By Loren Keim

Selling your home through a short sale is not for everyone.  There are pros and cons, or benefits and challenges to the process.  Before you do anything, you should consider all the possible options available, which are outlined in the last section, and perhaps consult an accountant, Realtor and even an attorney.

The Pro's of a Short Sale 

            What are the benefits or positive aspects of agreeing to sell a home with a short sale?  Why even consider a short sale?  Isn't it far easier to stop the harassing phone calls from the lender by simply walking away from the home, or giving the home back to the lender in a deed in lieu?

            In many states, when a lender forecloses on a property or takes back the property through a deed in lieu, they still retain the right to go after the home owner for the difference between the amount that the lender sold the home for and the amount that was owed on the home. This is known as a deficiency judgment.  What this means is that the lender may continue to hound you forever until the debt is repaid or you file bankruptcy.

            To clarify, there are laws and regulations in different parts of the country that limit or disallow this practice.  There are also laws being considered that may reduce or impact this practice.  Since this book is being written in a snapshot in time, and the mortgage crisis is fluidly changing, you must consult a professional.  You should always determine your rights and obligations prior to making a decision, and legal counsel is the best method to understand these.

            Another strong benefit is the possibility of preserving some credit for the borrower.  Although we don't have access to the formulas used by credit agencies to determine an individual's credit score, we can guestimate the potential outcome based on our work with customers in short sale situations.  Unfortunately, the credit reporting agencies appear to do a better job hiding their formulas than the government hides their nuclear secrets.

            Our analysis suggests that while a foreclosure may cost the borrower 200 to 300 points of credit score, a short sale may only cost 80 points to 120 points.  Again, you can't take these numbers to be gospel, but it does appear that a short sale impacts your credit significantly less than a foreclosure or bankruptcy, meaning that you can rebuild your credit more quickly.

            One further benefit of the short sale process is that the lender typically pays the bills for the borrower's closing costs to sell the property.  In essence, these costs are deducted from the net that the lender receives at settlement, but they are not paid by the borrower.

The Cons of a Short Sale 

            Several aspects of a short sale concern home sellers, and many that concern potential buyers of homes sold subject to a short sale.   For example, the home owner may go through a lot of work and pain to locate a buyer, negotiate a sale, and fill out all the required documentation of the lender just to be turned down by the lender.  Although we've found this situation to be rare because the lender is more likely to respond with a counter proposal, it is still a risk. 

            The reward of avoiding a bankruptcy or foreclosure on the owner's credit is often worth the risk of a denial. 

The risk for buyers in this scenario is that they could potentially waste sixty or ninety days waiting for an approval on the purchase of a home only to be shot down by the lender.  In many cases, however, the risk is worth the wait.  The potential value the buyer may receive in purchasing the home at a discount may be worth the risk of being denied.

            Another common complaint by home owners considering short sales is that the owner may not receive proceeds from the sale of the home.  "We need money in order to move!"  Unfortunately, the home owner made a commitment to purchase the home, take out the mortgage and made a guarantee to pay that loan back.  In a short sale, we are asking the lender to take less than they are owed.  In some cases, we are asking the lender to take far less than they are owed.  They gave the home owner a loan in the first place, and they are taking a significant loss.  They are certainly not going to give money back to the borrower.  They'll simply foreclose and resell the home at a later time.

Worse than the home owner receiving no proceeds from the sale is when the bank or lender only agrees to accept the short sale if the borrower agrees to take a personal loan for part of the loss.  Although this means the borrower may have to make an additional payment on a home they no longer own, it also significantly reduces their liability on the property and again, can save the borrower's credit from the damage and stigma of a bankruptcy or foreclosure. 

Additionally, the borrower doesn't have to accept the lender's proposal either.  The borrower can decide, after receiving this proposal, to file bankruptcy or walk away and allow a foreclosure.  Typically, if the lender is requiring a personal note or loan for part of the balance, it is because the borrower has sufficient income to justify the expense and, in our experience, the loan is typically for only part of the shortfall.  The lender is trying to share the pain.

One final note: lenders will typically not allow a home to be sold short to a relative or close friend of the current owner.  Most lenders are now requiring "arm's length" clauses requiring the owner to disclose any relationship with the buyer.

For more information on the step by step process, check out "Short Sales: Step by Step" at Amazon.com.

Loren Keim is the author of several books including "Short Sales: Step by Step" and "How to Sell Your Home in Any Market"