Miami, Review Your Options When Facing Foreclosure, Part 2

What are the options available to a homeowner facing foreclosure?

Most homeowners have several options, but some options (including a short sale) are not offered by some lenders depending on the homeowner’s situation.  Many options require the homeowner to have some cash available.

This article covers the options that typically do not require cash from the homeowner:

Deed in Lieu of Foreclosure – The lender offers to accept the deed to the property in exchange for dropping the foreclosure action.

Do Nothing: Foreclosure – The lender takes back the house, and the homeowner is required to vacate the home at the time of sale or eviction proceedings begin.

Short Sale – The lender(s) accepts less than what is owed on the loan.

Why would a lender accept a short sale?

A 2002 study by Craig Focardi of the Tower Group estimated that the entire cost of a foreclosure was $58,759 and took 18 months. Other factors that can influence a bank’s decision include 1) the liability risk it assumes by owning the property after foreclosure, 2) the money tied up during the holding period for a foreclosure and 3) Real Estate Owned (REO) resale, wherein the lender incurs additional costs such as attorney’s fees, and the additional reserves needed to offset the property value in the bank’s portfolio.

What are the potential negative aspects of a short sale?

When a lender accepts less that what is owed on the loan, this is called “Accepting a deficiency”.  The lender may choose one of three options: 1) Do nothing – often lenders simply write off the losses they take by accepting a short sale; 2) Securing a deficiency judgment and placing the balance owed on the homeowner’s credit; OR 3) Report the loss to the IRS on a 1099c as earned income to the homeowner.

There are some exceptions; but, typically, a 1099c, unearned income, does not apply to a primary residence.  Also, a 1099 may not be a factor if the homeowner is financially insolvent at the time of the filing.  These are the primary reasons the homeowner should consult a tax advisor or accountant.

A deficiency judgment is possible even if the homeowner does not pursue a short sale.  The lender may accept less that what is owed at auction, which could also result in a deficiency judgment.

These are the reasons you should consult an attorney and/or and accountant/CPA for advice.  Do not ask or expect advice from your Realtor on these topics.

So, for those with little or no cash, the only option to avoid foreclosure is a short sale.

The next article will cover the basic options available to a homeowner who does have cash available.  These options all involve the foreclosing lender.  It is my recommendation that you DO NOT PAY ANYONE to help you with a short sale.  There are many companies that charge homeonwers up front to negotiate with their lender.  I have yet to speak with a homeowner who actually received any help.  Without exception, every person I have talked with has felt taken advantage of by these companies.