Fab Real Estate Blog: Foreclosure vs. Deed-in-Lieu of Foreclosure vs. Short Sales

Foreclosure vs. Deed-in-Lieu of Foreclosure vs. Short Sales

Ilyce Glink published a great Q&A today regarding Deed-in-Lieu of Foreclosure

Oftentimes, when homeowners are behind on their mortgage and owe more than the home is worth, they panic.  Some will just decide they have no options and allow the home to foreclose.  Some will investigate what other options may be available to them. 

When facing foreclosure, you do have three options: 

  1. Pay the lender the amount needed to bring your loan current 
  2. Do a deed-in-lieu of foreclosure, if the lender agrees 
  3. Sell your home "short" - also known as a short sale. 

A short sale is a transaction where you sell your home for less money than is owed to the lenders.  Such a sale requires lender approval and can be a lengthy process. 

A deed-in-lieu of foreclosure is, basically, where you turn the home over to the lender and walk away without going through the foreclosure process. 

These days, lenders are becoming more amenable to the deed-in-lieu process.  Foreclosing on a home costs the lender money - a lot of money in attorney fees and court costs.  I've heard to cost for a lender to foreclose on a home can be anywhere from $25,000 - $50,000.  So, it may make financial sense for the lender to simply accept the keys and the deed to the home and avoid the whole foreclosure process. 

Of course, this is also why lenders are becoming more friendly towards short sales.  With a short sale, not only does the lender avoid the costs of the foreclosure process, but now they've also avoided the hassle of selling a home that they own.  Win - win! 


There are no set facts that determine which method may be best for you should you be facing a foreclosure.  Your specific questions should be directed to your real estate agent, your attorney and/or your tax adviser.  All options may have various legal and tax implications that must be fully investigated.  Of course, we would also need to determine your lender's willingness to go along with each method. Also, many lenders will only consider the deed-in-lieu option after your home has been on the market for at least 90 days. 

Each option will negatively affect your credit.  I am told that a short sale has the smallest least negative impact on your credit.  Next would be the deed-in-lieu of foreclosure, followed by an actual foreclosure, which will have the greatest negative affect on your credit. 

Should you find yourself facing foreclosure, consider your options carefully.  Talk to local professionals to determine the best route for you to follow.

 

Comment balloon 21 commentsDon Fabrizio-Garcia • September 16 2008 12:51PM

Comments

Lenders would be more amenable to all sorts of work-outs, if the value of the home were anywhere near market value.  With the proliferation of 100% loans and declining prices, the lender is going to lose no matter how they take the property back.  They look at each one and figure out how to mitigate their loses. 

 

Posted by Lenn Harley, Real Estate Broker - Virginia & Maryland (Lenn Harley, Homefinders.com, MD & VA Homes and Real Estate) about 10 years ago

Lenn - you are correct in that the lenders will look at their options to determine which is best for them from a loss standpoint.

Lenders are turning down short sale offers if the offer is for less than current market value.  It just doesn't make financial sense for them to accept an offer far below market value.

But for homes where foreclosure is imminent, they are now considering deed-in-lieu of foreclosure, which had fallen out of favor in recent years.  This can be a benefit to the homeowners, who will take less of a credit hit - and probably less of an emotional hit - if they can avoid foreclosure.

Posted by Don Fabrizio-Garcia, Owner/Broker/Trainer - Fab Real Estate (Fab Real Estate) about 10 years ago

Hi Don, my client just got got turned down for a deed in lieu.  We had it listed for a short sale for months and no takers.  She's probably going to declare bankruptcy.  It's tough out there!  Good post.

 

Laura Giannotta

Atlantic Shore

Posted by Laura Giannotta, Your Realtor Down the Shore! (Keller Williams Realty - Atlantic Shore ) about 10 years ago

Hi Laura - Did the lender give a reason for denying the deed-in-lieu of foreclosure?  Unfortunately, probably not.

Many people think they can just mail in the house keys to the lender and they're done - that the lender will automatically accept it and process a deed-in-lieu.  That is not the case.  I've had one seller where the lender offered a deed-in-lieu up front, or gave the option of 90 days to do a short sale.  That one surprised me, as usually they want at least 90 days of marketing before they will consider a deed-in-lieu.

Each lender is different.  Each situation is different.

Does the lender believe your client has the money to make amends?
Does the lender think they will make out better by foreclosing?
Does the lender have a policy against deeds-in-lieu?

I'd be interested in the answer.  However, I realize they may not have given you or your client a reason!

Has she spoken to an attorney?  Perhaps an attorney can speak to the lender on her behalf.  Or, at least advise her as to what her options are.  Maybe there is a way to avoid bankruptcy.

These lenders don't always make it easy.  I would suggest trying again in 2 or 3 weeks.  The lenders have been changing their policies lately, and you might just get lucky.
Good luck to you and your client.

Posted by Don Fabrizio-Garcia, Owner/Broker/Trainer - Fab Real Estate (Fab Real Estate) about 10 years ago

Don, I spoke to her bank  when I listed the property and sent in the mortgage authorization.  The bank is on my to do list this week, so see if they'll give me a number for a short sale.  If they do and it's reasonable she'll probably relist.  I'll keep you posted!  

Posted by Laura Giannotta, Your Realtor Down the Shore! (Keller Williams Realty - Atlantic Shore ) about 10 years ago

Hi Laura - Don't expect the lender to give you a number as to what they will accept.  Usually, they won't even consider values until they have an offer in hand.  And if they do give you a number, that number may be different next month when you present an offer.

Re-list at a price that is fair market value.  If it doesn't sell in two weeks, reduce the price.  Lather, Rinse and Repeat as needed.

Make sure that whatever price you list and sell at can be supported by a BPO and appraisal.  Prepare your own BPO ahead of time to justify the price.  The list of price reductions will help to justify the sales price, as it will indicate that no offers were received until the price was at $X, so this is an indication of the current market value.

Just make sure the numbers all jibe.  If the lender receives an offer on a short sale at a value that is at or very close to fair market value (as per a BPO and appraisal) then they are much more likely to accept the offer.

Of course, this isn't fool proof, as we never know what a lender may be thinking on the particular day they review your offer, or whether or not they got enough sleep the night before...

Posted by Don Fabrizio-Garcia, Owner/Broker/Trainer - Fab Real Estate (Fab Real Estate) about 10 years ago

Thanks Don, I did get a number on one of my short sale listings, but it was after an offer was submitted.  I was hoping that since the bank had a BPO done for the deed in lieu, they might give a ball park figure!  Not likely huh?  :)

Posted by Laura Giannotta, Your Realtor Down the Shore! (Keller Williams Realty - Atlantic Shore ) about 10 years ago

Laura - I'd say it's not likely.  But, give it a shot - you have nothing to lose other than your time on the phone.  Regardless of what they tell you, it probably make most sense to just re-list the house and get an offer.  If the lender has already refused the deed-in-lieu, the only options left are short sale or foreclosure.  Give the short sale option a chance.  Unless, of course, the owner can remain in the home and make the payments?

Please do let me know what the lender says.  Did they give a reason for refusing the deed-in-lieu?

Posted by Don Fabrizio-Garcia, Owner/Broker/Trainer - Fab Real Estate (Fab Real Estate) about 10 years ago

Don, this is a very good summary - easy to understand. 

Posted by Patricia Kennedy, Home in the Capital (RLAH Real Estate) about 10 years ago

Patricia - thanks for the kind words!

Posted by Don Fabrizio-Garcia, Owner/Broker/Trainer - Fab Real Estate (Fab Real Estate) about 10 years ago

Hi Don,

I agree with Patricia, very good summary.  I've had my short sale listing 2 days and now have 2 offers to submit.  The asking price was $8K less than what my seller owes on it. We will see how the bank responds.

signature

Posted by Jen Bowman, Realtor - Anna Maria Island & Bradenton FL (Keller Williams on the Water) about 10 years ago

Jen - Good luck with that short sale.  They're always a little different and never boring...

Posted by Don Fabrizio-Garcia, Owner/Broker/Trainer - Fab Real Estate (Fab Real Estate) about 10 years ago

Hi,

I was researching about Deed in leui because we are going thru it right now.  However, the lender is asking money to finalize and I don't know if we should pay to get out of this whole deal or if this can be avoided.

They reviewed our papers and financial situation and we thought they agreed to Deed in leui but now they are asking $2500 in order to finalize deed in leiu.  (they first asked $10000 and down to $5000 and to $2500).  What is this money for?  What happens if we don't pay this? 

We want to get this done as soon as possible but $2500 is more than one month salary for us.

Any advice? 

In FL

Posted by Kim about 10 years ago

Kim - The best advice I can give you is to speak to your real estate attorney - I'm assuming you have an attorney handling this for you.  If not, it would be wise to hire one.  The money spent on the attorney would be money well-spent to avoid any pitfalls.

However, I will say that it sounds as though the money they are asking for is negotiable.  You or your attorney may consider trying to negotiate some more.

Keep in mind that by proceeding with the deed-in-lieu of foreclosure you are avoiding having to pay for the home in full, as you promised to do when you financed the home, and the bank is agreeing to accept the home without full payment and without foreclosure.  Consider all your options carefully.

Posted by Don Fabrizio-Garcia, Owner/Broker/Trainer - Fab Real Estate (Fab Real Estate) about 10 years ago

Thank you for your reply.  We don't have an attorney representing us.  We've been communicating directly with the lender's negotiator.  We just want to make sure that they are not going to file judgement on us or asking the difference money later down the road.  I mean we asked them several times about it and they said that they will NOT do that.

.....

Posted by Kim about 10 years ago

Hi Kim - Again, I have to recommend you obtain legal advice in this matter.  Also, be sure to get everything in writing.  Good luck!

Posted by Don Fabrizio-Garcia, Owner/Broker/Trainer - Fab Real Estate (Fab Real Estate) about 10 years ago

Don, thanks for the post I hope it can provide a better understanding for clients facing the decisions ahead. Many have walked without thinking of the better long term credit solutions.

Posted by Steve Loynd, 800-926-5653, White Mountains NH ( Alpine Lakes Real Estate Inc., ) about 10 years ago

There's a fourth way which has become too common here in San Diego: Simply walk away from the home. I have a couple of friends who moved and mailed the keys to the mortgage company with a little note: "I can't pay the mortgage and you're unwilling to refinance it for me. Here's the keys. It's yours!"

Posted by Russel Ray, San Diego Business & Marketing Consultant & Photographer (Russel Ray) about 10 years ago

Steve - Absolutely.  There may be other options for people facing foreclosure. 

Russell - If they walk away, then the home will be foreclosed.  There are other options to consider - options that may have a lesser impact on your credit report.

Posted by Don Fabrizio-Garcia, Owner/Broker/Trainer - Fab Real Estate (Fab Real Estate) about 10 years ago

Great bolg with lots of useful info I can bring to my clients. Thanks.

Posted by Maurice Richardson (Maurice Richardson Realty Executives Preferred) about 10 years ago

Maurice - Glad to be of help!

Posted by Don Fabrizio-Garcia, Owner/Broker/Trainer - Fab Real Estate (Fab Real Estate) about 10 years ago

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