Short Sale v. Foreclosure

Since the beginning of the current financial crisis, foreclosures have cost the top five U.S. lending institutions $66 Billion, according to Bloomberg, L.P.  Yet, there doesn't seem to be any end in sight.  The banks don't seem interested in a solution and the government hasn't yet been able to do anything to help. 

Do to today's economic climate, many find themselves at the crossroads of either a foreclosure or a short sale, unsure of which direction to turn.  So, what is a distressed homeowner to do? 

In Arizona, a foreclosure is a non-judicial (no court is involved) legal action, that allows your bank to sell your home at an auction, following a default under the loan documents.  A short sale is similar to a typical "sale" of your home, except that your bank (or banks) agree to accept a lessor amount that what is actually owed. 

Here are a few key points:

1.  One of the biggest differences between a foreclosure and a short sale is that Arizona's anti-deficiency statutes (A.R.S 33-729 and 33-814) do NOT apply to short sales; they only apply to foreclosures.  Arizona's anti-deficiency statutes give certain automatic protections to homeowners in the event of a foreclosure.  These protections are NOT automatically available for a short-sale.

2.  A short sale is basically an amendment to your contracts with the bank.  They agree to let you sell your home for less than you owe.  However, it is not unusual for the banks to require certain conditions.  For instance, oftentimes a second lien holder will require some amount of money (in the form of a new promissory note or a lump sum payment at the close of escrow) in order for their permission to proceed with the sale.  Some lenders will reserve their rights to pursue the seller for a deficiency; such an action could happen years following a short-sale. 

3.  In either case (foreclosure or short sale) the bank will issue a 1099-C.  This matters because the IRS considers forgiven debt to be "income" for tax purposes.  There are exclusions and exemptions, but whether or not these exemptions apply should be discussed with a legal or accounting professional BEFORE making the decision to foreclose or short sale.

4.  The presence of a second lien (a second mortgage or a line of credit) can complicate your situation.  You need to understand the difference between "purchase money loans" and "non-purchase money loans".  It matters.

5.  You also need to understand what happens to delinquent property taxes, HOA fees and property insurance premiums.

6.  Both a foreclosure or short sale will negatively impact your credit.  How bad of a hit will it be?  How long with the hit last?  When can you purchase a new home?  All of these questions should be discussed with someone who understands the process BEFORE you move forward.

Foreclosures and short sales can be minefields.  We can help you find your best path forward.  If you have questions on what road is best for you, please don't hesitate to contact us today.