Understanding Options When Facing Foreclosure

There are few things more stressful than finding out that you’re about to lose your house. Cash flow is tight, bill collectors are blowing up your phone, unhappy family members might be pointing fingers, and you’re in enough hot water without having to find a new place to live, too. All you can think about is making the problem go away.

You might know someone who has been through that already, so maybe you have an idea of what can happen. You might not even realize you have more than one or two options. Walking away from the house is tempting, but your real options have to include your end game. What do you want your debt and your credit to look like after the house goes away?

Whether you’re a homeowner, a real estate agent, or an investor, you need to know all the options for someone facing foreclosure. As a homeowner, your best bet is to get enough information to make an informed decision. As someone who helps homeowners, you need to make sure they understand that information. You need to set realistic expectations for the loss of their home.

Let’s get a couple of the more questionable options out of the way first: deed-in-lieu and loan modifications.

A deed-in-lieu is nothing more than a voluntary foreclosure: it saves the bank time and money, but your credit still gets hit with the full ramifications of the the foreclosure.

What about loan modifications? The government’s Home Affordable Loan Modification Program (HAMP) promotes loan modifications as being a viable way to deal with the foreclosure crisis. Yet the current rate of success for those loans to go from trial to permanent modification is 4 percent. Using California as an example, roughly 140,000 trial loans have entered into the modification process; however, only 5,600 loans will be modified based on current success (4%). California is on pace to file 475,000 notices of default for 2009. Those being helped are few and far between given the current numbers.

Here are some more likely options:

1) Option one: stay in the house as long as possible, using bankruptcy procedures to stall the courts until the foreclosure auction date. It doesn’t prevent the foreclosure, but it does let you stay put at the lowest cost.

2) List the house for the amount of the debt and hope someone comes along who loves the house so much that they will pay your asking price before the auction date. You can dream all you want, but the odds are that nobody will pay more than the house is worth, and you’ll end up going back to option one.

3) List the house as a short sale, find a buyer, and make the buyer wait out the short sale process in order to buy the house at a discount. Many real estate agents recommend this solution because it sounds like the easiest thing to do while still earning their commission, but it’s a little more complicated than that.

One complication arises when the agent has to convince the buyer to not only sign the purchase agreement, but to wait several months for the bank to give their approval. The typical buyer needs something that is already available.

Another complication comes up when the short sale negotiations get sidelined because the agent and/or the seller aren’t fully educated on managing the process. The lenders are very well-trained in loss mitigation and debt collection, and if you don’t completely understand the short sale process and how to get through it, they’ll take advantage of that in a heartbeat.

I’ll give you an example. Did you know that deficiency judgments and post-sale promissory notes can be avoided in some cases? You can know the basics of how the process is supposed to work, but shouldn’t you learn how to work the process? Wouldn’t that alone be worth it?

4) List the property as a short sale, but work with an investor who already wants to buy the property and is willing to wait out the process and negotiate the short sale on behalf of the seller without cutting out the real estate agent.

Maybe the investor will keep the property as a rental, or maybe they’ll sell it. They do get something out of the deal. An educated and competent investor also knows how to use contracts and the lender’s own paperwork to get the best results for a homeowner in trouble.
Here’s another reason why the homeowner would rather work with someone who coordinates short sales on a daily basis. Did you know that there’s more to the BPO process than just being there when the bank appraiser comes to the door? Do you have any idea how to use the process to maximize the short sale outcome in your favor? A good short sale investor does.

As a real estate professional, you should be able to explain these four options to a homeowner who is facing foreclosure. They can let it go and file bankruptcy, they can sell for the amount of the debt, they can apply for a short sale and wait for a buyer, or they can apply for a short sale with a buyer already waiting for them.

If you need to learn more about how foreclosures and short sales work, Strategic Real Estate Coach is here for you. Our Silver Membership is absolutely free, and gives you all the networking and downloadable reports you need to get up to speed!

Finally, if you want to get some insight into a variety of legal issues influencing real estate investing, be sure to check out attorney Jeff Watson's blog here.

Give people the best and most up-to-date information possible. Help people understand what they’re up against, and what could happen with each choice. When a homeowner makes an informed decision about their future, they have a chance to stop feeling beaten down and walk away feeling relieved.