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Distressed Sellers - Should They Attempt a Short Sale?

Published by Lawrence Roberts | December 26th 2008 | Views:

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A short sale is a property closing where the proceeds from the closing do not satisfy the outstanding debt on the property. The lender must agree to accept less money at the closing table for the closing to occur. From a credit perspective, there is little or no difference between a short sale and a foreclosure. Both a short sale and a foreclosure will show a series of missed payments and a secured credit line (or multiple credit lines) with a permanent delinquency and discharge for what is generally a very large sum of money. Both will have a strong, negative impact on the borrower's FICO credit score that will persist for many years.

Because of the potential for fraud and the bureaucratic tangle of various parties involved, it is very difficult to get a short sale approved. If a lender is going to lose money, they are going to want to be sure the borrower is not selling the property to a friend or relative or engaging in some other kind of fraudulent conveyance. Also, the lender will want to be sure the borrower cannot pay back the money. They often require additional financial information like updated W-2s, 1040 tax returns, and a statement of assets certified by an accountant.

In most cases, the borrower will have to stop making payments as evidence of their inability to do so in the future. Further, the property will also need to be listed for some period of time at a sales price which would result in sufficient funds to payone of several other available properties on the market.

In the end, a short sale is only in the best interest of the borrower if they believe the bank will try to collect on the shortfall from the property sale. If a borrower is in a position where he will have to pay back any losses, a short sale may result in a smaller loss than a foreclosure and subsequent auction. If the borrower is not in a position where the lender either can or will go after the deficiency, there is little incentive for the borrower to even attempt a short sale. In these instances, the borrower generally lets the property go into foreclosure.
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