I can’t say “don’t get there”, because some have no choice, and some will be in foreclosure or become short-sellers not by choice but by other considerations that are just as compelling. Whichever is true, don’t rely on advice someone else pays for. Sometimes a lawyer can’t help. There’s enough at stake that I always advise hiring your own lawyer. But even if your lawyer can’t help, he or she will act in your best interests. Too many times I’ve seen a mortgage rescuer come forward suggesting the rescuer can take the Owner out of his misery, at no cost to the owner. But usually the misery will be just beginning. No-one proclaiming to have your best interests at heart at no cost to you is likely to be telling the truth. There’s something in it for them, or they wouldn’t be doing it.
There are two things I advise any short-seller or owner in foreclosure. The first is not to try to live off the system for nothing. Instead, take the amount of his mortgage payment, or as much as he can possibly afford, and put the cash away each month. Put it in a lawyer’s escrow account if he must, but put it away. When the final accounting comes, the Owner will be infinitely better off to have put some cash aside to rely on. As important, the habit of not making a fair payment for the place you live is not realistic. Don’t get out of the habit. Another reason is evident from the next piece of advice.
Do not let your property be foreclosed without trying hard to short sell, do a deed-in-lieu of foreclosure, or otherwise satisfy your mortgage without merely walking away as if it doesn’t matter. Walking away hurts your neighbors and your credit rating. Walking away, unless there is absolutely no choice, is financially irresponsible. Here’s why:
You have some hope of structuring an affordable loan repayment if you actively work to solve your debt. I’ve seen very few short sales that can’t be worked to result in either no residual balance (deficiency) the owner must pay, or a minimal one, if the negotiator takes the time and trouble to insist on that result. I’ve seen very large deficiencies negotiated to nothing, or to amounts that the Owner could pay in cash at the time of closing, or with an unsecured promissory note with very favorable terms. The alternative is to give up and walk away from a property with an undefined future liability. That deficiency hangs over the Owner for as long as the statute of limitations, or longer. The Owner doesn’t know whether he can buy another house, a car, or any other asset, because the creditor may sue at any moment for the unpaid balance of a forgotten mortgage. That result doesn’t contribute to the financial recovery of anyone involved.
In spite of this obvious advice, I see countless short sale negotiators accept a short sale approval letter that promises to cancel the mortgage, but omits mention of the promissory note. The note must be satisfied, not be allowed to hang out there unpaid until the mortgage company gets around to assigning it to a collection agency. That drags out the Owner’s agony, sometimes invites bankruptcy, and keeps the Owner from getting on with life. A short sale negotiator who works for the Owner will return the approval letter, even though to do so may jeopardize the sale, and say to the mortgage company, “this isn’t enough. Let’s talk about how this whole thing gets finished. I not only need this mortgage satisfied, but we must deal with the unpaid balance, now, not later”.
The Mortgagee will be trying to maximize its return, and is likely to be motivated to settle the whole deal now, rather than later. That’s particularly true if there is even a little bit of cash available to fund a complete settlement. But this result takes someone who is looking long term, not just someone satisfying their own need for the closing commission.
I have had this discussion with attorney Shannon Widman, in South Walton County. Shannon does lots of short sales, and I respect the fact that she would not leave the Owner to take his chances with a deficiency claim that may not show up until years later, at least not without a sincere effort to finish the matter successfully for the Owner. There are other excellent real property lawyers who have that philosophy, and who do excellent work for their clients. Please make sure your negotiator understands that you cannot truly “walk away”, unless the entire debt, including the promissory note, is resolved.
Next month in this space, Michael Hamby, tax lawyer and all-around good guy with our Shalimar office, will discuss the tax effects of debt relief realized by a short sale.