Suppose you had to get rid of a house due to a job transfer, major illness, divorce, imminent foreclosure or other emergency. In a soft housing market, how would you do it?
Perhaps you’d be fortunate enough to sell relatively quickly at a small discount. But if that’s not feasible, there are three other options: a short sale or deed-in-lieu of foreclosure, a strategic default, or literally giving the house away.
Short sale or deed-in-lieu
A short sale allows a homeowner to sell the home for less than the amount owed on the mortgage. However, the lender’s approval is required and these transactions aren’t speedy.
Rather, a short sale can take a year or longer to close, according to Tony Marriott, a broker associate at Show Appeal Realty in Phoenix.
The condition of the home and the real estate broker’s experience in home sale negotiations are key factors. But price may be the most delicate issue in the long time frame.
“If you get too aggressive with price, you’ll get a contract, but you’ll get pushback from the seller’s lender,” Marriott explains.
If you don’t want to put your house on the market or can’t get a short-sale approval, you can try to negotiate a deed-in-lieu directly with the lender.
The pace of this process — in which you sign over your ownership of the house to the lender to avoid foreclosure — depends on the specifics of the situation and the lender’s response. But again, it’s unlikely to happen quickly.
A short sale or deed-in-lieu will hurt your credit score, and you’ll be required to disclose your financial information to the lender. The lender may demand a promissory note that would obligate you to repay some portion of the loan after the sale or loss of the property.
A strategic default occurs when a homeowner who can afford to make the mortgage payment suddenly decides not to do so because the home’s value has fallen dramatically below the loan balance.
This approach can work, but it isn’t fast or easy, according to Jon Maddux, CEO of YouWalkAway.com and a strategic default consultant in Carlsbad, Calif.
“If someone is trying to get rid of a house in a hurry, a strategic default or walking away isn’t going to be the answer for them,” he says.
In fact, a strategic default can take a year or longer, depending on state laws and how quickly the lender might be able to sell the repossessed home.
However, the delays surrounding the foreclosure process mean homeowners often can stay in the home for up to two years before being evicted. In some cases, owners may be able to sock away as much as $30,000 or $40,000, Maddux says.
Some of these homeowners maintain the lawn and pay the homeowner association dues or property taxes. Others live in the house essentially for free.
“When they come out the other end, they aren’t destitute. They have a little money to take care of their family,” he says.
On the other hand, there are many drawbacks to a strategic default that go beyond the questionable ethics of refusing to pay your mortgage. They include wrecked credit, tax consequences and difficulty getting a new mortgage for years after the default.
Giving the house away
The fastest way to unload a house is to simply give it away. That may sound facetious, but some well-to-do people do give real estate as a gift, according to Martin M. Shenkman, an estate and tax planning attorney in Paramus, N.J.
“If you have a house that may have been worth $2 million a couple of years ago and can be legitimately appraised at $1 million today, wow, get rid of it,” he says.
The most common scenario is the gift of a family vacation home from parents or grandparents to the younger generation. A gift may be preferable to a quick sale because if the property were sold, the owner would receive the cash — but the family would no longer be able to use and enjoy the home.
A simple gift requires only some paperwork that Shenkman says can be prepared by an attorney or, in some states, a title company, in a few hours. The work is more complicated if the home is owned by or given to a family trust. An appraisal of the property is recommended.