Fallacy of the Year – Some People (bankruptcy attorneys?) Say Foreclosure is no Worse for You than a Shortsale!
Business Insider’s article tells some astonishing stories about foreclosures that are botched or otherwise create incredible hardships on both the homeowner and the home buyer!
One of the big problems for Homeowners/Sellers is that they lose all control in foreclosure, whereas a home buyer in a foreclosure always has control and the option to back-out of buying a home right up until the auction. Control equals dignity.
Moving out and finding new a new place to live is one of life’s top ten most stressful events, but when you do it on your own terms and without being in genuine jeopardy of homelessness, it does not have to be a disaster. If you are not prepared for foreclosure, it not only wrecks your credit for future home purchases, it can also result in an eviction. If you live in an extremely competitive rental area of the country, you may find that the availability and pricing on rental housing acceptable to your family is far worse than you knew. You may have to go on a waiting list and hope you can work out terms with the mortgage company to let you stay in your home until your rental is available. But if the mortgage company doesn’t cooperate or if they sell to a third party who needs your home as their own residence, you face a very real possibility of eviction.
Once you have an eviction judgment against you in the court system, good luck finding a landlord with a decent property to rent to you, or to rent to you at the same rate and with the same deposit that they would charge someone without an eviction on their record.
A short sale, on the other hand, spares you from having a foreclosure on your record, and gives you more predictable notice of deadlines for moving out. You are much less likely to face eviction in a short sale.
One final detriment in giving up on a short sale and allowing your home to go to foreclosure: The Deficiency. A deficiency is the part of the debt that remains unpaid AND UNFORGIVEN by the lender. In a short sale, you and your negotiator can be proactive and work hard to settle the debt. In foreclosure, cooperation is no longer a negotiation chip for the defaulting homeowner. The motivation and incentive for the lender to compromise on the deficiency evaporates quickly.
Even more objective is the fact that properties tend to command higher third party bids in short sales than in foreclosures. And of course, the lower the bid, the higher the unpaid balance, the higher the deficiency amount that the mortgage company will expect to collect, and the more likely they are to actually pursue the deficiency. All of which leads back to the buyer mindset when approaching a short sale vs. a foreclosure. In a short sale, the buyer can inspect, make an offer, have a professional home inspection, negotiate a repair allowance, get a loan, do a final “walk-thru” and then close on the property. In a foreclosure, the lender has absolutely no right to give prospective purchasers access to your home if you are living there! Naturally, they will bid less at a foreclosure than at a short sale due to the unknown conditions. A true “pig in a poke” paradox.
Bottom line, if you are one of those rare people for whom foreclosure makes more sense than short sale, (e.g., perhaps you need to file bankruptcy for other reasons, don’t have any time or energy to work with your lawyer and realtor for the short sale, and you already have generous family members willing to take you in), then I strongly recommend the following steps to protect yourself:
(1) Do not, if at all possible, abandon or neglect the property. Bring in a responsible tenant to live for free if necessary. But a vacant property is an expensive property and will usually increase the deficiency left to pay after foreclosure.
(2) Consider putting a sign in the yard inviting interested bidders to call you to make an appointment to inspect the house (unless there is major damage, odor, or other issues that would depress bidding at a foreclosure). Generally, bidders at a foreclosure will feel free to bid more when they have been inside a home.
(3) Forget the embarrassment and BE PRESENT at the foreclosure auction and invite as many interested realtors or prospective buyers as you know. Bring a color fact sheet on your property! Include information on value added systems you may have paid for in the property that might not show up on the court house records, e.g., geo-thermal heat pumps or other energy efficient appliances, new granite counter-tops, bathroom remodelling information, date of new roof, invisible fence or underground sprinkler system, name of your termite contract company, copies of existing surveys or title policies, etc.. Getting the highest possible offer is in your interest as much as it is in your mortgage company’s interest.
(4) Make sure the auction actually happens. Call the Trustee’s office before you go to make sure it has not been postponed. Get there early and take a witness. It is not unheard of for trustees to say that they conducted an auction and for one reason or another, it never actually happens. This can give you negotiating leverage for longer right to occupy the property or perhaps even for a modification or time to short sell the property.
Our advice is always to avoid foreclosure at all costs, but if you must go through it, know your rights and protect yourself!