Short Sales Offer Few Advantages to Borrowers

I rarely advise a client to participate in a “short sale” of their upside down residence. The only times that I recommend a short sale is if the lender is willing to waive the entire deficiency or agree to a promissory note that is considerably less than the deficiency judgment would be.  However, may times a lender will not agree to waive the deficiency and the lender or a third party could come after the borrower years down the road.  Because lenders rarely agree to waive a deficiency, there are little if any legal advantage for a homeowner. The only possible “advantage would be the peace of mind of not having to deal with the ownership of an upside down property anymore.  On the other hand the big winners are the lender and the real estate agents.  The lender benefits by having the homeowner market the house and usually procuring much higher sale proceeds compared to the lender’s own fire sale. The real estate broker benefits by gaining a guaranteed commission of usually 3 percent of the sale. The buyer also benefits by acquiring a house at a low price. But, where’s the benefit to the homeowner? The lender almost never releases the homeowner from personal liability so the chances of a lawsuit seeking a deficiency judgment still lingers after the short sale just as it does after foreclosure. Therefore, if anything there is only a false sense of security for the  homeowner.  In reality a homeowner could be served with a deficiency motion within the next five years by the Bank or an entirely new third party.

Another  common reason people give for their insistence in pursuing a short sale before letting a home go to foreclosure is “credit.” Many people insist that foreclosure has a worse effect on the borrower’s credit score, and they assume their credit will recover quicker if they provide the mortgage lender with a buyer in a short sale arrangement. However, there really is no science or method to determining how credit scores work and are affected.

For example,  on Saturday, November 27, 2010, the Wall Street Journal’s, Nick Timiraoas, wrote an article about short sales and credit. He posed the question, “Is a short sale as damaging to a borrower’s credit as foreclosure.” His answer was, “Generally speaking, yes.”  He explained that in either a foreclosure or a short sale a borrower’s credit score will fall by about 100 points according to Fair Isaac Corp.  So, your credit will get hit the same whether you make the effort to short sale your property or simply walk away.