Our real estate market seems to be shifting yet again. It’s no secret that the banks lose significantly less money if they accept a short-sale offer as opposed to selling the home as an REO.
So, why don’t they pick up the pace on accepting short-sale offers? The reality is they lack the systems to make the process smooth and efficient and, quite frankly, haven’t wanted to throw good money after bad to put the infrastructure in place for a “temporary” period of time.
Well it seems that the “big boys” realize that the short-sale market isn’t going away anytime soon. Mike Kelly, host of KSRO’s “The Real Estate Hour”, has it on good authority from a Sr. VP for REO at Bank of America, that they are in the process of “institutionalizing” the short sale process. (For more great market info from Mike Kelly check out: www.therealestaethourblog.com.)
Wachovia Bank has a great system in place and can close a short-sale almost as quick as a normal transaction. Rumor has it that Wells, the new owners of Wachovia, are adopting the same system for themselves.
So we know that the short-sale and REO markets aren’t going anywhere in the foreseeable future. Now more than ever people are in need of knowledgeable real estate agents to guide them through their options.
There is a lot of bad information circulating about the impact of a short-sale vs. foreclosure to a seller’s credit report. Let’s take a look at the facts so you can advise your clients accordingly.
A foreclosure is by far the greater of these two evils as it relates to credit score. I know that Fair Isaac begs to differ and says they are the same. It’s absolutely not true. Listen, the credit industry is big business and their allegiance is to the people putting money in their pockets, which are the banks.
Here’s the deal, the whole purpose of the credit scoring model is to predict the likely hood that a borrower will go 90 days late on a payment within the next two years. If someone has a foreclosure on their credit report then they, by default (no pun intended), have gone 90 days late and it crushes their credit score by as many as 300 points. Ouch! That’s some serious damage that will take an undetermined amount of time (years…and lots of them) to recover from.
On the other hand, short-sales (if done correctly) will have a minimal impact on the credit score. The average is anywhere from 70-100 points. I’ve even seen one scenario in particular where the client short-sold their home without going late and had virtually no adverse impact on their credit score.
The absolute best piece of advice you can give someone facing the decision to short-sell vs. foreclose is to not let them go more than 60 days late on their payments.
Let me state that again. It is of paramount importance to minimizing the damage to one’s credit report. If they have to go late to get the short-sale approved, or are already late, admonish them to not let their payments get more than 60 days behind.
The other big difference between a short-sale and foreclosure as it relates to future credit implications is that the narrative on a short-sale is “settled for less…” vs. “foreclosure proceedings started”.
I’m not saying that you should be advising that your clients attempt to short-sell their property every time. There are other factors that should weigh into their decision. But I do know that a properly negotiated short-sale will have much less of an impact on their credit score then letting the property go into foreclosure.