Home Ownership - The Pros And Cons Of The Short Sale

There is no question that with the current downturn of our economy, the real estate market has been left in a state of disarray. Whereas home ownership used to be a large part of the American dream, over the last three or four years it has more closely come to resemble aboulder hung around the necks of many folks. Home values have continued to drop, leaving homeowners in the lurch, owing far more on their homes than they are currently being appraised for. The end result is exciting and appealing for those looking to purchase a home (you can pick one up for the proverbial song), but disastrous for anyone looking or needing to get out of one.

In the real estate world, the term “upside down” is used to describe any scenario where you owe more on your home, property, or vehicle than it is worth. If you have lost your job, or if other circumstances have arisen that make it impossible for you to continue making payments on your house, the usual end result is foreclosure, the bank repossessing the home and evicting the occupants.

The most obvious solution in such cases would be to sell your home. However, with the glut of homes currently flooding the market, that is not going to be easy. The real estate world is filled with stories of people who put their homes on the market only to watch them sit…..and sit….and sit….for months at a time without so much as a nibble.

The other solution is what is known as a “short sale”, where the home or property is sold for less than the balance due on the mortgage.   The lender does take a loss, but not as severe a loss as they would if  they foreclosed.   This does get you out from under a home that you can no longer afford, but is it the best option available?

You should always consult a professional real estate advisor before making such a decision.  Here are a few of the pros and cons to consider with short sales:

The Pros:

-              It eliminates the possibility of foreclosure.  Foreclosure is a stressful and time consuming process for all involved, sometimes taking up to a year or more to complete.

-              Unlike foreclosure, which takes the situation completely out of the homeowner’s control, a short sale allows the homeowner to retain some measure of control over the process.  If you can find a buyer and successfully negotiate terms with a bank, the negative impact on your credit score may be reduced significantly.

-              While short sales do affect your credit standing, it will not do so as badly as if you had been foreclosed upon.  Less damage to your credit score means you can potentially be able to get back into another house sooner rather than later.

-              Large monthly mortgage payments will be eliminated, giving you the added funds every month to get back on your feet financially.

-              There is always the possibility that the lender may agree to forgive the difference between what you owe and the final price.  Obviously this is not guaranteed, but it is an excellent turn of events and should be taken if offered.

-              You will be able to re-qualify for a new home loan much more quickly than if you had been foreclosed on, due to the less severe impact on your credit rating.

-              If you are not able to continue making your payments or if you cannot work out an acceptable agreement with your lender for a lower payment, a short sale may be the last best option, even if it does mean losing your home and initial investment.

And the cons:

-              While a short sale will do less damage to your credit than a foreclosure, the operative word is “less”.  There will still be some damage to your credit, and the chances of getting another mortgage right away will be slim at best.  There may be a waiting period before you can successfully apply again.

-              The IRS treats the forgiven debt as taxable income.  You may still be required to pay taxes on the remaining debt owed. 

-              The lender is under no obligation to agree to a short sale.  They may very well insist on payment in full.

-              You will have to provide sufficient proof that you are no longer able to make your mortgage payments.  If you have acted irresponsibly, such as simply living beyond your means, it is unlikely that the lender will agree to a short sale.  Legitimate hardships, such as divorce, extended illness, or job loss are usually acceptable, valid scenarios.

-              Despite the name, a “short” sale is anything but.  It is an involved and complex process requiring all the right paperwork, documentation, as well as speed of the lender in expediting the process.  Lenders are not exactly known for being enthusiastic participants in short sales.

-              Once the lender does approve the short sale, it is still dependent on a good offer from a good buyer (i.e. a buyer with good credit that can actually get approved).  Real estate agents may also get smaller commissions on short sales, reducing their enthusiasm for your situation.

-              The bank may still pursue a repayment of the forgiven debt.  

Basically, while short sales may seem like an appealing way out from foreclosure, it is important to remember that there are still negative effects to the process, no guarantee that the lender will agree to it, a considerable effect on your credit score, etc.  However it is a viable alternative to a foreclosure.

Before making any decision on a short sale, contact a real estate professional with a successful record in short term sales.

Billy is the Director Of Content for LeadsByFone, a lead generation company servicing the water mitigation and restoration industry.  He is based in Atlanta, GA.