Foreclosure vs. Short Sale

[stranger706]

With such a diversified group of people I thought this would a good place to poke around. Here is the situation.

My neighbor & his family are being forced to relocate to another city in order to keep his job. If he stays here, he will get laid off with a slim chance of getting a new job. So about 6 or 8 months ago he put his house up for sale/rent. Our neighborhood is only 3-4 years old and is not completed yet. Just like the rest of the country the houses here have dropped in value to the point that most of us in the neighborhood are upside down on our mortgages, including myself. He has lowered the price to the point of taking a huge loss. He is now to the point that he must leave and start his new job, and find another place for his family in the new city. The problem is he cannot afford to pay the current mortgage and rent in the new city at the same time. Foreclosure is surely on the horizon for them. He was asking me if I knew what a short sale was and how it worked. I've heard of them but thats about it. Apparently they are not a great thing to do but a lot better than going through a foreclosure.

So does anyone have any experience with a short sale? If so, what is the difference?

Thank you and feel free to PM me or post here.

P.S. Being in the military, I may be in a similar situation in a year or two, so this surely has my attention.

 

[Kestas]

I believe a short sale is an agreed upon price between seller and buyer that needs to be approved by the mortgagor, since it means the mortgagor will not get all the money the buyers initially promised. This would make sense where the market value is considerably lower than the remaining mortgage, and the seller will not be able to meet future payments. The mortgagor can always say no.

A foreclosure is where the homeowner stops paying mortgage and the bank kicks the people out.

 

[HarleyGuy]

I was just talking with a real estate agent about this very topic.

In her opinion, many times going foreclosure makes more sense.

When you finance a home you not only sign the deed but a promisary note as well. In a short sale the lender can come after you for many years trying to collect the difference between what was owed and the selling price.

In this economy, and in light of so many home owners being upside down on their mortgages, it would seem the long term impact of a foreclosure may not be as bad as having the lender hound you for years trying to get $$$ from a short sale.

 

[VNTS]

He should talk to his lender about the possibilty of doing a short sale. THe bank may prefer the short sale to a forecloser and your friend may work a payment plan to pay off the difference between what the house does sell for and what he owed.

His credit will not be trashed for the next 7 years either unlike a foreclosure, he may not be impacted at all if he can work out a repayment plan for the difference and stay current.

It is also the professional thing to do rather than walking away from it and stiffing his creditors.

Does he have any offers??

 

[PandaBear]

It really depends on the lender. Like others said short sales is a way for the bank to take a "in theory" smaller loss than having to go through the whole foreclosure process if the owner tried his/her best to get a better price.

The process of short sales get very complicated if he has a 2nd mortgage (i.e. the primary loan has 80% and the 2nd mortgage has 15%). Many times the primary lender will approve but the 2nd lender will not, because they will be the one taking all the loss.

As far as it may sound "immoral", this is part of the calculated risk a bank and its credit default swap / insurance writer take when making such a loan. Many times the lender may make more by letting it foreclose if there's insurance involved.

The process of getting approval is going to be long, and it is usually not going to be faster than just letting the house get foreclosed if he needs to move and cannot afford mortgage at the same time.

 

[greenjp]

In a proper short sale you will not have the bank coming after you for the difference between the sale price and what you owed. A short sale means they have agreed to take whatever the sale price is and eat the difference. This is easier for them than foreclosing (after which they have to turn around and sell the house anyway) and easier on you than a foreclosure and the implied bankruptcy that goes with it.

The real trick is that the difference between what you owed and what you sold for, the amount the bank is "giving up", has to be reported by you on your income taxes. ie, if you owe $200k and sell for $150k, it's like getting $50k of income. Gotta pay taxes on it.

jeff

 

[JHZR2]

my biggest concern for him is that hopefully he can get a mortgage on a new home in his new location before forclosure... somehow, even on a shanty.

Otherwise he may have trouble even renting a place in the future. Id think if he got a mortgage on a new place, he would then be locked in, and not own enough for them to sue him for the new place.

Not sure if this is doable/reasonable, but Ive heard stories of people not being able to even rent due to foreclosure/bankrupcy.

 

[flanso]

On the front page of today's New York Times:
"Owners Seek to Sell at a Loss, But Bankers Push Foreclosure"
http://www.nytimes.com/2010/10/25/business/25short.html?_r=1&ref=todayspaper

 

[PandaBear]

Originally Posted By: JHZR2
my biggest concern for him is that hopefully he can get a mortgage on a new home in his new location before forclosure... somehow, even on a shanty.

Otherwise he may have trouble even renting a place in the future. Id think if he got a mortgage on a new place, he would then be locked in, and not own enough for them to sue him for the new place.

Not sure if this is doable/reasonable, but Ive heard stories of people not being able to even rent due to foreclosure/bankrupcy.


I doubt it is possible. The future lender will know that he already has one mortgage and cannot afford a second home. The requirement for renting is much lower, and as long as you have a job and can pay a deposit, it should be good.

 

[The Critic]

Unless the current home is in the husband's name and the new home is in the wife's name, then it may work.

 

[PandaBear]

How would it be possible if both incomes were not factored into the original mortgage in the first place? If only one income will be able to afford the original mortgage and another income will be able to afford a new mortgage, he wouldn't be bordering foreclosure in the first place.

The bank is smarter than that.

 

[The Critic]

Maybe, but what if the husband purchased the home before they got married?

 

[PandaBear]

Doesn't matter, if husband's income is critical for the new mortgage, and he has been foreclosed/bankrupt/short sales, his credit will be dinged and it will impact the new mortgage app.

 

[saberz]

Only the bank never truly "eats" a loss. They will make money off the property many times over pending the amount of times its bought and sold. Specially if the bank owns the property/development.

 

[PandaBear]

Originally Posted By: Anies
Only the bank never truly "eats" a loss. They will make money off the property many times over pending the amount of times its bought and sold. Specially if the bank owns the property/development.


Not true, many banks got taken over by FDIC when their cash / asset reserve dip below the minimum requirement for their deposit size and risk a "run". The bank still exists, but the share holders are wiped out.

Washington Mutual?

 

[dkryan]

Originally Posted By: greenjp
The real trick is that the difference between what you owed and what you sold for, the amount the bank is "giving up", has to be reported by you on your income taxes. ie, if you owe $200k and sell for $150k, it's like getting $50k of income. Gotta pay taxes on it. jeff


Yeah, it's called "forgiveness of debt" and it's very taxable.

But, I think I'd rather deal with the tax implications of a short sale than have to deal with the major fallout from a bankruptcy in terms of not being able to obtain any resemblance of credit for the next several years.

 

[ArrestMeRedZ]

You need to have your neighbor look at the laws in your state. Most states have a purchase money provision. If the amount owed is from the original purchase (i.e. not refinancing) in a purchase money state, the bank can't come after the borrower for a deficiency in most cases.
If your state isn't a purchase money state (like mine, Nevada), the bank can come after you after a forclosure for a deficiency. Most short sales here, the seller's attorney forces the bank to sign a clause forgoing any attempt to collect anything extra from the borrower.

 

[daves66nova]

Originally Posted By: HarleyGuy
In a short sale the lender can come after you for many years trying to collect the difference between what was owed and the selling price.
Unless you have a written agreement from the mortgage co. stating that they will not go after you for the balance.This is what I had done.(according to my real estate atty), when i did a short sale.