How does one determine whether pursuing a short sale is a good idea?
What are the main factors to consider in evaluating whether a short sale is a good fit for one’s situation? Is there a decision tree or simple flow chart one can follow to decide? Are there any red flag situations when it clearly does not make sense?
Pursuing a short sale really depends upon your specific goals and personal needs. In most cases, the alternatives to a short sale are less desirable. Let me explain.
There are basically 3 paths a homeowner can make if they are upside down on their mortgage:
- They can continue to pay the mortgage and hope that the market rebounds so that when the seller does attempt to sell the house they are no longer upside down,
- They can stop making payments resulting in the lien holder foreclosing on the property, or
- They can attempt to sell the property and request the bank to approve the short sale.
In all likelihood, in these situations the homeowner is wanting to move or sell the home. If the homeowner lets the property go to foreclosure, the homeowner will have a significant effect to their credit score. Additionally, if the homeowner doesn’t lives in an anti-deficiency state, then the lien holder could still pursue the deficiency from the homeowner. The alternative is to pursue a short sale. Pursuing the short sale will have less of a negative effect on their credit score, and likely the bank will negotiate a reasonable settlement on the deficiency. In anti-deficiency states, the homeowner would typically be protected from the deficiency at the foreclosure or Trustee Sale. The banks know this information and most times negotiate a limited or zero deficiency in the short sale.
So in most cases, if the homeowner needs to or wants to sell their property, pursuing a short sale is a more desirable solution than the alternatives.
In most instances, pursuing a short sale is a better idea than having the home foreclosed. Really there are no red flags that would steer a seller away from attempting a short sale.
Prior to July 1, 2011, there may have been homeowners in California who needed to heavily weigh the option of short sale versus foreclosure. Now that Senate Bill 458 covers deficiency on 2nd loans, there is absolutely no reason why a homeowner should not attempt a short sale as an alternative to foreclosure. NO ONE should have to be a victim of foreclosure if there are other ways out of the situation. One of the intangible benefits to a short sale is that YOU, the homeowner, are in control, not the bank. Once the bank moves to foreclose on your home, THEY are in control.
It’s always a good idea to “pursue” a Short Sale. There is no requirement that a Seller accept the terms offered by their lien holders once the approval letters have been issued. It gives the Seller another option to include in their decision about what’s best for their situation – which should be made in conjunction with qualified legal counsel.
I would recommend reviewing the site www.makinghomeaffordable.gov and looking over the HAFA guidelines after first checking Freddiemac and Fanniemae to see if your loan is under either of these. Then with that basic knowledge, a short consult with a real estate or bankruptcy attorney is always good. Many of my clients are confident they know they want to short sale, have come to me and decided against spending the funds to seek legal advice. This is a personal choice. In many states, attorneys are a part of all real estate sales so why not take advantage of their knowledge as well. I receive most of my referrals from attorneys in my area who have counseled clients and recommended short sales.