A recent post on Zillow has many people commenting on this topic. I did too but because Zillow limits you to 2000 characters or less, I’m going to flesh out my answer here on our site. For those readers who don’t know yet, a short sale is a real estate transaction where the house being sold has more debt against it than what it is being sold for. Therefore, the house is selling for short what is owed.
There is no one, single best answer for everyone. Typically a short sale has less effect on your credit score than “deed in lieu” or foreclosure but not all short sales are successful and they often depend on the between what is owed and what someone’s trying to pay for the property – as well as whether additional liens are posted against the property. Appraisals can also derail a sale if the appraisal comes in above what is being offered and the bank won’t budge. For them, depending on their financial evaluation of what they’ll eventually lose when comparing the short sale acceptance over a BPO (broker price opinion) that states the house is worth more, might lead them to not close the deal and force the foreclosure. It’s really necessary to sort out why the person is in default and then start looking for what will be the best remedy. If the seller has other assets other than the house, it might be harder to get a short sale approved. Bankruptcy for some is an option, but also can cause some issues that are long term like foreclosure.
For some people it is detrimental to their job to go the route of foreclosure, many companies do credit checks on potential employees and it could limit someone’s future employment opportunities to go this route. Other people can lose an existing job because of foreclosure; such as bank employees, jobs that require security clearances, and other financial services employees.
Loss mitigation departments are typically separate from foreclosure and even short sale departments. Each tends to be its own silo within a bank and often are in different states. Welcome to the world of call centers. We’ve been working with many short sales in our area and it is imperative that people understand what is needed to get the bank’s attention. When the financial storm hit the banks laid off employees, so staffing is short. Then the banks got hit again with the recent refinancing wave with not enough staff to handle it, and now the short sale and foreclosure waves are hitting. Working these kinds of deals requires a lot of patience and due diligence on the part of the seller, buyer, and agents (or others) involved.
An attorney and an accountant should be consulted. In some states there are taxes due on the forgiven debt, even if the IRS has the debt relief act in place for national taxes and extended it through 2012. WA State just had their REET (real estate excise tax) on debt forgiveness removed for this year with the Dept of Revenue (DOR) only just making the change last month. It will likely be reviewed annually.
Bottom line, be sure you’re working with someone who understands and can navigate the process.
