Short Sales vs Foreclosures

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“Yesterday I was asked by a client to compare the benefits of a short sale versus a foreclosure. Since I am in the business of helping people thought I would share with you the 3 major differences between when an owner lets a foreclosure take place versus the benefits realized when a short sale is completed and the owner avoids most of the stress, minimized the damage to their credit and likely saved themselves money.”

As a quick note, I am not an attorney or CPA. I advise all clients to review facts that may be specific to their needs and obtain the advice of tax and legal professionals.

For the record, I have a list of frequently asked questions about short sales just for you. Go ahead and click on the button that says “Short Sale Helper” and get the answers to the most common short sale questions.

I want to make this quick and hopefully easy to understand.  So I will break it down to a few basic points:

Short Sales Benefits vs Foreclosures Detriments 

1. Deficiency Judgments

For most loans that are foreclosed upon, the first lender may have up to six months to file lawsuit for a deficiency judgment. The second lenders may have up to six years to file their suits.

One benefit of a short sale is that we are often able to negotiate the removal of deficiency language from the short sale approval letter. The seller has nothing hanging over their head and can re-build their lives and credit.

2. Credit Score Issues

Foreclosure will more seriously impact the credit life of a seller. We have been told by many loan people in the business today when a person has had a foreclosure they are required to indicate on any future credit application that they have had that foreclosure. There is no such requirement for a short sale. In addition, the foreclosure may have a negative effect on your credit for as long as five to seven years. We are being assured by lending institutions in the market today that seller’s who choose to short sale today may benefit from being in a position to purchase a home again in the next 18 to 24 months, especially if they take care to preserve other credit accounts such as car loans and credit cards.

3. Control 

In a foreclosure situation owners lose control of the situation. They occupy the property at the will of the lender. Once the property is lost to foreclosure, owners can be asked to move quickly and without much notice. In a short sale a surprising benefit is that the seller is in control of the information stream to and from their lenders, they know there is an offer in place being negotiated, and from the beginning of the offer receipt they know approximately when they should be expecting to move. They are in control of whether or not to accept the lender’s offer to short sale. Few surprises and more control of their personal situation.

All three of these issues are serious and the benefits of short sale should be considered before walking away.

I recently completed a short sale for a client who was ready to give in and sign the property over to the bank. I counseled her to hang in there, let us work with the lender and her buyers offer. We got the short sale approved and without deficiency, promissory note or tax implications. As you can imagine, my client was happy with this result, thanked me for helping her see the big picture and will likely reap the benefits in the years to come.