Deficiency in Short Sale vs. Foreclosure - Mortgage Forum

AZhelpneeded · 03-11-2010, 09:46 AM

I have only explored a short sale and have done limited research on foreclosures. Our lot (1/2 residental land in AZ...no home on it) is listed as a short sale. We owe $220K and the offer is for 90K. The last lot that sold in there about 8 months ago sold $125K. Property values have continued to drop, so I would guess the lot is worth about $100K-$115K. Our bank is M&I (not very easy to work with). It looks like M&I will accept the offer, but will go after us for the $130K that we are short. I didn't know if this would be the case if we went into foreclosure instead. Of course we would rather do a short sale for credit purposes, but there is no way we could pay back $130K, so filing BK would be our only option if they would not work with us on the amount we are short. So my question is......if we did not do a short sale and went into forclosure instead, can they still come after us for the deficiency? I would assume if they could come after us in a foreclosure for the the $$$, it would be the total amount, $220K, right? Any ideas? We're in AZ, but this is not a primary residence. Is filing BK our only option here?

scottcollins · 03-11-2010, 10:52 AM

Assuming you get the $90K today, the deficiency is $130K...today. Since you wrote that you cannot afford this property, can we assume you are not paying the loan balance down now?

If you're not making the payments, the interests keeps accruing. And coupled with what you report to be a depreciating parcel, your deficiency by the time this gets foreclosed on will be larger...maybe a lot larger. Adding to that is the costs of the bank owning the property between foreclosure and sale...all your responsibility.

I don't know the laws of your state. Some are non-rcourse, but you have no primary residence so that's moot. Some are single action. If foreclosures in AZ are judicial the bank will probably get the deficiency judgment included.

Everyone is going to lose...how much and when is negotiable.

smith · 03-11-2010, 02:14 PM

There are benefits to doing the short sale for the bank too. Generally, they dont want to own property, especially vacant land. A deficiency judgment is not filed until the bank actually sells the property. So the deficiency would be the difference between what they auction it for and what you owe + the before-mentioned bank fees.
Most times the bank believes that since you couldn't make the payments that you are most likely insolvent. I would have an attorney draft something for you that says something like this: the sale of (property address) to the designated grantee will release (your name) from any financial liability or responsibility to the current mortgage holders of record, or any assigns thereof. All items that are generally payable by the Sellers as closing costs, etc. including real estate fees, real estate taxes and any property liens will be paid from the funds designated as the contracted purchase price. If there is any deficit in the application of funds, it is agreed that there will be no legal responsibility on part of (your name).

You have to insist that you are released from the financial liability.
I think that if they do go after you with a deficiency judgment that it will probably be negotiable. But it is not good to have a financial cloud hanging over you like that. Depending on your state they may have up to 10 years to file for the deficiency. I think if you get them to approve the short sale and then demand that they will release you that they probably will.
The other problem that you will have is the tax issue for the lender forgiving your debt. Since the land is vacant it would be difficult to claim that it is your primary residence so I dont think that the tax relief act of 2007 would help you. When a debt is forgiven I believe that you are supposed to claim the amount forgiven as ordinary income. So if you make 80k this year and they forgive 120k on a mortgage loan then you may have to pay taxes on 200k as ordinary income.
Depending on other assets that you have, Chapter 7 bankruptcy may be your best option. In Maryland (I know your in AZ) you are insolvent if you have less than $10,000.

Enough Already · 03-11-2010, 05:03 PM

Since you're in AZ you should look into whether or not your loans are non recourse. Many AZ loans are non recourse. If that's the case walking away may be the best option for you.

Check out this section of the forum: Deed in Lieu of Foreclosure - Do You Need Help to Walk Away? - Loans, Debt & Credit

The best thing you can do is to read, read, read up on this forum. There's lots to know and consider to determine what is the best move for you.

Good luck!

az_custom · 03-16-2010, 05:56 PM

AZhelpneeded,

I am in a similar boat with M&I and land loan (considered primary on my mortgage - I do not own any other properties). Although M&I is willing to accept a short sale, they have stated they will pursue a deficiency judgement. I owe ~$300K whereas the land is worth ~$130-$150K.

I've heard that deficiency judgement settlement judgement in the neighborhood of 10% are reasonable.

I have not decided what to do but will have to fairly soon - I ultimately fear being sued for the difference.

AZhelpneeded · 03-16-2010, 07:22 PM

AZ Custom-

Are you current on your payments? We decided not to pay our 3/1/10 payment. We also have 2 other loans with M&I (rental house and another lot loan). Those we plan on keeping and those are current. We're planning on meeting with a real estate attorney soon. I read/get different answers as to if they can come after you for the deficiency. I think they can, but others say they can not. There is another thread under short sales about M&I. So far I have only come across 4 of us that have M&I. There is another on here (thread: CITI & M&I) that got M&I to take $15K on a $107K short. I fear of being sued as well.........M&I does not seem easy to work with. Keep me posted on what you decide to do! Like I said, there are only a few of us with M&I and we need to stick together!

az_custom · 03-16-2010, 07:30 PM

AZhelpneeded,

I am current with my payments. M&I has said that they are willing to entertain a short sale but that I would be responsible for any deficiency. I think this is standard positioning.

I'm trying to find data on what the average %of deficiency amount lenders typically settle for. I am also concerned about any taxes due on debt forgiven since there is no home on the property.

I'm trying to do a little more research before listing. I plan to speak with an attorney shortly.

I vaguely recall another on this board who has gone into foreclosure with his property ... not sure what his/her current status.

Please keep the board posted on your status ... I will do the same.

AZhelpneeded · 03-16-2010, 07:42 PM

AZ Custom: I can tell you from expereince we were issued a 1099-C for canceled debt on our primary residence last year. Wachovia took 20% off the principle ($60,000). I do not have the damage yet since the CPA is stil working on it. I'll let you know how that shakes out.

I've heard 10% as to how much a bank is trying to get after a deficiency. I'm sure it all depends on your specifc situation and the collection person you are assigned to. So many factors. I can tell you that I am going to try not to go above 10% ($13K) and I would prefer 5%! I know the other person on here kept getting $25K thrown at them on a $107 deficiency. The way I see it, if I had $25K sitting around, I would just rather pay my loan for 2 more years than go through this.

It took almost 18 months to get an offer on my lot. I really would like this to go through. Land does not seem to be selling, which may help us when dealing with the bank. I mean why buy a lot and build a house when you can buy a built home cheaper! Plus it's hard to qualify for lot loans and construction loans now. Where is your lot? Ours is in Gilbert (.5 acres).

az_custom · 03-16-2010, 08:24 PM

AZhelpneeded,

I'm not sure a 1099C would be issued for land only (although on my mortgage it is identified as a primary residence).

I think I could swing a 10% deficiency if it meant I was out of this property

My land, ~0.9acres, is in a custom neighborhood in Verrado (Buckeye).

az_custom · 03-27-2010, 10:33 AM

AZhelpneeded,

Any update on your end?

az_custom

AZhelpneeded · 04-12-2010, 09:37 AM

AZCustom:

Sorry for the delay. We met with a real estate attorney. The outcome was what I expected.....since there is not a home on the lot, they can come after us for the deficiency. Anti-deficiency laws do not apply to us. So this is where we are now......

I decided to make out 3/1/10 payment afterall, so we are still current. We have the one offer at $90K and another one at $110K. Only the $90K offer was submited, since it was first, but it was denied by M&I because we put wording in there that we would be released of the deficiency. So now we are seeing if we can submit the $110K offer and see what kind of wording we can put in there that may give us an out if M&I will not settle with a reasonable amount. I too have heard 10%, but even the attorney said M&I is very difficult.

However, I've read on here another settling with M&I for about 10%, so I am hopeful.

I finally called and spoke with M&I. Our realtor had been doing all the conversations prior. It looks like it takes 30-60 days to get an approval after an acceptable offer is made. After an offer is made, M&I gets an apprasial, counters if needed and then it takes 30-60 days to get an approval. It looks like we are starting from square one.

Any forgiven amount will be issued a 1099, so then you have taxes to deal with. We are currently going through this for 2009 for the $60K that we were issued a 1099C for. We filed an extention for our taxes, so I'm not sure how all that will shake out yet.

Have you decided anything on your end?

az_custom · 04-12-2010, 12:09 PM

AZhelpneeded,

I agree with the deficiency route. Given no home, we're out of luck there.

The best chance is to short sale the lot and settle on the deficiency. I could live with 10-15% ... no much more.

ON the 1099 note - will the tax due on forgiven debt also be forgiven or are your responsible for any gains resulting from the debt forgiven? Did you consult with your attorney or CPA on this? I though there was some sort of Debt Forgiveness Act ... perhaps it does not apply to lots.

I'm continuing to make payments and staying current. However, over the course of the next few months, I have some decisions that I'll need to make.

Please keep the board posted on your progress.

Hope all is well,
az_custom

AZhelpneeded · 04-12-2010, 12:52 PM

AZ Custom:
In regards to the 1099 we got for last year, it's for our primary residence. We have a CPA working on this. We might qualify for the 2007 Debt Forgiveness, but since we still live in the house, I am not so sure. Insolvency might also be an option. The CPA is doing all our tax stuff and then we'll figure out the best route to go. Many of her clients are home builders that have had to go through the same thing, so she is experienced with our situation. I'm not sure you could say your lot was your primary residence and be able to take advantage of the Debt Forgiveness Act. Any forgiven amount will count as income on your taxes. So if you made $100k last year and then M&I forgave $100K, you would say you made $200K in income and have to pay taxes accordingly. BOO!

One thing you may consider is M&I has a policy that your property has to be up for sale for a certain amount of time prior to even entertaining a short sale. I think it is 3 months, but I really can not remember. So you may want to put it up for sale now if you are even considering a short sale in the future. Ours has been up for over 18 months and we got our first offer about 2 months ago.

Best of luck!

az_custom · 05-04-2010, 10:54 PM

Hello AZHelpneeded,

Thanks for the information. Any update on your end?

az_custom

sambo · 05-05-2010, 11:11 AM

Quote:

Originally Posted by AZhelpneeded

AZ Custom:

One thing you may consider is M&I has a policy that your property has to be up for sale for a certain amount of time prior to even entertaining a short sale. I think it is 3 months, but I really can not remember. So you may want to put it up for sale now if you are even considering a short sale in the future. Ours has been up for over 18 months and we got our first offer about 2 months ago.

Best of luck!

Wanted to note that with my short sale for M&I, I did not to have the property for sale 3 months before they accepted the sale. I had my property listed for 30 days when we got our original offer which was accepted by M&I (buyer backed out for other reasons anyway). Maybe my difference was due to the fact M&I was the 2nd on my home vs. the first. Can I ask whom at M&I you are negotiating with?

az_custom · 05-24-2010, 01:22 AM

Azhelpneeded,

Any update on your lot with M&I?

Hope all is well,
az_custom

az_custom · 07-06-2010, 11:18 PM

Quote:

Originally Posted by AZhelpneeded

AZCustom:

Sorry for the delay. We met with a real estate attorney. The outcome was what I expected.....since there is not a home on the lot, they can come after us for the deficiency. Anti-deficiency laws do not apply to us. So this is where we are now......

I decided to make out 3/1/10 payment afterall, so we are still current. We have the one offer at $90K and another one at $110K. Only the $90K offer was submited, since it was first, but it was denied by M&I because we put wording in there that we would be released of the deficiency. So now we are seeing if we can submit the $110K offer and see what kind of wording we can put in there that may give us an out if M&I will not settle with a reasonable amount. I too have heard 10%, but even the attorney said M&I is very difficult.

However, I've read on here another settling with M&I for about 10%, so I am hopeful.

I finally called and spoke with M&I. Our realtor had been doing all the conversations prior. It looks like it takes 30-60 days to get an approval after an acceptable offer is made. After an offer is made, M&I gets an apprasial, counters if needed and then it takes 30-60 days to get an approval. It looks like we are starting from square one.

Any forgiven amount will be issued a 1099, so then you have taxes to deal with. We are currently going through this for 2009 for the $60K that we were issued a 1099C for. We filed an extention for our taxes, so I'm not sure how all that will shake out yet.

Have you decided anything on your end?

Azhelpneeded,

Any update on your lot with M&I?

Hope all is well,
az_custom