A Conversation on Short Sales vs. Strategic Defaults
Original Question:
I have heard that a short sale might be better than a strategic
default. However, they are painfully slow and I’m really not sure they
have any “different” effect on surrounding homeowners: it’s still a
massive loss of value in the area.
Whether they short-sell or not, aren’t they going to be penalized
by future lenders anyway? I’m not entirely sure there’s much of a
different in the “outcome” at the end of the day – short sell or walk
away, they are going to suffer in creditworthiness.
And don’t short sales actually harm the bank “more” than the
borrower (perhaps) because it drags out the timeframe before the asset
can be put on the market, where as a walk-away can put that home on the
market right away – at TODAY’s possible sales price – rather than weeks
more of declining value.
Steve:
I can fully understand your overall point. However, as always, the devil is in the details.
1.) There are VERY HEFTY penalties to a strategic defaulter vs. a
person who short sales (ex. Fannie Mae has decided that they will “lock
out” any strategic defaulter from getting a mortgage for a minimum of
seven years and will also charge them with EVERY expense incurred during
the foreclosure process).
2.) The average short sale sells for 85.3% of full value.
Foreclosures sell for an average of 66% of full value. Every time a
house goes to foreclosure vs. a short sale the neighborhood loses that
19.3% equity difference when these homes are used as comps.
Again, I understand your overall point. I am just worried about future ramifications.
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