Short-selling VS Foreclosure

The real estate and home lending industries are full of terms that can sometimes be confused or misunderstood. And especially if you are in a financial situation where your home may be at risk, the technicalities and complications of the decisions you need to make and the stress involved can make the whole situation even more distressful.

For homeowners that find themselves behind on mortgage payments, or, because of unforeseen financial difficulty, are unable to fulfill their mortgage obligations, a couple of of terms you may encounter are foreclosure and short-sale. These are very different terms that are often used interchangeably.

In the simplest terms, a short-sale is the sale of property for less than is owed to the lien-holder. This type of situation may occur when a property has become devalued due to neglect and disrepair, the deterioration of the surrounding homes, or, in some cases, the borrower has borrowed more than the home is worth. Whatever the reason, the current real estate market will not support listing the home for what is owed. 

For example, if the homeowner owes $700,000 on the home, but on the current market the home could only be sold for $650,000,  the homeowner would normally need to bring cash to the closing to cover the shortfall. But if the homeowner is facing financial difficulty, coming up with the shortfall is not a likely scenario. The alternative is to ask the lender to settle for the lesser amount, and then release the owner from the mortgage obligation. The lender would be losing money in the deal, but it would likely be less hassle than hiring attorneys and going through the court process for foreclosure, which would eventually necessitate disposal of the property for less than the appraised value, regardless. It’s important to keep in mind that the mortgage company must agree to the short-sale, and there are many details involved in the sale. It’s best to use a Realtor® that is extremely experienced in handling short-sale transactions.

By contrast, a foreclosure is a legal proceeding that is initiated by the lender when the homeowner has fallen behind on their mortgage payments. After a certain amount of time has passed, with ever-increasing delinquency with climbing fees and penalties, the the mortgage company will file a default notice with the Recorder’s Office of the county in which the property is located. This is the first step in the legal foreclosure process.

After the default notice is filed, the property enters a “pre-foreclosure” stage, where the homeowner may still be able to work with the mortgage company to cure the default or pay off the loan in it’s entirety. The homeowner may have to supply financial documentation and budget details in order to secure a payment arrangement or mortgage modification, if they qualify. If the homeowner and the mortgage company cannot come to an agreement on a settlement, then the legal process continues to a legal judgement of foreclosure. The mortgage company will then take possession of the property, if vacant, or commence eviction proceedings if still occupied. Once they have taken possession, the home is either sold at auction or the lender will assume ownership until the property can be sold through a Realtor®.

Facing financial difficulties is extremely stressful, especially when it involves your home. Knowing the right course of action can be challenging, so it’s best to work with your lender, and experienced Realtor®, or a real estate attorney to find out all the options that may be available to you. For more information on short-sales and foreclosure, check out this article on Realtor.com.

My team has significant experience handling distressed real estate throughout the Silicon Valley area, and we have a strong network of buyers and investors that may be able to help. Let my team at Keystone Realtors® meet all your real estate needs. Paul Phangureh has 16 years of experience in buying and selling in the Santa Clara and San Mateo County areas, specializing in the high-end, luxury market, as well as commercial and multi-use real estate. Visit our website at Keystonesv.com for listings and information. You can contact me at 650-924-2544, or email at paul@keystonesv.com.

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