Short Sale vs. Foreclosure: What Are Your Options?

Let me give you a very common real estate scenario, one I have encountered more frequently in the past several years.

Mr. Seller paid $350,000 for his home in 2006. He now wants to sell his home because he [got relocated/got married/wife had their 4th child]. As a real estate agent, I now have the awkward responsibility of telling him his home is currently worth $315,000 in today's real estate market. He then tells me he owes $340,000 on his mortgage and that he doesn't have the cash to bring to closing and asks me what his options are.

If the above scenario sounds familiar, you're not alone. So, here are your options:

1. Bring enough money to closing to cover your remaining mortgage, plus closing costs. For example, you owe $340,000 on your mortgage but you can only sell your home for $310,000. You are responsible for the $30,000 difference, plus closing costs.

2. If #1 isn't an option, then you need to consider staying in your home until you are in a position to sell your home without bringing money to closing. Or, if you have to move you can choose to rent out your home until you're in a better financial position.

3. If neither of the above options sound good to you - you don't have much cash but you HAVE to sell your home and don't want to rent it out - then you need to consider a short sale. Meaning, you need to negotiate with your mortgage company and ask them to cover any shortage in paying off your mortgage after your home sells. Basically, this is like option #1, except you're asking the bank to cover the $30,000 shortage, plus your closing costs. This will negatively affect your credit, and most short sales are huge headaches and can take many months to close, but you will be able to move on to the next chapter in your life without taking a huge financial loss.

4. Just walk away. Many homeowners have chosen to simply walk away from their home and let go into foreclosure. This will negatively affect your credit more so than a short sale, but you won't have to deal with the headache of a short sale, or the ensuing months of paying a mortgage on a home you can no longer afford - or no longer want. This option is very attractive to the rich. e.g. 'Why keep paying on a home that is depleting my bank account and has lost over 50% of it's value since I bought it? Let the bank deal with that headache!' Having enough cash to get them through the next 7 years while their credit score recovers is also helpful.

Our real estate market will continue to force many people to choose between the scenarios I have outlined above. And every one's situation is going to be different. You need to decide what works best given your current financial situation. Talking openly and honestly with your real estate agent is the best advice I can give you. I make decisions based on the information my clients give me. If you tell me you're not in a hurry to sell and you're financially comfortable, then my advice will be much different than if you told me you needed to sell in the next 45 days or you will no longer be able to pay your mortgage, car payment, etc. Unfortunately, people tend to tell me the former, when the truth looks more like the latter.