Not so long ago, homeowners would just hire a realtor to list their property with the intent of making a profit on their investment. If you purchased a home from 2001 to 2008 you will find this is no longer the traditional way to get out from you current property. There will always be those few exceptions to rules and maybe you can sell with the traditional avenue. If this is your case, I would encourage you not to test the waters and see how much money you can recover above current market conditions. Price the home fairly and you will receive higher dividends in the short term than letting the home sit on the market.
More times than not, the nasty thoughts and terms of foreclosure, trustee sale, or short sale come up when you want to move from your current home. We have always viewed our homes as our nest egg or greatest investment even above our stock portfolio. To ease our conscious of the word foreclosure, we have come up with the term: strategic default. Since the home is worth far less than we owe on it, why not just walk away? Makes sense from an investors point of view, doesn’t it?
Arizona is a non-recourse mortgage state and has Anti-Deficiency Statutes to protect the homeowner. Does this mean you can just walk away without any future obligations? Maybe, depending on the loan you have and the guidelines which the property falls under. Non-recourse laws only apply to “purchase money” loans (i.e. original home loans that are used to purchase the property). All HELOCs and home equity loans are considered recourse loans and the lenders for these loans may sue borrowers to recoup these loans. Vacant land and properties on over 2.5 acres do not fall under the guidelines as well.
A short sale property is debt forgiveness of the loan upon by the bank upon the sale of the property. Sounds like a no brainer, but debt forgiveness is taxable. In 2007 Congress passed “The Debt Forgiveness Debt Relief Act and Debt Cancellation” to help these troubled borrowers. The debt forgiveness from a short sale or a mortgage principle will no longer be taxed. The property would be sold through a realtor similar to a traditional sale with many more conditions and guidelines set forth by the lender who owns the note to your property. The HELOC will also be negotiated into the sale of the property. The property will be sold as is and the seller is no longer responsible to fix mechanical issues or defects. Can you still achieve the same Anti-Deficiency status as a foreclosure? Most likely if you realtor negotiates the right wording into the bank’s approval letter. More and more banks are offering relief of debt in the approval letters.
The facts are foreclosures are down 7.1 percent compared to last year at this time. Many more sellers are taking the short sale route. Banks are taking the loss on a short sale over a foreclosure because the loss is generally less costly. There is a significant difference to your credit and recovery period between a short sale and a foreclosure. The stigmatism of the word foreclosure is not what it used to be.
The last and most important remark I can emphasize is to please discuss all your options with both your accountant and a good attorney who deal specifically with short sales, loan modifications and bankruptcies before you decide to walk away or short sale your home. The Phoenix market is in recovery mode and we have light at the end of our tunnel.