Q: I just listed my home for sale as a short sale. But a friend of mine just mentioned the deed-in-lieu of foreclosure to me, and now I’m thinking I should have gone that route. What do you think?
A: Your scenario is not an either/or situation. To anyone who owns a home and owes more on it than it is currently worth — that state of affairs we now curiously call being "upside down" or "underwater" — a deed-in-lieu seems like the best of all situations for sheer speed of closure and minimal effort required.
With a deed-in-lieu, you quite literally hand the keys back to the bank. The bank agrees to take the home back, and you sign the deed over to the bank.
For credit and tax purposes, a deed-in-lieu is identical to a foreclosure. However, because a deed-in-lieu seems to promise instantaneous divestment of a now-toxic asset, it seems vastly preferable to foreclosure — and to the six-plus months of payments a homeowner must miss in most states before a foreclosure becomes final.
Those preforeclosure "mortgage lates" exacerbate the credit damage experienced by those who lost their homes to foreclosure, significantly beyond the credit hit of an actual foreclosure or deed-in-lieu incident itself. And those six months are also anxiety-ridden and suspenseful as owners wait for the shoe to drop — not in a good way.
With those deed-in-lieu basics under your belt, here’s the critical piece of information about the deed-in-lieu process that renders your decision pretty stinking simple. For the same reasons that a deed-in-lieu seems fabulous to homeowners, it is seen as the next-to-the-last resort from the bank’s perspective.
(An actual foreclosure is the very last resort, with its legal fees and occasional problems getting occupants out of the home — but put yourself in their shoes: If any homeowner who was upside down and wanted to hand the keys and the deed back to the bank could, a whole lot of them would!)
So, before a bank will agree to a deed-in-lieu, almost without exception the bank requires that owners jump through several hurdles.
You have to document and explain your financial hardship. You have to agree to get out, as soon as possible. But most importantly, you have to document that your home has been listed for sale, as a short sale if appropriate, for at least 90 days, with no offers. That includes sending the bank a copy of your listing agreement with your real estate broker and the MLS listing, at a minimum.
And the fact is, some banks won’t even approve a deed-in-lieu request with all this. If they think it’s quicker to take your home via foreclosure than to run all the calculations, assessments and negotiations involved in a deed-in-lieu, it might not be an option that is actually available to you.
As a result, if you’re ready to divest of your upside-down home, listing it as a short sale is a prerequisite for ever having a chance at successfully negotiating to sign your deed and hand your keys back to the bank. And if you’re able to get the home sold via short sale, it could be better for your credit and position you to be able to buy another home sooner.
While your friends can be one source of information, my best advice to you is to sit down with a certified public accountant (CPA) or other tax professional and a real estate lawyer — make sure these professionals are local to you, and that they understand your state and local laws and standards of practice. Before you sell your home through a short sale, give it back to the bank via deed-in-lieu or even lose it through foreclosure, it’s critically important for you to be aware of the tax and legal implications of whatever route you take.