Is it better to do a short sale or foreclosure? I am leaning towards a foreclosure even though I have a

Asked by Diane Friedman, Monrovia, CA Fri Aug 8, 2008

hardship to qualify me for a short pay--it seems that it is an arduous process, and the realtor will get his ridiculously high commission!

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Shel-lee Dav…, Agent, Rolling Hills Estates, CA
Fri Aug 8, 2008
Diane:

Here are the pros and cons of a short sale (SS) vs. a foreclosure (FC).

SS - you take control of your life
FC - the bank has full control of your life
SS - you can dictate, to a greater extent, when you move
FC - the bank kicks you out after the trustee auction on their schedule. Sometimes the marshall comes and escorts you out with whatever you can carry, sometimes the bank gives you a certain amount of time to move out. No guaranees
SS - you can tell your neighbors any story you want about why you are selling or moving
FC - the bank publishes the foreclosure sale in the newspaper and posts a notice of auction on your front door
SS - the negotiations with your lender and how far behind you are in your payments is between you, the real estate professional, and the bank
FC - your loan amount & how far behind you are in your payments is public record
SS - we are seeing 80 - 120 pt hit on your credit score, and it is possible to negotiate this with the lender (number does not include hit for "late payments" and varies from person to person and lender to lender)
FC - we are seeing 200 - 240 pt hit on your credit. You are not talking to the lender so there is not room for negotiation available.
SS - You get nothing from the sale of your home
FC - You get nothing from the sale of your home
SS - You can walk away with your dignity intact
FC - All bets are off regarding dignity, when the marshal throughs you out

I could go on, but this should give you a good picture. If you want more comparisons, you can contact me directly. I will be happy to walk through your scenario with you. I just did that for someone on the East Coast via telephone. He sent me a thank you e-mail and said "When I got off the phone I felt as if a load had been taken off of my shoulders." We can do the same together.

Conclusion, if you want to stay in control of your destiny - do a short sale. If you want to abdicate control of your life to someone else - do a foreclosure.

Just remember in a SS or a FC you, the seller, walks away with nothing. AND In a SS your listing agent will put in many long hours to negotiate your short payoff and get the best results for you. I know, when I do a short sale it takes about 5 - 10 hours to gather information and put together a good short sale package, then you have to market the home and get an offer (standard real estate stuff), then spend hours on hold getting through to the bank, negotiate, negotiate, negotiate and submit justification for the price offered by the buyer (on average 20 - 30 hours for this part), submit more information, check over the final approval letter to insure that your client's assets are covered (that would be you) . By the end of the process the Listingn Agent has 50 - 75 hours into the short sale portion of the process and then the bank cuts your commission to 2 - 2.5 %. Trust me, if it was not because my client want and need my help, I could work a lot less and make more by not doing short sales.

Hope this helps you understand both SS and FC and enlightens you to the process of doing a SS. Make an informed decision, get past this difficult time in your life, and then Dare to Dream.

Shel-lee Davis
Real Estate Consultant
RE/MAX Palos Verdes Realty
4 votes
Sylvia Barry,…, Agent, Marin, CA
Fri Aug 8, 2008
Hi Diane:

The other agents listed very detailed information about the advantages and disadvantages of a short sale vs. foreclosure.

Without repeating the answers, I want to say a couple things about your two concerns: one is the arduous process, the other is the commission -

1) The process is not any different from a regular sale. You still have to get your house for sale, but you will not want to spend money doing updates, repairs, etc. You want to show the house in a good, immaculate condition just like any other sale, and allows showings. The many conversations and negotiations you hear about are true, but they will all be conducted by your agent with the lenders. The negotiation will be with Lenders rather than with buyers, most likely. He/she will report the progress to you.

2) On the commission side - The commission you listed with the agent is just a starting point. The lender usually negotiate the commission with the agents after that (the only way to go is down not up).

The work for the agent is a lot - On my last short sale, there was two failed escrows (the buyers could not wait but now a days, failed escrows are normal even without a short sale), but the net effect to the sellers is that they signed two more contracts. Again, all the work is on agent where I had to resubmit everything to the lenders and talked to the lenders. The advantage to my clients is that they were able to stay in the home they liked for 8 additional months. I ended up calling the lenders every couple of days (not talking about being on hold) on their behalf. This is not talking about marketing the property, etc.

At the end, the seller was very glad that he was able to (short) sell the house instead of being foreclosed upon. During the period, both he and his mother (who lived with them ) were able to find a rental property and do things according to their own schedule and plan.

And the other thing is, if the house ended up being foreclosed upon, the agent gets nothing. Some of the agents actually don't do Short Sales. I personally don't mind and actually like it because I feel I am helping the sellers who got into this situation unwittingly .

Sylvia
2 votes
Erik Hansen, , Orlando Fl 32828
Fri Aug 8, 2008
I have read through these answers, and agree with the options provided! My advice is to ALSO talk to your CPA about the tax consequences. If you can complete a short sale transaction without major tax liability, that is the way to go! Good luck!
1 vote
Ute Ferdig, Agent, Newcastle, CA
Fri Aug 8, 2008
Hello Diane. I would highly recommend that you seek advise from a tax professional in making your decision as both foreclosure and short sale can have tax consequences. The real estate agent commission should be the least of your concerns as the commission is paid for by the lender whether it's a short sale or a foreclosure. You should only look at what's best for you and that will depend on the facts of your situation. Yes, a short sale is a tideous process, but most of the work is done by the listing agent (that's why he/she gets paid the big bucks). You may also want to see if your lender(s) is (are) willing to restructure your loan(s) which might help you stay in your property at least until the market turns around and you can sell your house for enough money to pay off the loan(s). If you do choose the short sale route, you could negotiate an unsecured promissory note for the deficiency payable over 20 years with 0% interest. There are a number of options that you can explore that may soften the blow. No matter how you look at it, it's not a good situation and you want to make sure that you get the information necessary to help you make the best decision considering the circumstances. There's help out there and I would encourage you to take advantage of the resources available to you. Good luck to you.
1 vote
Dyanna, , California
Fri Aug 8, 2008
Diane everyone here is right on point, but I have one more thing to add. According to Fannie Mae and Frediie Mac, if you walk away from your home, foreclosure, it will take 5-7 years for you to be able to purchase again. Now if you do a short sale, it will take 2-3 years for you to be able to purchase. Everyone here gave great pointers!

Dyanna
1 vote
Don Tepper, Agent, Burke, VA
Fri Aug 8, 2008
From your perspective, it's better to attempt a short sale. Yes, you're right, it is an arduous process. Still, it's not as bad for your credit score as a foreclosure.

As is noted below, the Realtor is very likely to get a reduced commission and will have to work very, very hard for it.

However, if you feel that Realtors don't deserve their commissions, then you've got another option: Try the short sale yourself. You can try selling as a FSBO and prepare all of the short sale package yourself. Honestly, your odds of succeeding that way are small, but that's one possibility.

Or, as you say, just go with a foreclosure. It's easier and simpler. (On the other hand, when the bank puts the property back on the market as an REO, the bank will be paying the Realtor's commission. So you won't be avoiding that...just postponing it.)

Meanwhile, though, have you spoken to your lender about renegotiating your loan, or forebearance? That'll hurt your credit less than either a short sale or foreclosure, and there's no Realtor commission.
1 vote
John Hickey, Agent, La Crescenta, CA
Fri Aug 8, 2008
Leaving aside commission for a moment, let's just concentrate on you.

Foreclosure & Short Pays both affect your credit record. By most accounts, credit agencies & lenders assign a higher penalty for a longer period of time to foreclosures than for short sales. Consequently, the cost of credit will be greater for someone who has had a foreclosure.

This will follow someone for years when the buy a car, insurance, homes and so on. In the past few years employers have begun reviewing credit reports as part of the hiring process so it may have an effect here as well.

So, if you don't thnk any of that will affect you a foreclosure might be the way to go since a short pay involves so much paperwork

Now, regarding the commission. You'll be relieved to know that lenders in a short pay are the most hard-ball negotiators on commission. Rest assured that your agent's commission will be cut to the bone.

If you decide that saving a little bit of your credit standing and reducing your cost of credit for the next five or six years is worth going to the trouble of the paperwork be sure to get the best agent you can find to help you through the process. Your agent really will earn their keep!

Good Luck,

John Hickey
Dilbeck Realtors, GMAC
818-541-7311
John@JohnHickey.com
http://www.JohnHickey.com
1 vote
Steven Porzio, Agent, Holmdel, NJ
Fri Aug 8, 2008
A short sale occurs prior to the Foreclosure and to keep the property from Foreclosing. As long as the lender is on board with the short sale, this could be a much better transaction, depending on the State that you live in. The commission is paid by the lender, and trust me, he will earn every bit of the commission because a great deal of the work to bring the Contract to the lender for approval is done by the realtor. I would suggest you only use a realtor who is experienced in short sales.
1 vote
GARY RICCO, Agent, LONG BEACH, CA
Sat Jun 27, 2009
For anyone else who may have this question, here is food for thought.

Unfortunately most Realtors don't have the education or training to answer this question. But to sum it up quickly, You need a Realtor that can analyze your financial situation, show solutions to minimize your financial loss and limit the damage to your credit history. This will shorten the time it will take to recover from the hardship and repair you credit history.

I offer anyone in the North Los Angeles area free consultations. By doing alittle homework you can verify the information I provide and you won't have pay attorney fees or loan modification fees. Go to my website at http://www.riccosellshomes.com and click on the Short Sale FAQ's link. You can also read some of my blogs here on trulia
0 votes
Andy Bencosme, Agent, Sierra Madre, CA
Sat Jun 27, 2009
For anyone looking for a basic primer on this issue, you can read this article:

http://realestate.aol.com/article/_a/short-sales-vs-foreclos…
0 votes
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