Deed in Lieu of Foreclosure vs. Short Sale

Deed in Lieu of Foreclosure vs. Short Sale

Deed in Lieu (DIL) and short sale are the two alternatives to foreclosure, both of which are said to have a milder impact on credit. In the recent year short sales have become the most popular choice for sellers which are upside down on their mortgage. Recently, though,  the lenders in California have started offering Deed in Lieu of Foreclosure in areas where the real estate market is not as active and it is more challenging to sell a distressed property, or as an alternative to a short sale, so the sellers have started asking: “Deed in Lieu or Short Sale in California?” In most situations it is recommended that sellers explore either of these foreclosure alternatives before settling for a foreclosure. This blog is compiled from experiences of other people, and does not constitute legal advice. You should still always consult an attorney and a CPA to review your options.

What is a Short Sale?

Short sale is a process where a bank or banks agree to forgive part of the loan balance if a legitimate offer is received to sell the distressed property. If you have had a bad short sale experience, give it another go! The process is much more stream-lined now, and a lot of banks are hiring third party vendors to handle the pre-qualification process, as well as utilizing online tool, called Equator, for communication and tracking. In my experience, I was able to always get one of three bank negotiators, that were all familiar with the case, on the phone in less than a minute.

Short sales still do require a vigorous agent, though, willing to call the bank every other day, as persistence is the name of the game! You also need an agent that is good with problem solving, as more often than not, the short sale approval letters come back with unrealistic dates.

The process of short selling is the following:

  1. Find an agent that is good with problem solving, and handles short sales himself/herself (as you don’t want another party in an already complex process)
  2. List the property as you would if you were selling it normally. Commission most approved by the banks is 6%, though it is negotiable, and payable by the bank, so it doesn’t affect the seller much.
  3. Your agent will know how to price your property, but this is the most important part in the process, so make sure you are on target. Never price too high, then “work your way down”! Price below market to attract as many offers as possible, but make sure the buyer you accept is eager, as the bank may counter with a higher price, and always try to have a back up offer.
  4. Once an offer is received, the process begins! Your agent will enter it in online system along with the estimated HUD generated by the escrow company, then a negotiator will be assigned.
  5. The bank will then request a hardship statement and seller financial information, and conduct their own appraisal.
  6. It should take about 1-3 months to get a short sale approval letter, or a counter to the offer.
  7. The letter will specify, commissions, price, names, close of escrow, and any other conditions

In my experience, the average turn around time is around 1 1/2 months. One of the challenges I have seen is that you spend a long time waiting, and then nearly always the short sale approval letter will arrive with only couple of weeks to close. This is most often because the foreclosure date has been set and precedes the short sale date. Most banks are not postponing the foreclosure dates until 5 days prior to the date, which in turn means that you can’t get an extension to the short sale until very close to that date. You may need to accept the short sale with a short close date, then request extension, but be aware that they do not have to approve. Thus far, my experience has been positive with extensions.

Benefits of a Short Sale

In the markets where it is still possible to generate offers relatively quickly, it is a very good option. It is also good for sellers that need more time to move out of their homes. Another benefit is that the seller has more control over the process than in any other option. I believe that this is the cheapest option for the bank, as well, so there is some flexibility with how it is handled. In some cases sellers can get participation credit of up to $3000, so always ask!

Short sale are said to have a negative impact on your credit for only 2 years, though not verified. In California it is not possible for the bank to go after the seller for deficiency judgement on both purchase money, and recourse (i.e. re-fi, or home equities) loans. Banks are however required to file a 1099C, which would render the seller liable for the income taxes on the amount gifted by the bank. However the Mortgage Forgiveness Debt Relief Act provides tax relief for some loans between 2007 and 2012.

Benefits of Deed in Lieu

Deed in Lieu has just gained traction. There are areas where the markets are not as hot as in Lake Tahoe, or there have been several failed attempts at short sales, so the lender will offer Deed in Lieu instead. It is unlikely that DIL will work with multiple liens on the property. If you are offered a Deed in Lieu and have multiple liens on the property, make sure the lender is aware, and still OK to proceed. The benefit is that it is faster than a short sale, so if you are looking to get out fast, this is an option.

The credit impact, per CAR Legal Hotline, is the same on Fannie Mae’s creditworthiness checklist, as it is for short sales. I believe in California the bank still can’t go after the deficiency judgement, though you need to get an attorney to review your docs before you sign. You also have to make sure that the bank absolves you of all debt, and have a promise that they will stop all foreclosure proceedings. Same Mortgage Forgiveness Debt Relief Act applies to Deed in Lieu.

Should I Do a Short Sale or Deed in Lieu?

If you are looking to get out fast and have one lien on the property, DIL may be a very good option. Problem is, it is still fairly new in the new edition, and there are kinks to be ironed out. There are still no reports on the success rate, nor how long it truly takes. You will deal with DIL on your own, including managing the foreclosure dates, and more than likely will need to pay for an attorney and CPA for help. Other than that it has very similar effect as a short sale. You may be missing out on the buyers if it doesn’t work by opting out for DIL, though.

Short sales are handled by real estate professionals, and you will have guidance throughout. You may also get money from the bank for participating. You do not have to pay for anything in short sale, so the end result is very similar to DIL, but you have free guidance, and don’t have to do work yourself. Problem is they take longer, and buyers may walk. If there is a back up offer, you do not need to start the process from scratch, though.

 

 

 

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