myself or the others. We know nothing about your personal situation, and we are not licensed to give legal advice.
What I can also tell you is that foreclosure is not the same as bankruptcy, and also that if your attorney suggests that a bankruptcy might be your best option, that that isn’t the worst thing that can happen to you.
Life goes on. Get your financial house cleaned up, and get re-balanced, and yes, you will be able to own a home again, and possibly sooner than you think.
Don’t be worried about discussing your situation with a real estate attorney. It won’t cost as much as you think. If you don’t know anyone to talk to, ask your favorite real estate agent for some referrals.
Keep in mind too that attorneys will treat all of your information confidentially.
But first, make that call to your lender modification department.
that is a difficult question – We have a client right now that is going through a short sale and it is painful. Its literally an emotional roller coaster for everyone.
The problem with short sales it seems is it is really such a new activity still and so many of them are being done. There doesn’t seem to be a real system in place yet with most banks.
Foreclosures are better to deal with than short sales in my opinion. Either way you will be getting the property as-is. The bank is going to sell it to you for close market price and the seller in a short sale will not be able to get it approved for less than 80-90% of market value with a 2-3 month wait just for a responce.
Diane,
My partner and I have helped over 250 families in Southern California in the last 3 years by selling their properties short.
Out of these transactions, not 1 has had a negative impact on the seller.
While their are tax implications with Short Sales, the same implications exist for a Foreclosure.
The beauty of the Short Sale is that you can limit your exposure by selling the property for the current value in a Short sale transaction (“the spread” or difference between your loan amount and what the property sells) which you as the homeowner can control along with your Real Estate Agent. Or, you can “role the dice” with a foreclosure and and suffer by an increased spread or difference from the original loan amount to what is sold at auction + the associated legal fees the bank incurs during the Foreclosure process.
As for credit, your credit score will be impacted equally…initially, but as we have witnessed first hand, there are major lenders that will allow you to repurchase another home right after the short sale process as long as you have paid your obligations including the payment on the property you short sold. If you choose a foreclosure, your credit will be impacted for 5 to 10 years and you will not have the option of re-purchasing for a minimum of 5 years as long as the “foreclosure” remains on your credit.
States have different laws. In California, “purchase money loans”, a loan that is taken out by a buyer to purchase a home and that loan has not been refinanced is generally not susceptible to any “recourse” if sold at Short Sale or is forelcosed. On the other hand, a note that has been refinanced away from a “purchase money loan” is susceptible to “recourse” from the bank taking the loss however, a good Short Sale agent worth their “salt” can negotiate that “recourse” option away during the short sale process.
As for tax implications, as long as the property is the primary residence, the tax ramifications are eliminated under The Mortgage Forgiveness Debt Relief Act of 2007. This law applies to both Short Sale and foreclosure and should be read in whole to understand your qualifications.
I am not a CPA or an attorney, and the laws are clear and succinct. You as a Realtor, can become knowledgeable by aligning yourself with both specialists and you can make the Short Sale transaction the best opportunity for a homeowner that is suffering from an overwhelming burden of increasing payments or a simple need to move.
Regards,
Kris Darney
DRE# 01464957
Platinum Real Estate
West Covina, CA
If at all possible, we try to help the homeowner by attempting a short sale for a number of reasons that were succinctly laid out by CDPE (Certififed Distressed Property Experts)in a matrix.
Here are 10 categories where effects of foreclosure versus short sale are compared:
1. Future Fannie Mae primary loans — foreclosed homeowners are ineligible for 5 years; short sales owners for 2 years
2. Future Fannie Mae, non-primary — foreclosed homeowners are ineligible for 7 years; short sales owners 2 years
3. Future Loa with any mortgage company — foreclosed owners, 7 years
4. Credit score — foreclosed owners score lowered anywhere from 250 to over 300 years, and wil affect score for over 3 years. Short sales scores affected as little as 50 points, and they can recover or repair credit as brief as 12-19 months
5. Credit history — foreclosure stays on record for 10 years or more; short sale not reported on credit when sale is reported as paid in full
6. Security clearance — in some cases, may be revoked for foreclosed owners
7. Current employment — employers regularly check credit of employees in sensitive positions, and forelosure may be grounds for reassignment or termintation.
8. Future employment — many employers require credit checks. A foreclosure is a detriment.
9. Deficiency judgment — in some states, banks may have right to pursue
10. Deficiency judgment amount — depends on how much the property sells for and thow (thorough the REO process? Auction?) Lower price and longer time t sell may result in higher judgment.
The decision “Foreclosure. vs Short Sale. Which is Better?” is situational. Pacita Dimacali gives a detailed analysis of this fact. Repossession can be stopped either by selling the property or selling it or rent it back. The first choice comes into effect when the owner doesn’t wish to continue with the present living place and the later is the vice versa.
There is no right or wrong answer to the question the way it is asked. Each individual’s situation, needs, and desired outcome comes into play to figure out the best route. Either way, I do not feel Real Estate agents should be the best source for advice. Sellers that find themselves in this difficult situation should seek the advice of both Attorneys and CPAs or Financial Advisors.
This is a Hobson’s Choice. You wind up with similar problems either way. In a state like Florida you will wind up with a bill for the difference between the proceeds of the sale and your remaining debt. In a “mortgage forgiveness” state you will wind up at least with a 1099 for that amount, and the IRS will be looking for its money — which may be even worse.
Unless the remaining debt is relatively minor for YOU — and for many people these days even 20k of debt is significant — bankruptcy is a likely follow-on, with ensuing credit and employment discrimination — the latter for no rational reason.
Still, being rid of that house that you can’t afford and that is worth 50% of what it was 3 years ago, may bring a sigh of relief. So while it depends on your circumstances, there may not be much sense to a short sale which robs you of your house, still leaves you in debt, and still leaves you with major credit problems.
You should seek opinions from both a CPA and attorney, who more often than not will disagree with one another.
Note to Kris Darney’s comment above: that “as long as” your home is a primary residence is an awfully long “as long as,” and it does make a difference what state you are in. An investment property has a higher probability of being distressed than a primary residence. Also, it is not at all certain what years this tax forbearance will continue to apply to in the future.
In practical terms, many people who have 1099-G tax problems are going to have credit card problems as well, so bankruptcy is often the the cleanest sweep. Ignore radio commercials that tell you credit card debt can’t be bankrupted — consult an attorney for your situation.
While I am not suggesting anyone be a free-loader, many people have stayed in their primary residence relatively unmolested for a year or more while a foreclosure case works its way through the courts.
So who is most likely to come out a winner from a short sale? The broker who gets your listing — like Kris Darney, above.
my husban and i went up to the poconos to see some homes and i fell in love with a fixer upper we are very interested in this home but we would like to inspect the home to make sure theres no damage to the foundation we spoke to the realtor ladie and she acted kinda strange putting us on hold and then returning telling us that her broker said that if we want to inspect the house we have to make an offer on it or sing an agreement comiting ourself to buy no matter what. is this leagal? were first time home buyers, mine you the house has about $45,000 worth of reapairs and thats just what we seen. can some one PLEASE HELP………..
I do many short sales as a realtor in Santa Clarita California. In most cases a short sale is much better than a foreclosure because your credit is not hit quite as hard, especially if you did not miss that many payments. I had a client who did not miss ANY payments and she was not hurt at all, and it is NOT TRUE that you need to be delinquent in your payments prior to getting a short sale approval. Also a short sale is not stamped on your credit report as is a foreclosure which remains for many years which I am told can also hurt your future job prospects.
There is so much misinformation above. Foreclosures stay on your credit record for 7 years, and by law, they have to come off after 7 years.
We relocated for my husbands work, our old place lost 50% of its value, renting is not an option. I’d prefer a short-sale, because of the smaller credit impact, but the lender wants all of our assets before agreeing to a short sale. So, we’ll take a foreclosure and keep our life savings (in CA).
And life will go on.
Foreclosure was definitely the right choice for me, I just wish that I didn’t completely waste 3000.00 on a B.S. 6 month long loan mod through a crappy law firm. I wanted to keep the home as a rental, but a couple hundred dollar p/ mo. mortgage pymt. deduction for a 3 month “trial” wasn’t worth the trouble and go through the trouble of a shortsale???? Sending continuous monthly financial statements to the bank that “loses” my sent documents while my house in on the market before they’ll even CONSIDER a principal reduction??? No thanks. 120K under water on a home in a deteriorating neighborhood in Northern Ca. I’d be paying for it the rest of my life and may never live to see any equity in it vs. 7 years of a dinged FICO. My new wife was not on the existing mortgage, so her credit is not affected. No HELOC loan for possible deficiency judgements. I had 800+ credit score and didn’t want to ding my credit, but didn’t have a choice other to make the better business choice. I’m not a winner in this situation, but the banks sure aren’t either. It will be interesting to see what banks and the fed are going to do to stop the forclosures from rolling in through 2011-2012 if anything.
I don’t think that there is any simple 1 or the other, each client’s case must be assessed by quite a bit of differing criteria. Real estate agents should be working with a team of experts(lawyer, accountant, home inspector, etc)and advising the client(s) as to the best possible composite decision available.
I see both sides of everyone’s point of view. I have been working with homeowners attempting to get better terms for their mortgage, with lots of barriers and feet dragging by the banks and lenders. Yes I believe the short sale is a better remedy to the situation than a bankruptcy, credit wise and the later effects of the bankruptcy action. I read that 95% of NOS/FORECLOSURE sales are going uncontested. California being a Non-Judicial state, foreclosures are very lightly monitored by the courts. I believe that homeowners have the right to verify the bank paid trustees are processing foreclosures in a lawful manner before they go down the above remedies. I see evidence daily that most are cutting corners. No one is calling them on it, the folks entrusted to give legal advice or otherwise. Please spend some time and look into all avenues before you choose to give up your castle. On a side note credit deletion laws that are in place as of today can basically erase everything up to a chapter 13 BK and establish new trade lines if necessary. In a 6-10 month period you could repurchase a home at today’s value. If your home is so upside down, then the correct answer is to dump it and choose to live down the street for a fraction of what you currently owe on your present home. That being said the holidays are a pond us, so please do something for the less fortunate in your area and reap the rewards and you will benefit in more than one way.
To foreclose or short sale? That is the question.
Being a realtor that had gone through this tumulous state of economy, I can tell you of my situation.
I filed for a Chapter 7 and came up ahead. I owed more than $90K in unsecured debt and my mortgage is upside down and what do I care about FICO score? No remorse on that.
My credit was dinged for a year and I still get credit cards offer every now and then some with fees some without. So, did I come out ahead. You can bet your sweetie pie.
FYI my debts was discharged and I am now using one cc with fees and the other with annual fees. My foreclosure is still ongoing and I haven’t paid a single penny since Apr 2009.
I still get a job with the government and I am still existing, life goes on. This is a great time for bankruptcy Chapte 7 due to the state of economy and I would say that check with a bankruptcy attorney, it only cost me $1500 to resolve all my problems. It’s worth it considering the huge debts I was in.
I have to agree with Regina and Ninjaslice on this post. Foreclosure was best for me as well. I purchased my home in Northern VA for 349,000.00 which was a very bad deal in the beginning because it was way above the comps in the area. But I was a first time home buyer and trusted my Realtor who was my friend. The current balance on my home is $330,000. The condos are now going for $197,000-225,000. You do the math. My condo fees is 300 a month plus additional 2674.00. Not able to rent it, i know the bank will not modify it but only so much because of the price. I had a loss of income plus medical issues. I did send all paper work to company asking for assistance but they keep asking for the same paper work again. So, i moved out into a nice apt, have my money in savings and content with my quality of life and health. It is what it is and this works for my situation. I am not concerned about my credit because that has never stopped me before to get what i want. I am very stress free and that is just part of life. You have to weigh your situation.
At this time there are no tax consequences For now.
ability to purchase a home again is not that hard if you are willing to pay a little more in fees and interest Therefor benefit to a short sale vs. a foreclosure sale?
Are not there for the most part
I currenlty owe $162,000 on my house which is located in Union City, Ga. Homes are curently short saleing in my sub-division for $75000 to $115,000. I had to transfer to Charlotte, N.C. due to my distribution center in Atlanta, Ga closing I had to relocate to Charlotte. Therefore, I cannot afford to pay a hous note in Union City were I not longer live and pay rent in Charlotte. My home is current on the market for a short sale @ $79,900.
Short sale is better than foreclosure of course!
If there is no deficiency on the seller after close of escrow. It depends on the negotiation with the short sale department.
ok, i posted something on here awhile ago and back for updates. My home does not qualify for the short sale because of being extremely upside down with the equity and loss of home value in my neighborhood. So, for me the option is Foreclosure! Which is fine. My house will go to auction on Dec 21. I have been out of work for several months and had major surgery, so can not catch up on payments nor can not continue to make the payments. It is what it is! No love lost! Its just another experience in life that I have learned. Everyone situation is different, so it depends on the circumstances. Life continues to go on and I am thankful to be alive and for my health. At the end of the day, that is what matters to me the most!
A Short Sale is by far the better option for everyone. It is true that bankruptcy may be the best option for some homeowners especially if they are burden with numerous other debts. If it is the mortgage debt that is causing the burden than the answer is a Short Sale. Foreclosure leaves the homeowner liable for up to 6 years in CT for the loss the bank incurred and it stays on your credit report for 7 years.
With a Short Short Sale you could also potentially be liable, but then you don’t close. In a Short Sale the homeowner still owns the home and makes the decisions, subject to bank approval. If the bank doesn’t approve a sale with a full release to the homeowner than cancel the sale.
@Jason, if you qualify but in my situation, i don’t. As far as credit is concerned, i do not care and never really cared about credit. i dont plan on purchasing anything in the next 7 years that would require me of good credit. So, i do agree with Short Sale being the best, but i don’t qualify and have gone through the process. So as stated before, it depends on the situation of the person on which is better. thanks
Why wouldn’t you qualify? It doesn’t make any sense and you may be exposing your self to big risk. The foreclosure does not relieve you from the debt. The bank has every right to pursue a judgment against you for the amount of money they lost. It isn’t just your credit.
Do you still live in the home? Where do you live? A sharp attorney and/or Realtor can probably buy you more time in the house and get a short sale approved.
I stepped into a situation with a seller that was 2 days away from the foreclosure law day(auction date) and was able to get and extension for 60 days and eventually short sold the house.
According to my Mortgage Company and the letter that I received, I owe way too much money on my home then whats its worth. I paid 349,000 for the home, my balance is 333,000. The appraisal is 200,000 for my home. Again, if i need to pay a debt or whatever then that is my issue. You asked what was better and for me, its foreclosure. That is the discussion on the blog. I have also consulted with a lawyers and they have given me the same answer. Besides, my sale was today at the courthouse. I moved out of my house long time ago and living with my significant other who has A+ credit. thanks Maybe if I would have known you personally in Virginia, you could have helped but thanks anyway!!
I should consider my frame of reference before I start blogging away. I live and work in Connecticut and therefore speak about the laws and regulation here.
It depends on what state you are in. In California apparently the bank can not pursue you after foreclosure. In Connecticut where I am the banks can still go after you, so a short sale is much better than foreclosure. A short sale can be a bit more work but it is worth it in CT.
There’s a lot of good information here. I’m trying to make a final decision on Short Sale or Foreclosure myself. I’ve talked to the lender and I’ve talked to a realtor and I still haven’t really gotten a explanation of the differences that makes me feel confident making either decision so I thought maybe someone here could help.
My situation is this: I have a townhouse in Southern California. I owe approx. $350k on it and the market for similar in the area seems to be around the $260-280k range right now. My wife and I separated and neither one of us could afford the payment on it by ourselves. Because of this we have both moved from the house and are living in rented apartmets. We don’t own any other properties. The payments are now about 4 months delinquent and the lender has put it in to foreclosure. They have advised me that I can still attempt a short sale prior to it being sold at auction which they have not set a date for yet. Right now my biggest concern is having to owe someone, either the lender or the IRS, a large sum of money after this is all said and done and then end up having to file bankruptcy on top of everything.
My parent foreclosed on their home last year and basically just walked away from it with no money owed and no tax ramifications at the end of the year which is really my only real frame of reference. I fully understand what the negative credit implications are from both options. But my main question is given my situation which would be better financially to not end up oweing money after it is done.
Mike,
Understandably you are in the same boat 55% of prime mortgage borrowers find themselves in. The lesser of two evils but which one? CA does have a non deficiency law in place for owner occupied homes. My experience has been similiar to your parents situation, like the strategic default they went through. Most homeowners are not expected to make up the difference from the short sale to the loan they contracted to pay off. Almost all short sales are sold and are not able to pay off the original loan amount or the second. Under our current circumstances home values are plummeting daily. I am still unclear about the tax ramifications though, I have heard and seen that once the sale goes through the homeowner walks away free. My advise is to find a tax agent that understands your situation and can explain the ramifications of said actions. If you can remedy your situation by the following actions, either short selling or loan modification. Please exhaust all avenues before you give up your castle. Their are programs available to delay your NOS once it is posted. Credit issues if you are in default are the least of your worries, but the tax implications can scare anyone. I would be very curious to see how you attack this situation, please come back/write about the verdict. I am attending a seminar on just that topic this week and I could share my findings with you if you like. Shoot me some thoughts.
the last thing the bank wants is for you to take a short sale or loan modification because they lose money as well which hurts them as a whole. Please do take the advice Shaun has given and research and look into every other option like loan payment plans or get a 2nd job or their ways to get more money and don’t give up, it seems like a hard task but if it keeps your home then it will be worth it.
@One Mortgage
I wish it were as easy as getting a 2nd job or modifying my loan. That went out the window 6 months ago. Read my original post. It’s just not an option anymore. With the separation came separate residences and with that came rent in other locations. Neither one of us could afford the mortgage/HOA/property tax before on our own. Now that we are both paying rent in other places it’s an impossibility. Nice thought though. And I’m sure in today’s job market, especially, in the Los Angeles area, it would be super easy to just go out and get a 2nd job paying enough in and of itself to make an entire mortgage payment but there’s only 24 hours in the day. Thanks for the advice though.
After reading through everything and talking to the bank A LOT I contacted a Realtor specializing in short sales. So far it has been a relatively easy process. The lender seems in better spirits about the whole thing as opposed to being in foreclosure and we’ve already had an offer on the house at only $50k less than what we owe on it. My credit won’t be as greatly affected and if my financial situation improves I’ll be able to buy another house in a year/year and half. I haven’t incurred any expenses to enter in to the short sale and it seems the only “down side” of short selling it rather than foreclosing is losing the ability to just walk away. I did have to go clean the house on my own and get it at least somewhat presentable for potential buyers. That’s it. I’ve learned I’ll have to pay taxes on the difference at some point and I’ll deal with that when the time comes but there’s also a program to get those taxes waived as of 2007 that I’m looking in to. Given my situation I would say that short sale was definitely the way to go.
Hey! This is very interesting information.
It is a tough decision to make. Get all the info you can. Another great place for information on both is http://www.foreclosurerights.org/.
As stated foreclosures are better for the short sales. Banks sell for the close market price.
You hit the nail on the head! Doing a short sale will allow you to purchase another home in a couple years, whereas a foreclosure will hurt your credit and you won’t be forgiven by Fannie Mae and Freddie Mac for much longer. Yes, it does take some work to hunt down a few bank statements, w2′s and latest work stubs, but it’s worth it.
Yep.. a short sale is much better. Both can bite you in the behind though with the issue of a 1099 from the lender (for the loss). Unless you can prove insolvency; you need a special form included with your income taxes.
Short sale or Foreclosure, either way, one loses the house and gets bad credits. Short sale is not a guarantee when one could spend several months or over a year to get a denial at the end by many reasons.
Short sale is a tedious process in which there are so many kinds of paperwork that the seller has to submit, such as, two years of tax returns, two current bank statements, financial hardship letters, current check stubs, or schedule K, etc…. In short, the seller has to be qualified for a short sale first. If the seller has only one home, and there is no hopes of making the payments current, and has no money left in the bank, then he might get some consideration for a short sale.
Short sale process is purely a waiting game, and if it takes a bit too long, then one would have to resubmit current tax return, new check stubs, or bank statements, etc… On top of that, every 90 days or so, the bank would require new BPO’s, at least two by some lenders, or appraisals, one from seller’s lender, and one from buyer’s lender.
Agent or broker has to be on top of the situation by calling regularly. It is a mind boggling process in which when one calls into Loss Mitigation Department or Short sale division to check its status, the calls would be routed to either Home Retention or Short Sale Support, or Customer Service depending on how busy or how calls are routed. We could talk to some representatives in India, Phillippines, or other countries. The wait time could be anywhere from ten, fifteen minutes, thirty minutes, or longer just to talk to someone. Sometimes, the call just starts to ring for a long time then ends. Then the call is transfered to L, and it could take 20 minutes or longer just to talk to someone, or one just gets a busy signal after awhile. If one is successful to get through, the representative would verify all kinds of information, and if it is transfered, another rep would verify everything all over again. In short, one could spend hours to get any information, and the famous response would be to wait for ten days and call back again. The representative could escalate its status but if it doesn’t work, then they would just have to escalate again. A request for a supervisor to intervene could get somewhere or nowhere depending on whether they could pick up the phone or respond to their messages. The bottom line is good luck.
There would be lots of representatives from short sale support get involved but none really has any powers to get the case moving unless a negotiator is assigned. However, these negotiators could not stay on the same case for very long. The offer might be accepted, but one should realize that the offer could be changed or countered, or denial if it is not approved by the investors at the last minute. On top of that, the trustee sale might keep on going as scheduled regardless of the short sale procedure. So, the bottom line is one could waste lots of time waiting for the short sale to take place, but the bank would take back the property anyway.
Based on my experiences with short sale properties, I say we buy short sale properties at the final stage when there are approvals from the bank or REO properties in which there might be multiple offers and its price could be higher than market value based on demand. Short sale is truly a waiting game, and it could be a nightmare!
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