The troubling real estate market has left many HOA members with delinquent mortgages as well as delinquent association dues. The topic and procedures for foreclosures could fill volumes. Here we are going to discuss two options that owners are utilizing other than allowing their property to go into bank mortgage foreclosure, short sales and deed in lieu of foreclosure.
With the liberal lending requirements over the previous fifteen years, many owners have little or no equity, that is, the owner’s mortgage is close to or more than the property’s value. Many banks in these circumstances will sometimes accept less than full mortgage amount due, this is referred to as a “short sale.”
An owner wishing to pursue a short sale generally has a long and arduous task with the mortgage holder. Even though the mortgage holder may save many of the expenses related to the foreclosure process, the legal fees, the eviction process, delays from property owner filing bankruptcy, property damage, resale expenses, etc. Short sales are generally a much better option for the mortgage holder by allowing them to cut their losses quicker.
Generally, the mortgage holder will first require the owner to prove the necessity for the short sale: financial instability, job loss, job transfer etc. Interestingly enough, depending on the mortgage holder, the property owner does not necessarily have to be in default with their payments. The mortgage holder will want to know if the property owner has any other assets or sources of income to repay the mortgage.
This part of the process could take as much time and paperwork as the original loan. The property owner will need to prove they are unable to afford the mortgage payment going forward and that the owner has no other alternatives.
The mortgage holder will begin the short sale process by retaining a real estate firm or appraisal firm to determine the property’s market value. Some mortgage holders may accept the property owners own appraisal or comparable home sales within the market. After the mortgage holder gives the property owner the permission to short sale the property, the mortgage holder will have to see and approve all sales contracts.
Items the mortgage holder will insist on in any short sale is that the buyer is paying all the expenses associated with the sale and that the seller is not receiving any cash or other consideration from the buyer.
Even though mortgage holders are not emotionally attached to properties, short sale purchase offers are often rejected. These rejections are for various reasons, one being the many approvals needed on the mortgage holder’s end. Another reason for a purchase offer to be rejected is the offer is not close enough to the market value or appraised value.
Unless specifically agreed to by the mortgage holder, all unpaid balances owed are still due in full. Short sale agreements do not necessarily release the property owner from their obligations of the loan. The primary benefit to the short seller is that their credit is generally negatively impacted much less than from a foreclosure.
Other creditors holding liens against the property, second mortgages, home equity lines, and home owner’s association assessment liens, generally have to approve a short sale, should they be required to take less than what is owed.
Deed in lieu of Foreclosure
Another very common method of conveying real estate for distressed property owners is a deed in lieu of foreclosure. A deed in lieu of foreclosure is a deed instrument in which the property owner transfers all interest in their property to the mortgage holder to avoid going through foreclosure proceedings.
A deed in lieu of foreclosure is advantageous to both the property owner and the mortgage holder. The single most important aspect to the property owner is that it generally releases them from most or all of the mortgage obligations. The property owner also can negotiate more favorable terms than they would receive through a foreclosure. Another benefit to the property owner is that it does less damage to their credit than a foreclosure. The mortgage holder benefits from the reduction in legal expenses and the reduction in time to gain possession. As with short sales there is less chance of damage to property with this method as compared to the foreclosure process.
However, if there are any subordinate liens such as an equity line, mortgage holders generally will not accept a deed in lieu because they do not want to assume the liability the subordinate liens represent. The mortgage holder will generally prefer to go through the foreclosure process in order to remove the subordinate liens.
To enter into a deed in lieu of foreclosure, both the property owner and mortgage holder must agree to the conveyance voluntarily and in good faith. The agreement must have total consideration that is at least equal to the fair market value of the property being conveyed. In some instances, the mortgage holder will not agree to the deed in lieu if the outstanding mortgage exceeds the current market value of the property. However, most of the time, the mortgage holder will go along with the deed in lieu, because they will end up with the property anyway and deed in lieu of foreclosure is much more cost effective than full blown foreclosure.