Short Sales vs Foreclosures - The Real Deal

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Editor's Note: Short sales and preforeclosures are two home types that constitute a growing subset of bargain homes that also includes properties referred to as "distressed" and "auction" homes.
With many Americans facing the very real threat of foreclosure, many are looking for ways to avoid it. One option, and a topic that has garnered a lot of industry interest, is a real estate short sale. Normally reserved for stocks and other finance-related

Editor's Note: Short sales and preforeclosures are two home types that constitute a growing subset of bargain homes that also includes properties referred to as "distressed" and "auction" homes.

With many Americans facing the very real threat of foreclosure, many are looking for ways to avoid it. One option, and a topic that has garnered a lot of industry interest, is a real estate short sale. Normally reserved for stocks and other finance-related transactions, short sales are becoming an increasingly popular, and common, foreclosure avoidance tactic for homeowners.

To help understand how a short sale would relate to, or differ from, a foreclosure, it may be helpful to point out that short sales can also be referred to as "pre-foreclosure sales" which, as the name implies, precedes the home being officially repossessed or foreclosed on by the lender. That is, the property is sold much earlier than the months it typically takes to reach foreclosure, allowing all parties to move on from the transaction sooner.

It should be noted that there are still negative ramifications for short sales, even if less damaging than those associated with foreclosures and/or bankruptcy. For example, a short sale homeowner's credit will still be adversely affected by settling with the lender. In fact, according to an article by Elizabeth Weintraub on About.com, the effects on credit are about the same for short sale and foreclosure and could drop a sellers overall score by as much as 200-300 points. However, short sales do carry less negative effects than foreclosures. Short sale sellers are widely seen as less risky than foreclosed sellers. Case in point, Fannie Mae recently adjusted their guidelines to dictate only a two year waiting period for a short sale seller to buy another primary residence, while they extended the waiting period for foreclosures to five years. Fannie Mae Guidelines

At its best, a short sale can be a win-win for both parties. For the seller, a short sale provides the opportunity to avoid foreclosure and the dreaded implications that a foreclosure brings, in addition to being able to return to home ownership sooner; alternately, the lender receives most of the value of the loan sooner, and avoids incurring additional legal or carrying costs while the foreclosure process plays out, which can sometimes even take years. And, frankly, short sales are great options for savvy buyers - but these buyers need to not only be looking for a bargain, but have the time and skills to negotiate effectively as well. See "Buying Short Sales".

The net-net of this topic - short sales do present a better option for distressed sellers than foreclosures. However, it is neither an easy or short process, and sellers should seek thorough legal and tax advice when considering this route.

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