Foreclosure vs. short sale.. What are the pros and cons...?

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Real Estate Agent with Realty Direct, LLC/Realty Direct, Inc. 0225079749 VA

Does anyone know how this whole thing works.  Short sale that is.. I understand the fundamental principle of it, meaning the seller is having a hardship wants to sell for less than they owe...but does seller have to actually be in default to sell the home, through a short sale...and how is a short sale less painful than a foreclosure??  If you do have to be in default..then your credit is going in the toilet.....so what are the pros and cons of foreclosure vs. short sale..

I submitted, on July 7, 2007, mind you, a contract for a home that was a "Short Sale"  This is my first experience with this type of transaction.  So I really did not know what to expect.  Well..what's today August 27, 2007, and we still don't have an answer.  When I called the agnet, and asked them what was going on.  I was told that the seller, who has sinced moved out, was trying to avoid foreclosure, by selling the house short, BUT the bank would not even look at the deal until the seller was DELEQUENT...supposedly that is what they have been waiting for...(for the seller to be delinquent)  I am still confused...logic would dictate that the bank would want to tie this loose end up as fast as possible..because, from the looks of things, they have bigger fish to fry than a seller who has remained current, and tries to sell short....I don't get it....with all this trouble..wouldn't it be easier for a seller to walk away and let the house foreclose....it doesn't seem like the short sale is any easier...at least from my limited knowledge... 

 

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Rainmaker
639,790
Marchel Peterson
Spring TX Real Estate E-Pro
Results Realty

Konnie, I think they named these wrong they should not be called short sales but long sales.  I have done two of them both my listings.  Both of them took an extremly long time to get through.  You have to have a really flexible buyer to make it through the transaction.  My most recent one happened this last Spring and it took so long we lost 2 buyers along the way.  A third buyer showed up at the very end right before it went in to foreclosure and we closed in a week and a half. 

Like you I was thinking, why not just go to foreclosure but I talked to a friend who is a lender and she told me it is soooooooo much better for the person's credit to take the short sale hit rather than the foreclosure hit.  My first short sale was over three years ago with a friend who was recently widowed with 3 kids and upside down on her payment.  She has spent the last few years working on her credit and getting back on her feet and was able to buy a home this Spring. 

Personally I don't go looking for these; the two that I did were both past clients and friends but I'm glad I know how to do them should the need ever arise again.

August 27, 2007 09:14 PM
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525,089
Konnie McCarthy
Associate Broker - VA & MD
Realty Direct, LLC/Realty Direct, Inc.
Thanks Marchel...that is the kind of information that I am looking for...so the short sale impacts your credit...but not as bad as a foreclosure....to me they sound almost like the same thing..but I suppose the lenders are splitting hairs... You know with all this going on..you would think the lenders would really try to work with people....do everything they can to keep them in the house....
August 27, 2007 10:42 PM
Rainer
88,928
Catherine Myers
Walnut Creek, CA Real Estate
Windermere Bay Area Properties

I found an internet article that had some good information about this:

http://homebuying.about.com/od/4closureshortsales/qt/060907SScredit.htm

Read the link for information about when you'd be able to buy another house, and very importantly deficiency judgements if this it is not their purchase money loan.

One thing it says is so true a short sale is not for the faint at heart.  It is a tough process.  Plus if you did any funny business on your original loan application you run the risk of some consequences, i.e. I was involved in one whereas the buyers had committed downright fraud on their loan app.  The lender wants tax returns, pay check stubs, asset statements and more.. not an easy or short process.

  • Short Sale
    The affect of a short sale on a seller's credit report is much less damaging. The ding on credit will show up as a pre-foreclosure in redemption status, Steep says, which will result in a loss of 80 to 100 points. This means a short sale with a previous FICO of 680 will see it fall to 580 to 600.
  • August 27, 2007 10:47 PM
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    Konnie McCarthy
    Associate Broker - VA & MD
    Realty Direct, LLC/Realty Direct, Inc.

    Brilliant...thanks for the resource.  You know I had a client, I could not figure out what she was doing, but she was a school teacher, I was showing her $350K homes, and she was looking at $600K homes..she was getting frustrated with me because I was trying to keep her on track...anyway she told me she qualified for a loan for a $680K home...she bought it..it is getting forclosed on...and I wonder what that lender did to get her in the door.  (I never liked the guy, it was someone she had) All this is interesting...hopefully they will start handing out fines to all these knuckle head lenders who jumped into the game when the gettin' was good....they messed alot of people up...

    August 27, 2007 11:07 PM
    Rainmaker
    639,790
    Marchel Peterson
    Spring TX Real Estate E-Pro
    Results Realty

    Konnie- I agree, it seems to me that the lenders would do everything possible to get the short sale through rather than having the foreclosure but that's not the way they work.

    The second buyer's agent on my second transaction thought I was not telling her the truth and I wanted to let her call the lender directly and they would not allow it.  I told the gal at the bank that the buyer was threatening to pull out and she told me that did not make any difference.  It was in the pile to get looked at and it did not matter it would be looked at in the order that it was in the pile.  I guess they just are doing so many that we have to play the game to get it through.  If I have the buyer and they are looking at a home that says short sale I have been relating my experience and so far my buyers have decided that there were other homes they liked just as well.

    I also just recently found out that it does not have to be the listing agent who is the point of contact for the bank.  I have a friend who is a buyer's agent who is working as the point of contact.  The bank will usually only work with one person and I just assumed it was the listing agent.  My friend has been calling me with all kinds of questions as he knows I have done a couple of these.

     

    August 28, 2007 08:37 AM
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