Short Sale vs. Foreclosure

by Charlie Allred on May 16, 2011

Some Realtors would say “avoid foreclosure at all costs”.  I do not prescribe to this philosophy.  In some cases foreclosure results in a better position for the homeowner.  However, we always suggest trying the short sale first- most homeowners can avoid foreclosure successfully and create a fresh financial start for themselves.

Short Sales are best if:

  1. The short sale is negotiated so the lender “forgives the excess loan amount or deficiency amount”- this way the homeowner avoids foreclosure and has the entire balance forgiven.  Basically the homeowner walks away with no home debt.
  2. If you have 2 loans on the property- that were NOT purchase money loans.  If you have a HELOC- home equity line of credit, this applies.  In foreclosure in Arizona, only purchase money loans are protected by the “anti-deficiency statute”- meaning if the home forecloses the lender cannot sue you, however, a HELOC loan can sue the homeowner after foreclosure.
  3. If the home is an investment property- investment properties do not qualify for the Debt Cancellation Act by Congress- so with investment properties in a foreclosure and short sale there is a possible tax liability.  This can sometimes be avoided in a short sale.

Foreclosure is best:

  1. When a short sale is negotiated, but your lender won’t “forgive” the deficiency balance & your loan is a purchase money loan.  In this case the AZ anti-deficiency statute will protect you from the lender suing you.
  2. When a short sale is negotiated, but the lender requires a large amount of cash from the homeowner and the loan is a purchase money loan.  This is a personal decision, sometimes the homeowner paying some cash at the close of the sale is necessary, but if the amount of cash required is too large, the homeowner may opt for foreclosure.  Some homeowners would rather not have the foreclosure on their credit report.

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