Janice and I went on a listing appointment last week with a past client of ours who is needing to sell her home. She has been there for about 2 years and the ARM on her Vancouver, Washington home is adjusting soon. The new rate will be out of range for her and she is thinking about selling the home before she gets in too deep.
Of course, our first priority was to see if there was a way to help her keep her home. We put her in touch with our preferred Vancouver, Washington lender, but with the current rates, he wasn't able to help.
She decided to hold off on listing the home until she was able to meet with an attorney to discuss any options that she may be overlooking. She called me the morning after meeting with the lawyer and told me that she has decided to let the bank foreclose on the home rather than attempt to sell it. She explained that the attorney had recommended this course of action in order to avoid any tax liabilities or judgments against her in the future.
I couldn't have been more surprised. I know that it seems like the market is crashing down around us but our Vancouver, Washington real estate market has been in the top 10% of performers in the nation. After hearing this, I have to wonder how many of the foreclosures around us are voluntary. I can't imagine anyone choosing to put themselves through this but maybe it is happening more than we think.
I also have to question the tactic for people who are really in need. Is a foreclosure better on the credit record that a short sale. It seems that some sort of note referring the Negotiated Debt Settlement would be more favorable than the much dreaded FORCLOSURE.
photo by Editor B
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Short sales are tougher to do than foreclosures for sure. But they do not effect your credit as bad so... Nice post and good reading thanks for sharing
Mark
From what is happening in Florida selling the homes are in foreclosure are less complicated then the homes in short sales.
Good luck and success
Lou Ludwig
I think lenders and banks would rather foreclose since the lastest information I read stated that only 30% of shortsales actually close. I know that in some states a homeowner that lets their home go into foreclosure can open themselves up to a judgement but with so many homeowners going through foreclosure I don't think its feasible for Lenders and Banks to file judgements against everyone?
Advice from an attorney and from a realtor will never coincide.
She is a perfect candidate for our services. Everyone tries to refinance, which usually isn't possible, then they look at selling. If a person is looking to buy or sell, everyone suggests a Professional to help them, why not suggest a professional to help them in this situation. For those that qualify for our services, we have a success rate of 97% at saving the home. Call me Monday for more details, family here visiting right now.
Something else I have to wonder...did she get a second opinion? One attorney may advise her as this one did, while another may think that is a huge mistake. Attorneys have also advised people to file bankruptcy to save the home, and I have wonder why, as most homeowners lose their home as soon as the bankruptcy ends because of a few things that attorneys don't tell them, or maybe don't even know themselves. I would opt for foreclosure over bankruptcy myself.
I am not an attorney, but this sounds like this homeowner got some uniformed advice to me, at least based on the reasons they said their attorney gave for letting the home go to foreclosure rather than doing a short sale.
While the credit agencies report Short Sales, Deeds-in-lieu and Foreclosures identically, Fannie Mae and HUD do not view them as equivalent. Fannie Mae, in their recent Announcement 8-16 has made clear that it views Short Sales much more positively than it does DIL or Foreclosure. How so?
You will have to wait a minimum of 2 years after a Short Sale to qualify for a Fannie Mae loan again, but you will have to wait a minimum of 4 years if you do a DIL and 5 to 7 years for a foreclosure. I think over time the credit agencies will be modifying their reporting of these events to conform with Fannie Mae's differentiation.
Regarding taxes, although I am not a tax accountant, the tax effect is the same whether the home is a Short Sale, DIL or Foreclosure. If it is a primary residence and the debt went into the home or for improvements to the home, the write-off from the lender will be non-taxable (there are limitations).
Cash outs will be taxable.
Foreclosure will not eliminate the tax if the property was not a personal residence or the in the case of a cash our refi. In fact, given that the loss to the lender from a DIL or Foreclosure will be greater than for a Short Sale, the tax will be greater for a Foreclosure than for a Short Sale.
See my Blog on Active Rain and my outside blog at http://foreclosuredocket.typepad.com/foreclosure_docket/ for details.
Mark-
Once again an attorney is right there to kill a sale. God love em. Though I am not a tax accountant, tax attorney nor am I providing legal advice...but, as I understand things banks have the right to 1099 a seller whether the property is foreclosed upon or is negotiated in a short sale. The above comment regarding the avoidance of the responsibility of the 1099 is also, as I've read on target. Also, if sold in a short sale for reasonable market value the tax consequence logically would be less than if the home were foreclosed.
Good luck with the listing-