A short sale is when a homeowner sells property, but for less than the amount due on the outstanding mortgage. The lender agrees to release/discharge the mortgage on the property to allow the property to change hands to a new owner. Now, there seems to be a belief out there that short-selling a property is better than allowing it to slip into foreclosure. I’m not going to agree or disagree on this – because what’s good for some people, is just not good for others. But since there is a resurgence of media reports that former homeowners are “surprised” to learn they are still responsible for their debts to the bank even after a foreclosure, I thought I would revisit the subject and list out some pros and cons as well as perceptions and realities.
Pro: you’re selling your house. When all is said and done, you can move forward from the process being able to tell people that you sold your house, which admittedly sounds a little better than saying that you lost it in foreclosure.
Con: it’s not as easy as you might want it to be. If you think you can short sale your home to a family member, below comparative local values and/or make no effort to market the property, you’re in for a rude awakening. If you’re serious about a short sale, market the property and try and get the highest price possible. Merely having a buyer with a pulse is not going to cut it.
Perception: you avoid the ugliness of a foreclosure auction. Your name is not in the paper. People won’t show up on your front lawn. The neighbors will not know.
Reality: your servicer’s loss mitigation department and the foreclosure department may not be speaking to each other. This happens. One time, a client – who had not yet called me – was working with their loss mitigation department and thinking “everything is under control.” They even had a letter from the loss mitigation department telling them to get documents in by a date certain. Imagine their surprise when the neighbors called them at work and told them about an auction taking place on the front lawn. How many ways can you spell “mess”? Even though these are really big businesses, you’d be completely amazed at how utterly dysfunctional servicers and lenders they are. So it is entirely possible that you have a lender/ servicer approved short sale with a closing date, that’s scheduled the day after the foreclosure auction. Assume nothing – and get an experienced professional on your side who can make sure everyone is talking.
Pro: You’re avoiding foreclosure and getting out from under the clutches of a horrible mortgage that you now know you never should have signed.
Con: The balance remaining on that horrible mortgage? You’re likely still going to be on the hook for what the sale does not pay for unless you negotiate a separate deal in writing. Don’t accept a handshakes. And no winking! Get an attorney. Even if you’re not on the hook for the balance, you might be on the hook for the taxes. Talk to a tax professional to ensure that you’re not exposing yourself to a taxable event. Get everyone’s understanding in writing (and if you can, make every effort to get that understanding before embarking on this process – so you know what you’re getting into – and that means by talking to a professional, not by reading this here blog!).
Perception: It will be better for your credit rating.
Reality: That’s wishful thinking. If a lender is getting paid less than what was originally bargained for (i.e., what you agreed to pay), you are guaranteed a derogatory remark on your credit report. Lenders and servicers are legally obligated to report truthful information credit reporting agencies.
Perception: Banks would rather foreclose. They make more money that way.
Reality: True. Sort of. But lenders and servicers also are getting increasingly concerned over the number of properties on their books, and if they can avoid further losses, they will. Over the last couple of years, I’ve seen the short sale process move smoother and quicker for some clients. But whether this is an option is not something to explore on the eve of foreclosure.
That’s not to say that short sales are the best option for everyone. Short sales are not going to address credit card debt, tax liens or medical bills, and in most cases, people who are struggling with the mortgage also have other financial issues that need fixing. The is also this nasty issue with second mortgages – and in really bad scenarios, third mortgages and liens. If any of this sounds like you, then exploring the short sale option is something you should do after meeting with an attorney who can explore all of your options, lay them out for you so you can decide what is the best option for you.
Tomorrow – - I’m going to discuss the biggest reason people give me for wanting to do a short sale, and what they are not thinking about.
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