Short Selling vs Foreclosure

As you can imagine in these times many Bend Oregon Real Estate owners have questions about these two ugly options.  It is my goal to shed some light on the consequences and the processes involved in the short sale and the foreclosure. 

First of all, what is a short sale?  A short sale is a home sale where the selling price and value are less than the amount the homeowner owes the lender.  A short sale involves missed mortgage payments by the homeowner.  To short sell, the homeowner AND the lender must approve the sales agreement and terms.  The lender may retain the right to come after the homeowner for the deficit.  The homeowner will face about a 200 point credit score hit that remains for 2 years and this documentation will remain on his credit record for 10 years however, it is not frowned upon as negatively as a foreclosure. 

What is a foreclosure?  This is where the owner of a home has stopped making mortgage payments and the home has been sold by the lender.  The owner will face about a 200 credit score hit that remains for 5 years and this documentation will remain on his credit record for 10 years. Future loan applications will ask if you have ever foreclosed on a home. 

Next, we should clarify some details.  With each purchase in Oregon there are two involved documents:  1) the Deed, and 2) the Promissory Note.  These documents are part of your closing documentation at purchase.  Basically at closing you promise to repay the loan (Promissory Note) and if you do not, the lender will retain the deed and possession of the home. 

When people short sell their home, their lender must agree to release the deed/possession of the home to the new buyer.  The lender does NOT have to release the promissory note meaning that the lender would be maintaining the right to come after those funds sometime in the next 6 years.  Do not agree to a short sale without proof of the lender’s release of both the deed AND the promissory note.  Otherwise they can come after you for the deficit. 

There are a couple things to consider before comparing these two.  First, is this your primary residence or an investment property?  Second, do you have one loan or more?  Third, who is your loan(s) with and how much is the shortage? 

Is this your primary residence or an investment property?  This is important for tax reasons.  In a short sale situation, the lender may issue a 1099 for the deficit.  If this is your primary residence, there will be no taxes due for this 1099-ed amount.  If it is an investment property, you should discuss tax consequences with your financial advisor.  There are two ways to handle this in order to lessen your tax consequences.  It is possible that with the high property value assigned by the county and the low current values, your accountant will be able to avoid taxes for you on this deficit. 

Do you have one loan or more?  This is important to understand because it complicates a successful short sale process.  An offer comes in, the seller agrees, all documents are submitted to the lender for their consideration.  If there are two lenders, documents must be submitted to both lenders.  The lenders must agree to payoff amounts.  Often the first and the second can not come to terms thus killing the deal.  Often buyers can not endure the extra time that having a second lender involved requires thus killing the deal.  

Who is your loan with?  It has been my experience that some lenders are consistently NOT releasing promissory note obligations.  They are retaining the right to come after their short homeowners for the deficit amount.  They have 6 years to do so. 

If your loan is with one of the other lenders, this could be good for you.  Some lenders ARE releasing their right to pursue for the deficit and will provide this in writing prior to close of escrow. 

How much is the shortage?  Obviously a larger shortage is a more difficult pill for the lender to swallow thus complicating the possibility of a successful short sale. 

Let’s say you have decided to short sale your home.  What would that process mean for you?

1.  List your home for sale with a real estate agent who will publicize using the MLS.
2.  A sign goes up in your yard.
3.  A lockbox on your door.
4.  Your home is published on the internet MLS. 
5.  Buyers will want to see the home accompanied by their agent.
6.  Offers will hopefully come in.
7.  A large packet of your financial information and your accepted offer are submitted to the lender.
8.  45 days to 3 months later, your lender’s negotiator will respond IF your buyer has not backed out.
9.  An appraisal and Broker Price Opinions (BPOs) are performed and presented to the negotiator.
10.  The lender could take 3 more months to finalize a decision as to how much they will let the house go for.
11.  They may ask you to contribute money toward this sale.
12.  They may not release your promissory note.
13.  They may counter your buyers offer.
14.  The sale could close or you could kill the deal refusing to contribute or your buyers could kill the deal by rejecting the lender’s counter offer.
15.  Hopefully you successfully short sell but you could still proceed to foreclosure even after all your efforts. 

If you have a renter, they would need to agree to the lockbox, the MLS and to the  inconvenience of agents showing their residence to potential buyers giving a maximum of 24 hours notice. 

It is not illegal to continue to collect rent from your renter even though you are not using that rent to pay the mortgage.

Let’s say you decide to foreclose on your home.  What would that process mean for you?

1. You quit making mortgage payments.
2. You receive calls from your lender asking when you can pay.
3. You receive notification of the foreclosure date.
4. Once the home has been foreclosed on, the occupant will be notified that you/they have 90 days to vacate.  The occupant will be given 10 days to decide if they want to move out quickly and receive "Cash for Keys" or if you/they want to occupy the property for the full 90 days following this notification of foreclosure.
5. If you have a renter, you will need to let them know you are in the foreclosure process.
6. You may continue to collect rent while the property is in your name. 
 

If you are planning on foreclosing it is not necessary to continue to pay the property taxes.  The property taxes are a liability of the property and not you personally so you do not need to pay them – they will be paid by the lender or eventual buyer. 

Note to Bend Oregon real estate owners:  This is only the tip of the iceberg but I found this information to be helpful to many who are weighing the pros and cons of each. 

I can’t imagine reading the above information and not having questions.  Please feel free to contact me with any and all of your questions. You may email me at This e-mail address is being protected from spambots. You need JavaScript enabled to view it .   It is always my honor to assist with your Bend Oregon Real Estate needs.

Teri Green
Bend Oregon Real Estate - Senior Real Estate Specialist
The Hasson Company
(541) 350-8434
www.BendOregonRealEstatePlus.com