Home Loans and Support

Planning a "Buy and Bail" in AZ

Discussion in 'Deed in Lieu of Foreclosure - Do You Need Help to ' started by walkingwesttoeast, Nov 25, 2011.

  1. walkingwesttoeast

    walkingwesttoeast LoanSafe Member

    Here's my situation: I purchased a new home in Phoenix in September of 2006 as a single man. House sold for $345K, with a ADJUSTABLE mortgage of $311K. One month later, I met my wife to be. In October of 2007, we were married.

    The house, while nice for a single man, is not so nice for a married couple. There's simply not enough room for us. In addition, today I still owe $290K on that loan, while Zillow says my house is worth $135K.

    I work from home for a company on the east coast. I've been having to make trips back to the east coast (which is a pain), so my wife and I have decided to buy a home nearer to the office. Luckily, I am eligible for a VA loan, and did NOT use it on the current home (not sure WHY I didn't use it, but for whatever reason, I didn't). I'm also luck in that I have enough income to qualify for both homes.

    Since I am so upside down on my first house, and the interest rates will only continue to rise, while the value won't come back for years... we've decided to buy the house on the east coast, then walk away from the house here.

    My understanding is that since AZ is a non-recourse state, and since I only have the one loan, and never took money out of the house, it should be very easy to walk away... with no fear of a 1099-C. After reading the IRS rules, it appears that we would be taxed on the difference between the amount we owe and the basis cost of the house (in our case, the original loan value). Since that equates to a loss of $20K for me right now, there will be no taxes owed.

    So, we will purchase the home on the east coast using my VA benefit, and as soon as we close, stop paying on the home here in Phoenix.

    I plan on passing this plan past a lawyer first, and then retain that lawyer to deal with the bank when they start contacting me for payment. My hope is that if I have a lawyer represent me, the bank will accelerate the foreclosure process.

    Does anyone see anything wrong with this plan, or have any tips they would like to give me.
  2. InMesaAZ

    InMesaAZ LoanSafe Member

    we did what you are planning, except we didn't really plan it out like that. we also bought a small starter home in 2006 (265K, 80/20 30 yr), the value dropped by more than half after the crash. we bought another house with the intent to rent out our first home. we rented it for a year. while we were crunching the numbers for the rental, it became more and more obvious that walking away was in our best financial interests.

    we did a free consult with an attorney and they pretty much said the same thing. our 2nd mortgage was held by green tree, and they were *******s about everything. GMAC knew what was up, we talked to them once and they never bothered us again. we didn't get an attorney for the process, as we knew our rights and there wasn't much of a benefit to one. we stopped paying in april 2010, got our notice 3 months later, and the house sold 1 year later. our credit took a big hit once the notice to foreclose was posted, and has been gradually increasing since then, presumably because we have kept current on everything else, including the 2nd house.

    obviously the premeditated aspect of it wasn't an issue for us, i don't know how/what banks are doing nowadays to prevent that. at the time (2010) we heard that banks were tightening down things to prevent people from buying and bailing, but obviously they had no qualms about approving us for another loan even though we were way upside down on another house. good luck to you, this site has been a great resource!
    Last edited by a moderator: Dec 26, 2011
  3. shayl475

    shayl475 LoanSafe Member

    If you retain an attorney, see if you can get him to negotiate a "cash for keys" settlement for you as well! I think you will not have a difficult time qualifying even under scrutiny because you are moving so far away. Good luck and keep up posted on your progress.
  4. walkingwesttoeast

    walkingwesttoeast LoanSafe Member

    What is this "cash for keys" program that I've been hearing about? How does it work in AZ?
  5. startingout

    startingout LoanSafe Member

    Did you ever get an answer about the "cash for keys"? And how are things going with your situation?
  6. walkingwesttoeast

    walkingwesttoeast LoanSafe Member

    We've found the home in Virginia and are in the process of getting a VA loan on it. To prevent "Buy and Bails", the loan companies are now requiring statements as to what you're going to do with your existing home. We said that we intend to rent it out; however, we've now decided that we will probably short sale the house - as short sales are now doing very well here (with the average wait being only 49 days right now).

    The loan process has been a pain (aren't they always?), especially since we are trying to qualify for a SECOND home. Luckily we make enough money to do so - and I'm sure this is not something most people could do.

    Now, we're just waiting on the IRS to verify our taxes before the loan funds. Maybe a few more weeks. Once closed, we'll put the home in AZ up for sale, and hope that the bank will accept a short sale. If not, we may have to foreclose as expected.
  7. bigweather

    bigweather LoanSafe Member

    walkingwesttoeast:
    We are doing the same here in Arizona, though only moving about 30 miles from our current home. After over three months of negotiating with the bank on a purchase of a SS, we finally reached an agreement (verbally, still waiting for contract). I'm curious about your comment "the loan process has been a pain." How so, as I'm in the process of gathering all of my docs and want to be prepared for potential obstacles. I have not yet been asked about what we plan to do with our current home and frankly we haven't decided though considering we are underwater by 50 - 60K, and monthly mortgage exceeds what we could get with rent, will likely let it go (though will still rent in the meantime for positive cash flow and occupancy). Any tips on getting through the loan process will be appreciated.
  8. walkingwesttoeast

    walkingwesttoeast LoanSafe Member

    There have been several issues, and most of them are because I'm going for a VA loan:

    1. I have both W2 and 1099 income. That cause a lot of qualifying issues, because they want to treat me like I'm "self-employed", even though I get more money via W2.
    2. The timing was horrendous. They need to verify my 2011 taxes, and make sure I paid them - and guess what? It's tax season. The IRS doesn't process the returns of people who OWE money until the middle of May.
    3. The issue with buying a new home while still having the home in AZ - I had to give them a statement saying that I was going to rent my home. I actually had a renter (and a rental agreement with him), but because the loan is taking so long, he may soon backout. Which means I'll need to look at what to do - short sale or foreclosure. I'm not behind in my payments at all, so I may go for short sale and try to save my credit a bit. But - this was done by them specifically to prevent a Buy and Bail, and was mostly likely a VA loan thing.

    DO NOT tell the loan company that you intend to let your home go. That will end the loan process (obvious, I know - but you'd be amazed at what people tell loan companies). In fact, don't tell them ANYTHING that they don't specifically ask about.

    Good luck with your loan - they will ask for some crazy things. Just grin and provide, and you'll get through it.

    Silly that loan companies really don't look at reality - hey! isn't that what got us into this mess in the first place? - but bottom line - I'M comfortable that I can make the payments needed, even if I have to keep my home in AZ - so all I can do is play the game.
  9. TomEason

    TomEason LoanSafe Guide Staff Member

    bigweather

    Thanks for your post.

    To qualify for the purchase loan, I recommend you list your current home as "pending sale" on the Form 1003 loan application. By doing so, you won't need to justify the probable negative cash flow on a rental property.

    Once you close on your new place, you can do whatever you please. Were it me, I'd immediately rent it out while making no more mortgage, property tax, etc payments. You'll enjoy instant positive cash flow rental income and will likely enjoy that recurring revenue stream for many many months (until you 1st FCs).

    @ wlkingwesttoeast & @ bigweather

    I commend you both for engaging in a buy 'n bail, a very savvy move!
  10. bigweather

    bigweather LoanSafe Member

    Thanks walkingwesttoeast with you quick reply and the info. I too have both W-2 and 1099 income split about 50/50. I'm hoping my process is smoother simply because it's not a VA loan. Hopefully our tax return has been processed by now. I plan to be vague regarding the current home. Thanks for the support and advice. Good luck to you.
    Tom Eason: writing "pending sale" on the loan app seems like stretching things a bit and potentially entering the loan fraud arena if the house isn't even listed. How about "rent or sell" which covers my bases and is truthful?
  11. TomEason

    TomEason LoanSafe Guide Staff Member

    bigweather

    Thanks for your post.

    Reference your statement
    all I can say is "good luck with that." If you want to be qualified for the loan, the lender will require you to state your plans with definity. I recommend you download a 1003 to see what's required.

    FYI, "pending sale" means the property will be marketed for sale; it doesn't imply the property is currently listed. The 1003 requires the code "PS" for properties that will be sold. And since a FC is a sale (albeit a distressed sale), the borrower won't be stating an untruth.

    Again the lender won't allow you to state "rent or sell" but will require you to state which one on the 1003. and/or sign a Letter of Intent.

    Sounds as if it's been a long time since you've applied for a mortgage loan. It's a much stricter procedure than it was during the bubble.
  12. bigweather

    bigweather LoanSafe Member

    Thanks Tom. I will download the form and inform myself. So I trust even though with a FC it wouldn't be me who is selling the home, but the trustee, stating PS would be accurate. Why do you suggest PS versus "rent" if you plan to do that at least short term?
  13. TomEason

    TomEason LoanSafe Guide Staff Member

    bigweather

    I recommend that because it's usually easier for the borrower to qualify. However, for the borrower who can show the income necessary to carry the new home as well as the existing, it won't matter.

    FYI, whether a short or long term rental is irrelevant. The underwriter only looks at the numbers, to wit DTI ratios.
  14. bigweather

    bigweather LoanSafe Member

    Thanks Tom. I was told by our broker that my income can carry both loans though my DTI is approaching the threshold.
    I downloaded a copy of 1003 and it looks pretty straight forward. I didn't however see the question regarding what we plan to do with the current property. After reading your post above, though, I'm less concerned about exactly what to say, but know now to be specific with what I state.
    Much appreciated.
  15. TomEason

    TomEason LoanSafe Guide Staff Member

    bigweather

    Thanks for your update. Glad to hear your income qualifies you to carry both properties.

    I neglected to comment on this
    .
    Although the trustee would be conducting the actual FC auction, in the eyes of the law (and the IRS) the owner is the one who's selling that asset.
  16. bigweather

    bigweather LoanSafe Member

    This is good to know, thanks.
  17. walkingwesttoeast

    walkingwesttoeast LoanSafe Member

    bigweather:

    I just went through this, and the loan company required me to state that I was going to rent the home, and for how much. THEN, they required me to have a signed rental agreement, AND a rental deposit. The renter has since backed out because the loan company took 45 days longer than anticipated - but it's all good... see my update post!
  18. walkingwesttoeast

    walkingwesttoeast LoanSafe Member

    And now... an update!

    We received the "Clear to Close" on our VA loan last Wednesday, and we are doing a remote close TOMORROW.

    In the meantime - we contacted a local realtor who came and looked at our property, and is going to do a shortsale for us. We're in a really nice neighborhood, and typically the houses sell in 1-2 days. We have Wells Fargo, and the realtor says that they are typically processing short sales in 3 months.

    Here's the kicker... as you may know, in Arizona, if you only owe on a "purchase money" loan (a single loan), and you get foreclosed on, you can't be hit with a deficiency claim from the bank - so we would not owe any taxes if we got foreclosed on. HOWEVER, you do NOT get the same protection if you short sale. You MUST have a clause in the paperwork from the bank at selling time that states that they won't pursue a deficiency against you. Without that, they have SEVEN YEARS to come after you for the deficiency - so they could wait until after the current law allowing us to "offset" the deficiency expires at the end of this year, then hit you.

    So, my plan is to stop paying the mortgage immediately (I'm caught up), and put the home on the market on July 3rd (we're moving across country on the 2nd). If it sells, and Wells Fargo approves it with the appropriate agreement to release us from deficiency - then all is well. If not, then we'll just let it go to foreclosure and never deal with them again. Either way, we're clear of it, with no tax burden! Obviously, we hope the short sale goes through - that will save my credit a bit (except for the 2-4 months of missed payments on the loan).
  19. TomEason

    TomEason LoanSafe Guide Staff Member

    walkingwesttoeast

    Thanks for your post.

    If it were me, I definitely would not SS, but would instead FC. A SS might save about 5-10 points on your FICO; that's it. But the drawback is this. In doing a SS, you'll be truncating your ownership time.

    If you were to FC, you'd own the property for a much longer time, allowing you to rent it, and enjoy cash flow positive rental income for many many months. This would afford you the opportunity to stash a bunch of savings.
  20. walkingwesttoeast

    walkingwesttoeast LoanSafe Member

    Tom - that's quite true; however, I failed to mention that there is an HOA of $200 a month, which I am legally obligated to pay as long as I own the property, AND there is insurance that I would have to maintain as well. True, after paying those I'd still have positive cash flow, but not enough to justify owning the property to me.

    I'm hoping that the short sale is really fast, and I can be rid of this. I can't imagine that a SS with 3-4 missed payments will only differ from a long foreclosure process by 5-10 FICO points. In fact, I'm pretty sure it's more than that - because a late payment on one credit card can account for that.

    Still, for some people, that would be a great move!

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