Short Sale vs Foreclosure

This comment was posted for the previous article about Michael Hellickson. We want to respond to the question as well as begin a discussion about this highly sought out topic.

Kevin,

You state “our community as well as the entire US population desperately needs real short sale experts . . . Saving America from foreclosure truly is a group effort.”

As lawyer, broker and licensee I’ve yet to see an explanation of why it’s in ANY borrower’s best interest to do a short sale, particularly given the abuse leveled on borrower and agent alike in reaching accord with virtually any lender. You apparently have a strong conviction that foreclosure is a much worse option. Give me your best argument.

Blair . . .

What are your thoughts? Agree or Disagree?

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9 Comments

  • Seattle short sale team on

    In response to your posting Blair, our hope is that each homeowner chooses what is best for their particular situation. Some homeowner chooses the foreclosure route, and some do choose to pursue a short sale. Here are several reasons that a homeowner or investor might choose the short sale option.
    1. It is believed that a short sale will stay on your credit report for 3 years versus 7 years for a foreclosure. Fannie Mae and Freddie Mac do both say on their website that they will back a borrower who has completed a short sale in 3 years versus 7 for a foreclosure as stated earlier.

    2. A second very important reason is deficiency waiver. A homeowner is potentially able to get a deficiency waiver on both the first and second lienholder as long as the verbiage is in writing on the bank’s approval letters with something similar to “we hereby release the homeowner from any liability and waive any right for us to pursue a deficiency”. This is of course not a guarantee but an important factor in choosing a short sale. In a foreclosure, I understand that a first deficiency is automatically waived, but not a second mortgage and the bank would reserve the right to pursue a deficiency.

    3. Lastly is the burden of having gone through a foreclosure. Many homeowners see doing a short sale as the right thing to do. Many homeowners don’t want to have the impact both financially and emotionally of the foreclosure and would rather attempt to sell it and have some control of which Realtor to use, how much to list it for, and see the transaction through to the end. It is more satisfying to close, even with the sale being a short sale, than losing a home to foreclosure.
    Again, it is up to the homeowner and each homeowner must get council from multiple sources to figure out what is best for their situation. Many do choose the foreclosure route, and many choose a short sale. We are all in this together and definitely need to continue the education process of informing homeowners of their options and let them choose what is best.

    Reply
    • Short Sales only make sense when you have assets you need to protect. For 98% of people:

      1) It’s a myth that a Short Sale does not affect your credit as much as a Foreclosure. For example, once you go 4 months late on a credit card in this country, it’s the same thing as a Foreclosure –at least unless you discharge in Bankruptcy.

      2) Isn’t it less likely that a Collection Agency will go after you for a Deficiency if you go through Foreclosure (because you did not qualify for Modification) and if they do, can you not just file for Bankruptcy as easily as you went through Foreclosure –which, if approved, counters the Foreclosure’s credit impact and cancels the Deficiency Judgment? Now look at the other side, if you take a Short Sale and don’t get a Deficiency Waiver, then the collection agency is going to say “hey, this guy cares about his credit, slap him just hard enough that he will start paying us to avoid a Bankruptcy”

      3) What “burden” of foreclosure? You just pack and leave. Period! Aren’t Shortsales an endless nightmare of dealing with real estate agents –perhaps the same ones that were on the front lines “overselling” the real-estate market to begin with? Nice, honest people those real estate agents, I tell you. Maybe you’re talking about “guilt” or “shame” –it’s the same thing as having a credit card charged-off, only you have to move.

      Reply
      • I have been dealing with Wells Fargo for over a year to get a home loan modification after my divorce. I also put the house on the market. Finally there was an offer in November-and we still haven’t closed on the deal. I have complained to the BBB, and the Comptroller of Funds and the WA state attorney General’s office about how Wells Fargo has been basically wasting my time and my realtor’s time. Every month they have a new excuse as to why the deny the short sale-one month is was because they claimed they didn’t have all 4 pages of last year tax filing, when I have a printout from the fax machine stating that all pages went through, now they are not accepting because they want a letter from my X about child support. Why didn’t they tell us how they wanted it back in November? It is now March and the bank is denying a short sale for something that could have been cleared up months ago.

        It has been a nightmare to try to short sale-I have given up, but the realtor keeps e-mailing me for new things-If I could go back in time, I would have walked from the house as soon as I got divorced and knew I couldn’t afford it-I would have not paid and would have been able to stay in the house for several months free (and could save rent money during those “free months) before an auction date would have been set.

        I advise anyone dealing with not being able to pay the mortgage to tell the bank to F-off-I don’t care if I ever own a house again-I don’t ever want a mortgage again, and I want to deal with banks as little as possible.

        Reply
        • Hello Gilhegirl,
          I am truly sorry to hear of your situation especially as I have seen many stories like this before. According to various sources, Wells fargo has not been the most favorable bank to work with when it comes to a short sale. However, in lieu of this, they are now using the equator system which will greatly optimize their ability to handle their short sales.

          Criticisms on short sales are often involving the difficulty of working with Lenders/Banks/Buyers/Realtors and the inability to close. All parties are not easy to work with and that is exactly why we cannot emphasize more the need for an experienced short sale negotiator to handle and oversee the process. Our team of negotiators have a stellar 90%+ success rate which is why numerous realtors hire our team to close the short sale and leave homeowner’s with the greatest terms possible. Also, our negotiations services are free to you and your agent.

          It is unfortunate that we were unable to help you earlier. If you have any questions, we are here to help. Feel free to email me at Peter@seattleshortsaleblog.com

          Reply
      • In response to the rebuttal
        1. Yes, you are correct as fairly new releases by Fair Isaac, who created the FICO scoring model, shed light on some misconceptions whether a short sale hurts your credit more than a foreclosure, and a short sale and foreclosure do look to have the same effect on one’s credit score. One major point to consider is that a foreclosure still has a worse stigma than a short sale. Some government employess cannot go through a foreclosure or they will lose their security clearance, whereas a short sale is fine. Here are some of the different score effects that were released by Fair Isaac.
        30 days late: 40 – 110 points
        90 days late: 70 – 135 points
        Foreclosure, short sale or deed-in-lieu: 85 – 160
        Bankruptcy: 130 – 240

        2. It is not wise to take the risk of going through a foreclosure and leaving yourself open for a deficiency judgement. This does depend on whether the loan is a recourse or non-recourse loan of course, and whether it is a 1st or 2nd lien. In the State of WA, the foreclosing lender, cannot pursue for deficiency and wipes away that right. The other lender, which is typically the 2nd, can pursue for deficiency. Many times, homeowners are still able to pay their mortgage, but do a “strategic default”.
        We at the SSB feel it is better to pursue a short sale, and get a deficiency waiver, prior to closing the sale. Those 10 words or something similar on the approval letter, “we hereby release our rights to collect a deficiency judgement” are huge and in our mind, better than hoping the lender will not come after you after foreclosure. Our team of negotiators specialize in getting deficiency judgements waived and have been very successful thus far. Lenders are agreeing more and more to do this.

        3. Some people do choose a foreclosure because they don’t have to deal with the headache of a short sale, which, at times, can try all of our patience. Also, you are right, there are Real Estate agents out there who have their own pocketbooks in mind more than the struggling homeowner’s best interest. Firstly, a homeowner needs to consult with an attorney, accountant, and knowledgeable Real Estate Broker. Once these meetings have taken place, the homeowner can make their own determination after understanding ALL the options that are available. I have heard from many attorneys and we have seen that after explaining all the options, homeowners will often choose to attempt a short sale. Many lenders are also taking into account “inevitable delinquency” meaning that homeowners don’t necessarily have to be behind on payments, but it is inevitable in the near future.
        Lastly, if the home is a primary residence, the homeowner is able to stay in their home during the short sale process which may be extremely helpful in the transition process of such a difficult season of life.

        We at the Seattle short sale blog are here to answer any questions regarding the short sale process.

        Reply
  • What kind of license is needed, in Washington State, to be a short sale negotiator?

    and does Kevin Kim have such a license?

    Reply
    • Jim
      In the state of Washington you are required to have a real estate agents license in order to negotiate a short sale.

      Recently the DFI and DOL have cooperated to review former laws and post their interpretation of these laws as it pertains to short sales. Seeing as the number of short sales transactions in Washington State is growing rapidly, they want to regulate it, to assist in the protection of homeowners from possible scams, etc.
      Their findings have recently been posted and below is a brief interpretation of the “recently released guidelines” of the older laws.

      1. If you are an agent who is actively participating as a representative of at least one of the parties as either a listing agent or a buyers agent (co-listing agent suffices) you can negotiate a short sale but may not charge a fee.

      2. If you have a MLO license (Mortgage Loan Originator) you can negotiate a short sale for any transaction in real estate and you may charge a fee, however that fee cannot be upfront.

      After recent conversations with the DFI we have been notified that this is simply their interpretation and they can be challenged in court over their definitions. That said, they (DFI & DOL) have the right to revoke licenses until that time. The risks must be weighed as any homeowner and buyer proceed. The SSB team does carry a real estate license and we are working towards our MLO license presently to be compliant.

      Homeowners and Real Estate Brokers involved in short sales need to be aware of these recently released guidelines. They are well written and very informative in explaining the risks of a short sale. We want to continue to bring the latest news in the short sale marketplace.

      SSB Team

      Reply
  • question: We have gone through bankruptcy with all debts discharged including 1st and 2nd mortgage. We are still in our house, the mortgage co wants us to short sale within 90 days, if it does not sell we sign over a deed to them and leave the house. If it does sell they will pay us a fee. We have not paid the mortgage for over a year. due to loss of job. hence the bankruptcy. We do not know what to do, we don’t believe the house will sell in 90 days and don’t trust the mortgage co to agree to anything, within the 90 days. Therefore not having to pay us a fee. Our attorney advises us to stay here rent free until we save the money to relocate or they ask us to leave. any suggestions?

    Reply
  • Pingback: 3 Reasons you should choose a Short Sale over a Foreclosure — Destin Foreclosure Real Estate

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