Oakland Real Estate: Short Sale VS. Foreclosure, What You Should Know

Basically a short sale is when a property is sold for a price which is less than the remaining balance owed on the property.

For instance: A buyer purchased a property in 2005 using and adjustable rate or interest only mortgage that was due to reset in two years. So today, the interest rate adjusts, causing the monthly payment to rise by 25-50%. This is one scenario, another one could be that the buyer simply lost a job or had some other financial hardship which is causing them to have trouble paying the mortgage. In this situation, once three mortgage payments are missed the buyer is heading toward foreclosure.

Sometimes a buyer can renegotiate the terms of the loan and have the lender add the past due amount to the "back end" of the loan and have you pay it off. This is done on a case by case basis.

One alternative is for the buyer to refinance into a better loan. Unfortunately this is rarely possible, because now the buyer has missed payments and has worse credit than when they started, not to mention there is likely no equity in the home.

Another alternative is for the buyer to file bankruptcy, which we all know is a serious endeavor which should be avoided if at all possible. It will leave the buyer with no credit for many years.

A third option is to simply let the house go into foreclosure and walk away. This option will leave your credit ruined for 7-8 years and make it highly unlikely that you will be able to to purchase another home within that time frame.

So in reality, the best option for someone in this situation is to hire a Realtor and try to proceed with a short sale. This way, you get the property sold before it forecloses and basically ask the lender to forgive any left over debt after the home is sold.

It's called a short sale because the lender will end up "short" on recovering the money they lended on the property. This however is good for YOU because you can get out of the property and not be responsible for the remaining debt. On the other hand, you may be subject to being taxed on the amount that you are forgiven. So if you owe $600k on your property, but that is all you can get for the property on the market, then after real estate commission and other fees you will end up with around $550k or so. This means the lender must agree to forgive the $50k balance, which would mean that the IRS will treat that $50k as taxable income. I would say that being taxed on 50k which is being forgiven, is better than having a foreclosure or bankruptcy on your credit any day.

In a short sale, the property needs to be priced attractively to make it move quickly. This doesnt hurt the seller, because remember they are facing losing the property anyway, and the money is going to the lender, not the buyer. For this reason, it's the lender who accepts or rejects the offers that come in, and they also must approve the commission being paid to both real estate agents involved. This is one reason why many Realtors refuse to work short sales, they can end up working for months and never get paid if the lender doesn't approve the commission (or the sale itself).

Short sales are complex and uncertain, but the bottom line is that they can be the best option for someone facing foreclosure. If you would like more information on short sales, contact me at your convenience.

Hamid Grinage is a Realtor with Prudential California Realty
Oakland California Real Estate
Oakland Condos