Can I sell my home (i.e. my “primary residence”) for less money than I owe to my bank? The short answer is that “it depends.” If there is only one lender and the short sale price clearly represents the current fair market value of the property, the answer – in Oregon, at least – is most likely “Yes.” If there are two lenders, the issue becomes more complicated, but in many cases, the answer is still “Yes.” Short sales have been with us for several years now. However, it hasn’t been until the last year, or so, that banks have finally come around to understanding that actually, short sales represent a far better alternative than foreclosure in almost all cases. The reasons, for bank and borrower, are the same: time and money. - While all distressed transaction will negatively impact one’s credit, short sales can be completed faster than foreclosures. This means that credit repair can begin sooner with a short sale.
- Lenders are finally realizing that short sales eliminate the title risk that can occur when they take properties back via non-judicial foreclosure.
- In some cases, second position lenders can retain deficiency claims after being foreclosed by the first position lender. The short sale process brings this issue to a head before closing, thus giving borrowers the ability to actually negotiate the matter. Negotiation in advance is a far preferable alternative than having the home foreclose and then waiting to hear from a collector seeing repayment at some unknown time in the future. Remember: The statute of limitations for commencing legal action on a promissory note is six years. This means that the collection company has plenty of time to wait for the borrower to get back on their feet.
- Typically, if a homeowner wanted to do a deed in lieu of foreclosure, the bank will require that they first try to complete a short sale. So distressed homeowners should commence a short sale sooner rather than later, even if they believe it will be unsuccessful. The deed in lieu should be Plan B; the short sale Plan A.
- Most people with significant negative equity are distressed; the short sale process is the fastest way to get past this unpleasantness, since it can be completed sooner than the other two alternatives, foreclosure and deed in lieu of foreclosure.
- Many big banks have significant REO inventory. This means they are incurring millions of dollars of carrying costs that will continue until they can re-sell the home. Short sales do not increase REO inventory since they get the home off their books and into the open market sooner. This savings of time and money is even more significant if the lender is foreclosing judicially, since there is a six-month right of redemption following the sale. (The “right of redemption” is the period, provided by statute, that foreclosed borrowers have to repurchase their home after the sale. This statutory right only has value when the foreclosed borrower had equity, which is rarely the case today.) Nevertheless, this right of redemption means that the property must remain in the banks’ REO inventory even longer following a foreclosure.
- Banks are starting to realize that short sales yield better prices than REOs. According to a recent Bloomberg article, short sale proceeds were 15% higher than foreclosure or REO sale proceeds. (And according to the article some lenders are actually paying delinquent borrowers to pursue non-foreclosure solutions. To read the entire article, go to this link.
- Nonpayment of one’s mortgage is the only way to invite a foreclosure. But if a distressed homeowner first stopped making their loan payments in 2012, the foreclosure will not likely be completed until 2013. We don’t yet know whether the government will extend the 2007 Mortgage Forgiveness Debt Relief Act (which cancels the income tax on debt forgiveness) now set to expire on December 31, 2012. Since a short sale can usually be completed in six months, there is still plenty of time this year to close it before December 31.
- For homeowners wanting to relocate for employment or other reasons, they will generally find the short sale a faster solution than a deed in lieu or a foreclosure, and frequently it can be handled even after they have moved.
- Although some are faster than others, generally, most short sales, once started, actually do result in a successful closing. In other words, unlike loan modification, which can be an exercise in futility, short sales do produce results.
