What is Best for Home Sellers: Short Sale, Foreclosure or Deed in Lieu? These are tough San Diego Real Estate Choices.
During the real estate “Bubble Years” from the late 1990’s to 2007, many people bought homes in San Diego using 100 percent financing, exaggerated income on loan applications, and high hopes for future appreciation on their real estate “investment.” Many also jumped into products like Option ARMS, that allowed them to make variable payments on their home loan, ranging from perhaps 1 percent to 6 percent. If the one percent option were chosen, the deficit would be added to the loan’s principle balance which further added to the home owner’s debt burden.
Fast forward to today, and many struggling San Diego homeowners are agonizing over what to do with their homes, their underwater mortgages, their credit ratings, and their financial futures. Many have big mortgages and no jobs–and life goes on for others, who are transferred, divorced or face other life transitions that necessitate a move. Online and neighborly advice, government programs, and scams abound for these distressed homeowners.
Should they pay an attorney to seek a loan modification? Should they discuss a short sale with a Realtor? Should they just throw in the towel and let their home go to foreclosure? Or would they be better off just mailing the keys into the lender and offering the property on a “Deed in Lieu of Foreclosure” to the lender? These are just some of the options being considered by distressed homeowners in not only San Diego and California, but throughout the United States. Below are listed some of the alternatives that might be available to homeowners:
San Diego Short Sales
Many of San Diego’s homeowners believe they would be able to avoid a foreclosure and get out from under their upside down mortgages, where they owe more than the home is worth, with a real estate short sale. The short sale might seem like an easy out, but it can be a long a drawn-out process. In interviewing several real estate agents, I learned that most home owners involved in a short sale have stopped making payments on their mortgage–which also seems to help motivate lenders to accept less than what is owed on the property.
Many sellers feel a sense of relief when they finally make the decision to let go of their home and turn the short sale over to a knowledgeable real estate professional. They are relieved to have made a decision, they are able to save some money from not making mortgage payments, and most recognize that their credit rating may be damaged for only a couple of years, especially if they stay current on all their other bills.
One of the other advantages of a short sale is the cost savings for the homeowner compared to a regular sale. All real estate commissions and closing fees are paid by the lender, not the owner. On a regular sale, the seller bears the burden of these costs. Finally, many lenders are also offering some owners financial assistance to help with moving and relocation costs, which can make the transition to a new home far easier.
Getting approved for a short sale, though, is not guaranteed. The borrower must be able to show financial hardship, which might include medical problems, loss of employment and/or income, job transfer, death or other life calamity. Basically, what the borrower has to do is “un-qualify” for the loan they currently have. Additionally, the lender will order an appraisal or BPO (Broker Price Opinion) to verify the home’s true market value. Lenders, however, frown on “strategic” short sales, where the hardship doesn’t exist, and the owner simply owes more than the home is worth. Those types of short sales usually won’t fly, according to my research.
To start the short sale process, the home is listed and the owner writes a hardship letter detailing events that make it impossible to continue paying on the mortgage. The lender will require the borrower to provide proof of income, debt, assets, tax returns and any other documents supporting the borrower’s stated financial situation. Additionally, the owner must sign an authorization letter allowing their lender to communicate with your real estate agent, attorney or whoever is assisting you with the short sale applicaltion.
Short sales are generally preferable to Deed in Lieu or Foreclosures when it comes to the borrower being able to purchase a home again. With a short sale, conventional financing may be available again in as little as two years, while foreclosures and deeds-n-lieu could hang up the ability to get a home loan for five years or more.
Finally, the home owner who does a short sale could end up with a deficiency judgment from lien holders who suffered a loss. For example, junior (or second and third) lien holders are usually wiped out in a foreclosure and may receive only pennies on the dollar for what is owed to them. This loss could lead to a deficiency judgment against the borrower, depending on regional laws. It is always advisable to seek the professional guidance of attorneys, accountants and knowledgeable real estate brokers.
Deed in Lieu of Foreclosure
This means of property disposition basically means that the home owner is allowed to turn in house keys and sign over deed to the home to the lender. This saves the bank or lender all the fees and costs associated with doing a foreclosure, but does not relieve them of the costs and aggravations involved in preparing a home for sale, its marketing and buyer demands. For the homeowner, there is the peace of mind in knowing that they are out from under the burden of home debt and they no longer have to worry about billcollectors calling.
On the other hand, their credit rating may be damaged almost as much as if the homeowners had let their home go to foreclosure, and it could be several years before they could once again qualify for a conventional or government home loan. The credit damage could also impact their ability to lease a home if a credit check is required–and could be an issue for future or current employers who demand a clean credit report. These are all issues that should be considered before letting a home go or turning in the keys to the home.
San Diego Foreclosures
Foreclosure probably ranks just above bankruptcy in terms of being a nuclear bomb for one’s credit rating. When this occurs, the owner’s interest in the home is foreclosed upon and the bank or an investor takes title to the home. Foreclosures always occur because of a default, but there are hazards for both the former homeowner as well as the buyer who may be an investor on the courthouse steps, or conventional buyer who acquires the home from the bank as an REO (real estate owned) or bank-owned property.
For the sellers, there is the burden of a damaged credit report that could preclude them from buying a home with conventional or government financing for up to five years or more. For some, there is also the shame that can come from letting a home go to foreclosure.
For buyers, there are no owner disclosures that are typically and even legally required in a conventional sale. Did a death occur in the property? Have there been any mold or water incursion issues? Foundation failure? Slope slippage? These (and so many others) are all issues that owners are required to disclose to buyers in a normal sale. When a home is a foreclosure or bank-owned, no disclosures are given and the home is essentially sold as-is.
For this reason, it is very important for the buyer to hire professional inspectors go through the home very thoroughly before making a final commitment. It might also be wise to talk to neighbors to see if there are any other issues that might impact the desirability of the home. Finally, a home warranty can go far in providing peace of mind about the purchase of a foreclosure or bank-owned property–but they too, will often want to see the results of the professional home inspection report.
The costs of a foreclosure for a lender, though, are very steep. To begin with, they lose payments on the mortgage, have collection costs, and then must pay attorneys and filing fees to accomplish the foreclosure. Then, should they get it back as an REO, they may be faced with evicting the owners and/or offering “cash for keys” to get them to move. After that, there will likely be rehabilitation costs involved in getting the home ready to market and sell. All of these costs can run into the tens of thousands of dollars and they might net no more (and possibly much less) than they would have netted with a short sale or deed-n-lieu of foreclosure.
Conclusion for San Diego Real Estate Market
The recession and downturn in the real estate market has affected so many homeowners, lenders and Wall Street and the losses have been enormous for all. And the pain has not yet ended.
According to USNews.com, nearly one-quarter of all American homeowners owe more than their homes are worth–and that statistic raises even more questions about the state of the real estate economy and even the financial state of our entire country. Will home prices deteriorate even further as more homes are sold as short sales and foreclosures? Will unemployment stay high until the building trades and suppliers can get into motion again? Will that high number of distressed homeowners create even more pessimism on the part of the American consumer?
These are questions that concern us all and volumes could probably be written (and probably have been) about possible solutions to the crippled real estate market. Some say we should just open the flood gates and let the foreclosures and short sales occur freely until the market has flushed itself of these toxic assets. Others champion the government stepping in and directing the banks to offer principle reductions on these loans. I can see both sides of the arguments, but hope more than anything that real solutions can be quickly found and implemented–and that San Diego real estate choices in the future aren’t so painful.