Oakland Real Estate: Short Sale VS. Foreclosure, What You Should
Author: Hamid Grinage
Basically a short sale is when a property is sold for a price
which is less than the remaining balance owed on the property.
For instance: A buyer purchased a property in 2005 using and
adjustable rate or interest only mortgage that was due to reset
in two years. So today, the interest rate adjusts, causing the
monthly payment to rise by 25-50%. This is one scenario, another
one could be that the buyer simply lost a job or had some other
financial hardship which is causing them to have trouble paying
the mortgage. In this situation, once three mortgage payments
are missed the buyer is heading toward foreclosure.
Sometimes a buyer can renegotiate the terms of the loan and have
the lender add the past due amount to the "back end" of the loan
and have you pay it off. This is done on a case by case basis.
One alternative is for the buyer to refinance into a better
loan. Unfortunately this is rarely possible, because now the
buyer has missed payments and has worse credit than when they
started, not to mention there is likely no equity in the home.
Another alternative is for the buyer to file bankruptcy, which
we all know is a serious endeavor which should be avoided if at
all possible. It will leave the buyer with no credit for many
A third option is to simply let the house go into foreclosure
and walk away. This option will leave your credit ruined for 7-8
years and make it highly unlikely that you will be able to to
purchase another home within that time frame.
So in reality, the best option for someone in this situation is
to hire a Realtor and try to proceed with a short sale. This
way, you get the property sold before it forecloses and
basically ask the lender to forgive any left over debt after the
home is sold.
It's called a short sale because the lender will end up "short"
on recovering the money they lended on the property. This
however is good for YOU because you can get out of the property
and not be responsible for the remaining debt. On the other
hand, you may be subject to being taxed on the amount that you
are forgiven. So if you owe $600k on your property, but that is
all you can get for the property on the market, then after real
estate commission and other fees you will end up with around
$550k or so. This means the lender must agree to forgive the
$50k balance, which would mean that the IRS will treat that $50k
as taxable income. I would say that being taxed on 50k which is
being forgiven, is better than having a foreclosure or
bankruptcy on your credit any day.
In a short sale, the property needs to be priced attractively to
make it move quickly. This doesnt hurt the seller, because
remember they are facing losing the property anyway, and the
money is going to the lender, not the buyer. For this reason,
it's the lender who accepts or rejects the offers that come in,
and they also must approve the commission being paid to both
real estate agents involved. This is one reason why many
Realtors refuse to work short sales, they can end up working for
months and never get paid if the lender doesn't approve the
commission (or the sale itself).
Short sales are complex and uncertain, but the bottom line is
that they can be the best option for someone facing losing their
<a href="http://www.oaklandhomespecialist.com">Oakland Real
Estate</a>. If you would like more information on short sales,
contact me at your convenience.