Pending Short Sale Or Would Foreclosure Be Better Option?

[caoracon]

I purchased a house lot for $25,000 cash in Florida in 2002. In 2006 I took an HELOC equity line for $114,000 out on the property. I have had business failure and I have had the property on the market for a short sale. I obtained a buyer for the property for the amount of $20,000. I stopped paying my mortgage in January 2011. The deficiency balance is $89,000.00.

Of course Wells Fargo has my financials as the short sale is scheduled for around June 30,2011

Wells Fargo wants me to sign approval letter stating that Wells Fargo does not forgive the debt and I need to call them within 10 days after the closing to discuss payment arrangments. Wells Fargo will accurately report short sale transaction on credit report and will not change historical payment record.

I am not in a position to make any payment arrangements and wonder if it makes sense to let Wells Fargo forclose on the property instead.

Your thoughts are appreciated.

[caoracon]

Some additional information here is that I went to family members who offeres to help with $8000 but only if Wells Fargo remove the deficiency from the approval letter. Wells Fargo refused. The real estate closing attorney suggest go ahead with the short sale and pay for 6 months. He said it would be better to get a now note after the closing and pay for 6 months.

I explaind to my negotiator at the attorneys office that I could not make arrangements pay Wells Fargo but she says close on the short sale and pay $100-$200 a month to buy time. I have stopped paying my credit cards have no health insurance and no work. I am paying for groceries and gas for my car from what is left of my savings and that is about it.

My biggest concern is this would be considered a stategic default I would be sued for breach of contract but my credit report is a shambles and I own a 2000 Ford Taurus so what point would it be in sueing me?

[Francie]

It makes very little sense to keep paying (deficiency note payments/new note) for something you no longer have: you might just as well keep paying the note you have right now.

Do keep in mind, though, that a deficiency can be enforced for 20 years if a judgment is granted. But, the terms are such that WF should be told to take a hike unless there are more facts you havent' told us.

Another problem lies in the fact that it is land and not a primary home. That deficiency, if cancelled/forgiven could cost you substantially in tax since you can't get a waiver via the Mortgage Debt forgiveness relief act. If you're insolvent, there may be some help. Download publication 4681 from the irs.gov site and use the worksheets.

Check your county property appraiser's website to see what the appraised value is or call them to see the projected 2011 "Just Market" value. Won't get that normally until August. You might need to know that to help make your decision.

Some numbers: if you have an $89,000. deficiency, that is either paid via a new note (what WF is demanding) or if forgiven/canceled becomes taxable as ordinary income (assuming you're not insolvent). Not a great prospect - $ signs with wings. If you let them foreclose, there could be some advantages from a tax standpoint regarding the debt, but there still are tax issues. In a foreclosure, the property is treated as sold for the note value. The difference between the note and the "Fair Market Value" is the deficiency for tax purposes. That's why you want the county number. If it's close, it MAY be something to consider. Also, it is evidence to be introduced at a deficiency hearing in FL - the deficiency hearing is separate from the foreclosure hearing and you should attend both to protect your rights. However, there will be a capital gain between the $25,000. original cost and the $109,000 "sale" price - the note balance, according to your example. That will be at a lower rate and can be offset by other real estate losses you might have. In any case, the percentage is lower. If it were a primary home, it's almost a no brainer as there would be an exemption of much more than the sale price but that isn't the case, here.

After getting the county number and reading 4681, you'll be in a better position to make a decision. Off the top of my head, I'd tell them to take a hike as there's nothing helping you with the "settlement". Also, unless there are other facts you haven't mentioned, get another attorney. I can't see paying someone to help the opposition collect; you could negotiate that yourself. As far as "buying time" you will have signed another contract and you'll be in the same position you're in, now.

One thing you may need to consider if WF plays hardball is bankruptcy b ut that's a whole 'nother subject, a last resort and you need a good attorney. Another reason I bring this up is to warn you not to try to be clever and mention it as a "negotiating tactic"/ It's not. And, you could screw yourself big time if you mention it, especially in writing.

[caoracon]

Francie Thank you so much for your response. I definitely feel like I am between a rock and a hard place and after reading this post and other information about HELOC short sales at this point I am leaning toward refusing the short sale. I understand that the HELOC pursues the deficiency balance vigorously and I am just not a good negotiator. All the fight is out of me after this ordeal.


How do I tell the closing attorney I am not going through with the sale now as it is just days away?

[caoracon]

Francie I am not living in Florida so was not planning attend any hearings. What rights should I be protecting at the hearing?

[Francie]

It all depends what you've signed ("how to tell the attorney...."). If you have signed a purchase and sale agreement and it was not contingent on a satisfactory short-sale agreement, you'll just have to go through with it. If it was contingent on a satisfactory agreement or approval from the bank, then simply refuse to sign the approval letter and the bank will withdraw its approval. Tell the attorney the terms are unacceptable; ditto the bank's negotiator. If you've signed the letter, you may be stuck, too. You're free until you sign.

As far as the hearings, you would be preventing a loss by default. Depends how much the attorney charges (you may not have the right one, though. If the foreclosure proceeds, you will get a notice to respond. RESPOND! You can do it yourself, depending on grounds. The really important one is the deficiency hearing. It would help if you had a decent attorney. Did you check into the tax implications?

Another, slight possibility is WF might just relent on the deficiency or part of it. Only you, with full knowledge of your financial condition, can be the judge of that. They just might settle on 10%. OK, that's a hunk of change but less than the tax issues. One needs to look at the whole package. As far as vigorous pursuit, I suspect they do it for two main reasons: one is that usually an HELOC is used for things other than the home so it's a philosophical issue ("They bought cars and other stuff and now want to walk away free") as well as tactical - the federal tax can be waived on a primary home only if the loan being cancelled was for the home or upgrades to it, the idea being that any forgiveness of debt would be taxed heavily so you can pay me (bank) or the Feds but you will pay.

[caoracon]

Thanks for your response. I have not signed anything except purchase and sale agreement which has a clause that states that I would not be responsible to pay any money to the bank.

I have net loss carryover from my business so I think taxes are not a problem for me.

As far as the foreclosure hearing goes you are the first to discuss the importance of responding and attending the hearing. Is this of particular concern because the property is in Florida, a judicial state? If you have time could you elaborate.

[SurfwhenUcan]

What do you mean "clause that states I would not be responsible to pay any money to the bank"? I thought WF refused to waive deficiency?

BTW, whose real estate closing attorney is telling you to do this, yours or theirs:
The real estate closing attorney suggest go ahead with the short sale and pay for 6 months. He said it would be better to get a now note after the closing and pay for 6 months.

And what's a "now note"?

[Francie]

Thanks for your response. I have not signed anything except purchase and sale agreement which has a clause that states that I would not be responsible to pay any money to the bank.

I have net loss carryover from my business so I think taxes are not a problem for me.

As far as the foreclosure hearing goes you are the first to discuss the importance of responding and attending the hearing. Is this of particular concern because the property is in Florida, a judicial state? If you have time could you elaborate.

Depends on the business. You may or may not (most likely not) be able to offset real estate gains with business losses.

As far as the hearing, failure to respond will result in a judgment by default. You don't really care about "part 1" the foreclosure because you want it off your back. Part 2, the deficiency hearing is the problem. It is separate from the foreclosure hearing but the creditor has 5 years to file it. Usually it would be after the sheriff sale and the bank puts in the value received which, subtracted from the note is the deficiency. It can be an appraised value if they don't get any bids. You can, at this hearing, refute the bank's appraisal with your own appraisal. This is important. You need to be represented at that hearing. I have heard, admittedly anecdotal, stories of a default at a foreclosure hearing and the bank immediately moving for a deficiency hearing and shoving their value in. Even if that isn't done, if you don't go to the hearing, their value will be used, leaving you with a judgment which, if filed properly will be around for 20 years.

Here's what I hope will happen. Your refusal to accept the "deal" from WF and an indication to move forward with foreclosure will delay the process, costing them money in the form of foregone interest, taxes, some maintenance, etc. and they just might be more amenable to a deal. They might not wipe it completely, but might settle for quite a bit less (from your standpoint 10% is max.).

[caoracon]

Surfwhen you can- Thanks for your response.
In the actual purchase and sale agreement I put a clause that states that as a condition of the sale I would not be required to provide any additional funds toward the sale. This clause is there for just this scenario where the buyer and seller agree on a price and then the bank requires more. So this protects me from being forced to go foreward if I find this is not the right deal for me.

The approval letter from the bank is where the language is about the bank refusal to waive the deficiency.

My real estate attorney is telling me to go ahead with the deal and negotiate the deficiency. His most recent email says that he will negotiate the deficiency for me if the the bank pursues it.

Sorry I meant "new note" which would take the place of the original HELOC note. Essentially replacing the original note that had to do with the property with a note with no collateral. So it would be like a credit card loan.

[SurfwhenUcan]

Ah, now I understand. What happens to the second is the lien is extinguished, meaning their right to foreclose is extinguished. The note is the same, it is just unsecured. It's more commonly called a "sold out junior".

Your atty thinks you should pay payments on the SOJ? I can't say I agree with him but he's more familiar with your case so maybe he has a good reason. Having to negotiate with the lender on a deficiency after the sale is exactly why I hate Short Sales - through the process they get to pick through your financials with a fine tooth comb and they don't have to lift a finger to get the information.