What Is a Short Sale Vs. Foreclosure?

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While consumers perceive short sales and foreclosure listings as discount bargains, there are fundamental differences between the two. The property owner, who owes the lender that funded the initial purchase, lists the short sale. The lender who obtains the property after foreclosing typically lists the foreclosure listing. Some property owners use the short sale as an alternative to foreclosure.

Short Sale

  • In a short sale, the lender agrees to allow the property owner to list and sell the property for less than the amount necessary to satisfy the loan balance and to release the property lien. A lender will typically only agree to a short sale if the property owner shows property values have dropped, resulting in the borrower being upside down in the loan. Depending on the state law and agreement between the seller and lender, the lender might be able to issue a deficiency judgment against the seller for the unpaid balance. If the lender does forgive the unpaid balance, the seller may be liable for additional income tax, but there are some tax exemptions if the property is the seller’s primary residence.

Foreclosure

  • When a buyer purchases real estate, he typically pledges the property as collateral on the debt. A foreclosure is a legal process involving selling property to satisfy the debt after the borrower defaults. The foreclosure process varies, depending on the borrower’s loan. In a judicial foreclosure, the property sells under court order, while a nonjudicial foreclosure does not require court action, as the agreement includes a power-of-sale clause.

Credit

  • When a property owner is struggling paying her house payment and is unable to sell the property to pay off the loan, she faces possible foreclosure. To avoid foreclosure, some homeowners pursue the short sale. There tends to be more negative stigma attached to a foreclosure than a short sale, as the foreclosure is often seen as the result of the buyer failing to live up to her obligations, while the short sale is perceived as the result of falling property values, beyond the control of the property owner. Both lower credit scores, as lenders tend to report short sales as settled and not paid in full.

Occupancy and Maintenance

  • The seller typically occupies a short sale house, while the foreclosure is usually vacant. Foreclosure listings might be more vulnerable to damage, especially if the evicted owners left angry. In a short sale, the property owner is legally responsible for the property until he conveys title to the new owner.

Attorneys and Accountants

  • Before proceeding with a short sale consult with your attorney and accountant. Depending on state laws and your agreement with the lender, you may be liable for more expenses in a short sale than a foreclosure, such as taxes or a deficiency judgment.

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