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Roberta Murphy - San Diego’s Blog

By Roberta Murphy CRS, GRI | Broker in San Diego, CA

Painful Choices: Short Sale, Deed in Lieu or Foreclosure?

Our nation's mortgage meltdown has resulted in many stressed and relocating homeowners wondering what to do. Some are able to renogiate the terms of their mortgage with their lenders, while others are helplessly under water.

They are left to wonder
:

Is it simpler to just let the home go to foreclosure?

Perhaps the lender will accept a deed in lieu of foreclosure?


Or should they go through the uncertainties and aggravation of a short sale?

Fannie Mae’s recent announcement seems to provide some real clarity for owners of homes in default.

After studying the announcement, we can only conclude:  Avoid foreclosures, bankruptcy and deed in lieu of foreclosure if at all possible. It is far, far better to have a short sale–or a pre-foreclosure sale–as a resolution.

Why?

Under the Fannie Mae Announcement 08-16 (released 06/26/2008), short sales or those engaging in pre-foreclosure sales will be cleared to borrow on another home via Fannie Mae in just two years from completion date of the short sale.

This may be painful, but two years is far preferable to the alternative of 5 to 7 years if the home goes to foreclosure and 4 to 7 years if one opts for deed in lieu of foreclosure.

Please distance yourself from anyone advising that there is no difference between a short sale and foreclosure–or that a deed in lieu of foreclosure may be preferable to either.

If homeowners were to follow this disastrous advice, our country’s real estate market would remain in the troughs for at least another five years–and by that time we might have gone through an economic depression of epic proportions.

If your home is in default,  contact a qualified short sale specialist as soon as possible to help avoid the long-lasting consequences of foreclosure. The best buyer for your home may a cash buyer who is in a position to perform on short notice–at no cost to you.

There is even the possibility that your agent and negotiators may be able to get the lenders to drastically reduce or eliminate potential deficiency judgments.

We work with such a buyer–and are willing to forfeit any real estate commission on the sale to this investor group, because they will eventually turn around and list with us. An agent in your area may be willing to do the same.

Wherever you live, it is imperative that you act immediately if you are in danger of losing your home.  If you let it go to foreclosure, you could be throwing away buying opportunities for the next five or so years.



Comments

By Jamie Glenn,  Thu Jul 10 2008, 20:28
Roberta, I think you make some really good points. It really baffles me that our society has come to accept walking away on an obligation that you committed to. The news media focuses a lot on the number of foreclosures, even these numbers are sometimes misleading as most don't understand notice of default vs. auction vs. bank owned.

I have not seen much talk or reporting on short sales, so I applaud posts like yours the inform distressed home owners of other options. I think real estate professionals can provide a great service by making owners more aware of short sales and the trade offs with foreclosures.
By Roberta Murphy CRS, GRI,  Thu Jul 10 2008, 20:38
Jamie: I think short sales kind of fly under radar and are difficult to report. But as I see it, they are the best alternative available to those who cannot keep their homes. A short sale is settlement of debt. If people keep other credit obligations current and maintain their credit, they should be able to purchase again within a year or so.

This will be crucial to the recovery of our real estate markets.
By WINSTON WANG,  Fri Jul 11 2008, 16:36
I have seen a listing where the asking price is below original transfer value and yet, it is not listed as a short sale. This is most likely done to make the house attractive compared to other short sales and foreclosures in the neighborhood. Perhaps the seller is coming up with the cash to pay off the difference in the loan. If so, that appears to be another alternative without taking a credit hit.
By Roberta Murphy CRS, GRI,  Fri Jul 11 2008, 20:25
Winston: It would seem there is a disclosure problem when the short sale status is not disclosed--unless, of course, the seller is going to make up the difference. We are very careful to disclose short sale status, because buyers must be prepared for uncertainties and delays--and agents may be facing commission cuts.
By CJ Brasiel,  Mon Aug 25 2008, 11:02
Great points Roberta. I would also add the advice to the home owner to not wait until they are in default to contact a short sale agent. We have seen examples where a credit ding was reduced greatly and some never recorded when the home owner was able to short sale the home before a notice of default was given. If a home owner knows that they will not be able to make the payment in the next month or so, I recommend they call now.
By Roberta Murphy CRS, GRI,  Wed Aug 27 2008, 14:03
CJ: I second your advice. It also helps when homeowners can put closure to difficult chapters in their lives.
By Norma,  Mon Oct 13 2008, 08:47
I am considering a deed in lieu for an investment property that I have and have
not been able to sell for 5 months, do I need an attorney to represent me or
can I just do this with the bank and myself? thank you any advice you can give me.
By Roger Bequette,  Mon Oct 13 2008, 09:56
Have you contacted the holder of the loan yet? Before you make up your mind to take any action with regard to not honoring your loan, contact the holder of the note (bank, S&L, hard money lender, etc) to see what can be done that is in the best interest of all concerned. In this market the lenders are more receptive to working out a new payment plan then to have another property on their books and, what looks good in the short term may come back to visit when the market does come around and you were wishing you still had that property to sell.
By Norma,  Mon Oct 13 2008, 11:22
i have not been able to make my payments for the last 5 months
and i did advise them of my intentions. My realtor also suggests
that i do this before they foreclose.
By Theresa Gali,  Mon Oct 13 2008, 22:55
Aloha from Hawaii, we bought our condo 3 years ago and we have been paying 2,500 dollars a month we can't afford it anymore, my husband just recently found out that his shifts is reduced and we may not be able to pay our mortgage anymore for next month what would be best for us to do? Should we do the short sale or the deed in leiu of foreclosure there's is no way we can afford i work in the hospitality industry and we have been experiencing a very slow occupancy. thanks for any advice.

Theresa from Hawaii
By Steve,  Mon Oct 13 2008, 23:28
Sorry to hear of your situation Therasa.

From a real estate agent you'll hear an auto-pilot response of 'short sale!!'. In actuality your credit will be impacted the same regardless of whether it's a short sale, deed-in-lieu or foreclosure. You'll take an equal hit to your FICO regardless. See:
http://www.myfico.com/CreditEducation/Questions/foreclosure-alternatives-fico-score.aspx

The only possible difference is you may qualify for an insured mortgage sooner following a short sale than a foreclosure. Fannie Mae got real fearful of the 'walk aways' and enacted new policies to do their best to scare people to pay into insurmountable debt as long as they could coax them to. At a minimum, be wary of the motives here.

Without knowing all your finances (which is probably for the best on a public internet board) it's impossible to respond to your situation with any accuracy. I'd highly recommend you consult with an attorney or CPA who can review your unique position and provide an accurate assessment of your best course of action. You're unlikely to find unbiased advice around these parts.
By Norma,  Thu Oct 16 2008, 10:36
hi Theresa,
To do a deed in lieu, some banks like mine, require that your property is listed with
a broker for a minimum of 3 months showing that you made an attempt to sell, that
you lowered the price, etc. You need to check with your bank to see what their
requirements are before you make a decision and then you need an attorney just to
be sure that years later they dont come after you for payment. I am exactly your same situation.
Today I sent my papers to the bank to see what happens.
By David Baum,  Thu Nov 6 2008, 07:34
Roberta,
In California purchase money loans are non-recourse. Walking away provides people protection from further deficiency judgements. A short sale does not unless it contains a written release stipulating that there will be no deficiency pursued. Each lender has different policies and some will put this in writing while others won't. Blanket advice is very dangerous as each case is different Clients need short sale representation that understands the intracacies of the federal and state laws, that representation should include an attorney working hand in hand with an agent. That agent needs to be ready to tell their client that they should consider walking away from an improper short sale acceptance letter. Most agents wont walk away from their commission checks at this point. Clients need one that will.
By Voices Member,  Tue May 25 2010, 11:30
Write more great articles like this Roberta. Richie
By We Buy Properties For Cash,  Tue Aug 17 2010, 00:25
Are you in danger of losing your land due to foreclosure and you only have 90 days either to buy the house back or risk being homeless because you wanted to save some value out of it? If you answered YES then we can be of help. How? Simple, we can buy your property and settle in CASH and it CAN be done within 30 days or less. We can facilitate you get out of that situation and walk away from everything and look forward to a brighter future. Whether its divorce or foreclosure or even death in the family - there’s always a way to resolve money matters when it comes to your homes. I don’t like to make it sound simple - but definitely is! All you need to do is pick up the phone and call 267-970-0890 or email fmvprops@gmail.com and we’ll do the rest to save you from misery or even the humiliation of getting a bad credit score for 12 years!
By Pompapah,  Sat Nov 27 2010, 10:33
The credit bureaus have made it clear that short sale is much less damage to a FICO. Make sure the investor or other purchaser can negotiate away the mortgage deficiency based on hsrdship.

Mortgage modification is a do it yourself project.

The solution to ensuring a good faith mortgage negotiation is proving to be the REST Report. The Rest Report calculates an unbiased Net Present Value using bank software. The lender can't dispute the calculations. The REST Report has been sanctioned by every single judge who has ruled on it. The software always recommends modification or short sale since those solutions benefit the mortgage investor and homeowner the most.
Click for Information on the Do it Yourself Mortgage Modification
By David & Samuel Rifkin,  Mon Jun 17 2013, 14:02
Thank you for this great information.


Samuel Rifkin
By Timothy M. Garrity,  Wed Jan 8 2014, 13:47
How times have changed.
By Roberta Murphy CRS, GRI,  Sun May 4 2014, 07:45
Tim, Indeed they have! Today we have inventory shortages and dwinding supply of "shadow inventory."

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