Short Sales: The Long and Short of It

GOMEZ LAW, APC Aug. 3, 2017

Essential Insights on Short Sales: What Homeowners Need to Know

Facing the dilemma of choosing between a short sale and foreclosure can be incredibly stressful for homeowners. Many are unaware that there are alternative options available. This article aims to provide a clear understanding of short sales and explore other potential solutions to foreclosure.

Understanding Short Sales and Foreclosures

Short Sales Explained

A short sale involves selling a property for less than the amount owed on the mortgage. This process requires lender approval, as they will receive less than the full loan amount. The property must be "underwater," meaning the mortgage exceeds the property's market value. While it may seem like an attractive option to avoid foreclosure, short sales come with their own set of challenges and drawbacks.

Foreclosures Explained

Foreclosure occurs when a lender takes control of a property due to the homeowner's failure to make mortgage payments. In California, this typically involves the Foreclosure Trustee auctioning the property to the highest bidder. If the auction price exceeds the mortgage balance, the surplus is paid to the borrower. However, this is rare for properties that are underwater.

The Reality of Short Sales

Many borrowers are pressured into short sales by real estate agents or unlicensed foreclosure consultants, believing it will protect their credit. Unfortunately, homeowners in default have already suffered significant credit damage. A short sale appears on your credit report as a "Pre-Foreclosure in Redemption" and can impact your credit score similarly to a foreclosure or bankruptcy. The actual effect depends on how the lender reports the transaction to credit bureaus.

Additionally, any forgiven mortgage debt from a short sale is considered taxable income by the IRS, potentially leaving homeowners with a hefty tax bill.

The Stress and Hassle of Short Sales

Entering the short sale process involves hiring a licensed realtor or attorney to negotiate with the lender. This can be a lengthy and stressful process, as the lender must approve the sale price, and all liens on the property must be cleared. If the short sale falls through, homeowners face the immediate threat of foreclosure.

Beware of short sale scams. Only licensed professionals should handle short sales, and homeowners should be cautious of unlicensed individuals offering "foreclosure consultant" services.

Exploring Alternative Options

Chapter 13 Bankruptcy

Many homeowners can avoid foreclosure by filing for Chapter 13 bankruptcy, which allows them to keep their homes and restructure their debt.

Subject To Sales

This arrangement involves selling the property while avoiding foreclosure and potentially rebuilding credit. It can be a viable option for those needing to move but wanting to avoid the negative impacts of a short sale or foreclosure.

While short sales may seem like an attractive option to avoid foreclosure, they come with significant risks and challenges. Homeowners should explore all available options, including Chapter 13 bankruptcy and Subject To sales, before making a decision. For expert advice and assistance, contact Gomez Law, APC, or Stay-Or-Go.org.

Contact Information:

Before proceeding with a short sale, make these calls and explore your options. The consultations are free, and there is no obligation.