Walking away Vs. a Short Sale

(My Original Blog Post: http://www.minnesotainvestors.com/blog/walking-away-vs-a-short-sale/)
What are the disadvantages from walking away in foreclosure Vs. Selling on a Short Sale?

SOLUTION: I believe selling on a properly executed short sale is better than walking away.

DISCLAIMER:
Before I answer questions below, I am not an attorney, a CPA, or an accountant. I suggest you seek legal,and/or competent CPA's advice before making any decisions. What I am typing below is based on extensive research I have read. It's suggested that you do your own research on the topic of he information below, it's in no way to be used as: legal, tax or financial advice.

SELLING SHORT SALE SOLUTION: SOLVING THE PROBLEM SOONER Vs. SUFFERING CONSEQUECES LATER:

With a short sale, typically within only 4-8 months you have put almost everything behind you. A properly done short sale can work towards a satisfaction of the mortgages and promissory notes, eliminating the possiblities of a future deficiency judgment against you personally.  People often like to mention that short sales takes months to complete, but what they should realize  is that the negotiator, agent, or investor is the one that spends 95% of the time following up. The homeowner simply just waits and doesn't have to do much work at all other than allow for the house to be shown and sign some paperwork upfront.  Little to any money is involved on the seller's end, as the bank pays the majority of the fees. Seller's may have to pay any past due associate fees and or required city inspections.  Those are required WHENEVER you sell a house, regardless if you sell on a short sale.

WALKING AWAY CAN HAUNT YOU LATER ON:

Walking away and letting the bank take the house back seems like an easier solution today, to many, as it doesn't appear to take any work, you don't have to keep thinking about the central focus of your problem today, your house. This is because you don't know what you don't know.

"Walking away from your house is like sweeping everything under the rug, eventually, it has to be dealt with, for now you don't have to look at it or think about it, but later it comes back with an escalating number of cockroaches and ants, requiring an exterminator."

BEFORE 2012, THERE ARE SOME TAX BENEFITS:

It's true that there are some great benefits currently before 2012 allowing homeowners some great tax credits on losses due to foreclosure and short sales.  This can be seen through the IRS website IRS.gov under The Mortgage Forgiveness Debt Relief Act and Debt Cancellation
http://www.irs.gov/individuals/article/0,,id=179414,00.html

This is great, but this is independent of the other issues. What I am saying is this only covers taxes, not deficiency judgments and lender collection attempts and wage garnishment. The lender who DOES NOT do the foreclosure by advertisement would like to collect the judgment later.

Note: Remember when you signed your mortgage and got a house loan you also signed a promissory note,  obligating you to pay your creditor/bank/lender.
You heard this goes away with foreclosure, but you only half heard what you wanted to.  Please read below, it is true that foreclosure by advertisement does waive the right by THAT lender to seek a deficiency later.  The key word is THAT.  In some cases, it may be true that only 1 lender likely initiated foreclosure waiving their rights. You may want to seek an attorney's advice on this point.  I suggest getting a satisfaction with the 2nd lender on a property executed and negotiated short sale.

FORECLOSURE BY ADVERTISEMENT:

Foreclosure by advertisement is by far the preferred method of foreclosure because it faster, more simple and less expensive. Foreclosure by advertisement is only for mortgages that include a power of sale clause. A power of sale clause simply grants the lender the right to sell the property upon default.

DEFICIENCY JUDGMENT: THE #1 THING YOU ARE TRYING TO AVOID

"If the foreclosure sale does not bring in enough money to pay off the debt, the creditor may be able to obtain a deficiency judgment against the mortgagor. If the statutory redemption period is six months, however, such a deficiency judgment can be obtained against the mortgagor only if the foreclosure was by action. No deficiency judgment can be obtained against the mortgagor if the redemption period is six months and foreclosure was by advertisement. If the redemption period is twelve months, however, a deficiency judgment can be sought. Finally, even if the redemption period is six months, a deficiency judgment can be sought against any guarantors of the promissory note." -source http://www.extension.umn.edu/distribution/businessmanagement/df7297.html

ONLY 1 LENDER INITIATED THE FORECLOSURE:

Keep in mind that often the 1st lender is the one that initiated the foreclosure. Often there is a 2nd lender in the equation who DID NOT initiate a foreclosure that does have a promissory note signed by the borrower, which they can use later against you.

DECISION TIME:

Typically what's going to happen, is that the homeowner will decide either to:
A: Give the house back (walk away-Foreclosure)
B: Sell on a short sale

BEST SOLUTION: SELLING ON A SHORT SALE:

Often when selling on a short sale the 2nd lender will release the lien/mortgage from the house, so that the seller can sell the house to the new buyer. Notice I said release, not cancel.  What this could do is make it so that the seller owes the 2nd mortgage company even more money down the road.  Often the 1st mortgage lender needs to know about this as the 1st lender only  agrees to give up a short sale discount based on dictating what the 2nd lender will receive.  At this point Private Mortgage Insurance (PMI) and others can get involved as well as the investors backing the loan such as FHA, Freddie Mac, Fannie Mae, servicers, etc.

Short sales can be the right solution, but often are too complex for a homeowner to try to do on their own.  Homeowners may get ahold of the bank after numerous phone calls for months and eventually get the house sold, but often with major mistakes along the way, that they may not catch until years later. That's why hiring a professional short sale negotiator is recommended.

With the above, we discussed doing a short sale, solving the problem and wrapping it up within 8 months or less on average. With a successful short sale you should be able to often receive a satisfaction on the loan. You should be able to minimize taxes, especially before 2012 based on current laws.  The short sale itself has a minimal impact from obtaining your next loan in 2-3 years, provided you qualify in the other required areas.  A full foreclosure could take 5-7 years with Fannie Mae and Freddie Mac, 3 years with FHA, currently less under extenuating circumstances with job loss, or medical. A short sale should have less of a credit score impact than a foreclosure.  Source: http://www.wecallyourbank.com/FREE/shortsalevsforeclosure.pdf

ALTERNATIVE TO A SHORT SALE:
WALKING AWAY:GIVING THE HOUSE BACK:FULL FORECLOSURE

When walking away from your home and giving the house back through foreclosure, your problem doesn't easily go away, in fact, it may linger on for many years. For now it appears to be the easier solution. It may give you more peace of mind today since you don't have to think about it right now.  It's very likely you will have to think about the repurcussions of walking away for years into your future.  Let me discuss some things you have to look forward to, if you choose to walk away Vs. selling on a short sale.

Important Note: Those doing loan modifications, then later walking away after 2012, are even worse off as the IRS tax benefit expires after 2012. See: The Mortgage Forgiveness Debt Relief Act and Debt Cancellation http://www.irs.gov/individuals/article/0,,id=179414,00.html

SOLUTION: Sell on a short sale before 2012 if you are or will be over-financed on your home.

FUTURE PAIN OF WALKING AWAY:
(FORECLOSURE  RECORD AND ON YOUR CREDIT REPORT)
ENVISIONING YOUR LIFE'S FUTURE THE NEXT 20-25 YEARS:
HINT:(IT'S NOT A WONDERFUL LIFE)

YEAR 1:

Dealing with non-stop calls from your banks' collection department

Dealing with threatening debt letters from your bank and notice of default letters

Dealing with late fees and penalties, accruing daily

Dealing with 1st lender, 2nd lender or your association initiating foreclosure action

Dealing with repeated unsuccessful attempts to get through to your bank by yourself

Dealing with an unreasonable and unsuccessful repayment plan

Dealing with giving the bank all of your private financial paperwork which may later be used for collection methods

Dealing with negotiating unsuccessful loan modifications

Dealing with getting calls from your bank at work or to your co-workers, or boss

Dealing with your family and kids getting calls from your bank at home

Dealing with bankers calling neighors or having them knock on your door to get ahold of you

Dealing with a banker knocking on your front door to serve your spouse or kids paperwork

Dealing with unpaid water bills and taxes, eventually becoming liens on the house

Dealing with day to day money stress, affecting your life and your families

Dealing with your house being publically advertised in the newspaper for foreclosure

Dealing with someone to stop by and research the property for the bank for a BPO

Dealing with a sheriff sale deadline date

Dealing with a redemption period time limit and deadline

Dealing with possibly being evicited at the end of redemption

Dealing with possibly cleaning the house very well for your bank under "cash for keys"

Dealing with a possible eviction filed on your record, later making renting hard

Dealing with continued missed payments showing up on your credit report as rolling lates

Dealing with over agressive REO agents trying to get data before the bank owned listing

Dealing with the house listed with a foreclosure sign in the front yard of your neighorhood after the bank gets it back

Dealing with moving out into a cheaper place while in foreclosure, may actually hurt your "bankruptcy means" test

YEARS 2-5:

Receive collection calls from collection companies for years at work, home, during dinner and family time

The other lender(often the 2nd lender) may seek to collect on wage garnishment from the promissory note

Credit score takes a bigger dip with a foreclosure Vs. a short sale

Penalties can accrue for years on unpaid balances

High-interest can accrue for years on unpaid balances

A lender may not hire an attorney to find you for a couple of years

It may take years before you realize that the debt forces you into bankruptcy, starting a new time clock

YEARS 5-7:

Up to 5-7 years from foreclosure to get financing with lenders backed by Fannie Mae and Freddie Mac

Up to 6 years and 180 days for the creditor to file the judgment

Up to 7 years with a foreclosure shown on your credit report

Up to 7 years of employment background and credit checks with foreclosure shown on your credit report

Up to 7 years with foreclosure on your credit report limiting your job optios or not getting certain jobs at all

While in Chapter 13 bankruptcy,repayment plan could show up as rolling lates for years on your credit report

Missing even 1 payment on a 5 year bankruptcy repayment plan possibly incures all interest and penalties since day 1

Attorney's fees can accrue very high the entire time for every letter, or call for many years for unpaid collections

YEARS 7-10:

All discharged bankruptcies, whether a state or federal filing remain on a Credit report for 10 years

A dismissed chapter 13 remains for 7 years

A dismissed chapter 7 remains for 10 years

Bankruptcy affects employment background and credit checks limiting you on certain jobs or getting a job

Bankruptcy affects receiving high-security clearance type jobs

Judgments can be collected upon for up to 10 years

Judgments are paid through bank levies, all types of property liens, or wage garnishment

YEARS 10-20:

Judgments can be renewed a 2nd time for another 10 years

On the 2nd renewed judgment, you could be levied by your bank, receive liens, or wage garnishment

YEARS 20-25:

Through the next 10-year renewed judgment, you may still have money garnished from your weekly paycheck, taking years to pay back

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Please contact: ron@minnesotainvestors.com if you would like to sell on a short sale, or
if you already gave your house back to the bank and need a place to live, and future loan.
http://www.ronorr.com/2010.html
Real Estate Broker
MinnesotaInvestors.com, Inc.