Short Sale vs Foreclosure

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A "Short Sale" is a sale of real estate in which the sale proceeds fall short of the balance owed on the property's loan. It often occurs when a borrower cannot pay the loan on their property, but the lender decides that selling the property at a moderate lodd is better than pressing the current debtor. Both parties consent to the short sale process, because it allows them to avoid foreclosure, when then involves hefty fees for the bank and poorer credit report outcomes for the borrower.

A foreclosure is the legal process by which an owner's right to the property is terminated, ususally due to default. This typically involves a forced sale of the property at public auction, with the proceeds being applied to the debt.

Forclosures or short sale are indeed going to affect the market value of neighboring homes in one way or another. Whenever a house sells in neighborhood, the amount at which the house is sold is noted and has an effect on general housing prices within the same locality. If your neighboring house is facing short sale or foreclosure, then the house sells for much less than it would have if it hadn't gone into foreclosure. Additionally, if that foreclosed house is similar to yours in size and attributes then this can depreciate the market value of your house.

The same is true when people sell their homes for less than the homes are actually worth because they just want to get rid of the loan. Every real estate transaction in your neighborhood has the potential to bring up or bring down the market value of your home. Every real estate market is different. Your real estate professional's main goal is to get you the best price in any martket.

“Why should a seller go through the short sale process rather than letting their house be foreclosed upon?”

While we cannot speak to every client circumstance, we can say one thing with complete conviction.  In almost all instances in which a potential seller is contemplating whether they should short sell their house or let it go through the foreclosure process, a short sale is the better option. The following are examples to consider:

Example A - Short Sale
Mr. Smith owns a home in which he has a mortgage balance of $220,000 and a current market value of $150,000. Mr. Smith has elected to short sell his property. His Realtor successfully obtains a buyer who puts forth an offer price of $120,000 (80% current market value according to Realty Trac Foreclosure Report 5/26/2011). After reviewing the buyers offer and the financial hardship information from Mr. Smith, Mr Smith’s bank agrees to accept the short payoff of $120,000 which would leave a deficiency balance of $100,000.

The transaction closes and is final.  Mr. Smith then pulls his credit report 30 days after the transaction takes place. On the report he notices that the mortgage trade line states “Mortgage debt was settled for less than full” and the balance on the mortgage is $0.  Mr. Smith is now on the road to financial recovery.

Example B - Foreclosure
For the ease of illustration we will use the same value and mortgage debt amounts as in Example A. However, Mr. Smith has elected to forgo the short sale process and let the bank foreclose on the property.  The bank holding his mortgage facilitates the proper legal procedures to foreclose on the property, all of which are costly.  Mr. Smith is notified and his property foreclosed upon of which is taken back by the bank to sell as an REO.

Six months later, the bank finally sells Mr. Smith’s home only they sell it for $90,000 (60% of current market value according to Realty Trac Foreclosure report dated 5/26/2011). Remember, as a short sale, the home would have sold for $120,000 keeping the deficiency to $100,000. In addition to the deficiency now being $130,000, the bank has elected to add on legal costs of $15,000 and asset preservation costs of another $5000 for a total deficiency liability of $150,000. Mr. Smith pulls his credit report 30 days after being notified that the bank has sold his property and of his liability.

On the report he notices that the mortgage trade line states “Foreclosure” and the balance is $150,000. Because of Mr Smith’s choice to choose foreclosure vs. short sale his road to financial recovery has taken a major detour. He not only has a foreclosure on his credit report but now has a much larger deficiency balance in which the bank, in most cases, will report on his credit report as a balance owed.

The Best Option is Clear
While the financial and credit advantages are clear when choosing a short sale over a foreclosure, other advantages are sometimes overlooked. The most important of all of them is maintaining the seller’s dignity and peace of mind. We have heard too many stories of families having to leave their homes because of a Sheriff’s order or some other type of legal action. The short sale process alleviates this negative social impact. The process puts the control back in the seller’s hands so that they can get back on the road to financial recovery and start providing for their families. In the battle of the two evils, a short sale always wins!!!

Click here for more information regarding Short Sale vs Foreclosure effect on credit score, credit history and future loan ability.

IMPORTANT NOTICE: Keller Williams Realty Sonoran Living is not associated with the government, and our service is not approved by the government or your lender. Even if you accept this offer and use our service, your lender may not agree to change your loan. If you stop paying your mortgage, you could lose your home and damage your credit rating.

Posted in: Distressed Property, Foreclosure, Home Owner, Mortgage Help, Seller, Short Sale, Underwater, Upside Down