News and Views

The recent decline in home values left a lot of home owners owing more on their homes than they were worth and many were unable to keep up their payments. Others needed to sell for various reasons such as divorce or job transfers. This left only two alternatives for many, a Foreclosure or a Short Sale. 

Many sellers are unsure as to which is the better way to go and my advice is always to consult with your financial advisor and/or a real estate attorney. The observations here should also help.

The questions people first ask when considering giving up their home are (a) what future liability could they have for the debt and (b) what will be the effect on their credit rating. In fact there are other factors that should also be considered.

A Foreclosure can effect your ability to get a job (or sometimes to keep your job). It will show up on a background check by a potential employer and is a serious challenge if you need security clearance. With a Foreclosure on your record, you are unlikely to be able to finance another home purchase for five years, while those home owners who have sold with a Short Sale may be able to finance a home in  two years or even less in some circumstances.

But what about the effect on your credit? It is interesting that the major hit on your credit score is likely to come from late mortgage payments rather than anything else. If you can keep making payments while going through the Short Sale process, the effect on your credit score will be minimized.

You will inevitable have late payments with a Foreclosure of course. Without late payments, the Foreclosure process can’t even get started.

Now as to the question of future liability for remaining debt after Foreclosure or a Short Sale, this is a fairly complex issue and much depends on the type of financing you have.

As a result of recent legislation, when you sell a home via the Short Sale process, all your liabilities should be wiped out. That is regardless of the existence of a second lien on the home. When the first lien holder forecloses on your home, they also lose the right to chase you for any outstanding debt, but if there is a second lien holder, they will almost certainly pursue you and they have a legal right to do so, if they are not a party to the Foreclosure.

The biggest issue may be the uncertainty associated with a Short Sale. You just don’t know if your lender will agree to it. But the good news is that many banks really are getting their act together at last. And the government is also helping in this regard. More Short Sales are being approved these days and we are increasingly seeing pre-approved Short Sales that really do take away a lot of the stress.

If, as a seller, you want to have the best chance of completing a Short Sale, you absolutely have to have a listing agent who has experience in these transactions. More Short Sales fail to close because of the agent’s lack of experience than for any other reason.

Buying a Short Sale

Now let’s look at Short Sales from the buyer’s perspective. How does this differ from a regular home purchase?

The first thing you have to remember that the home owner is still the seller, not the bank, although the bank (sometimes more than one bank) has to approve the sale. But the homeowner should have little concern for the sale price. They will just get to walk away from the home free and clear when escrow closes. Their debts have been wiped out.

The price will be what the bank will accept after an appraisal has been done by them. So at least in theory, you should pay no more than true market value. This should take into consideration that it is an “as is” sale. No repairs will be carried out regardless of condition.

The transaction will take some time. From agreement to the sale by the seller to approval from the bank will typically be between one and four months, sometimes longer. But there are some good buys to be had in Short Sales. A lot of buyers don’t have the patience so you have less competition and that is a big consideration in today’s market where we are so short of inventory.

 If you are thinking about buying or selling anywhere in the San Ramon Valley or Lamorinda and you need advice on any aspect of the process, give me a call and I’ll arrange to meet with you and evaluate your situation.