Foreclosure or Short sale on 2nd property with 2 loans?

Question

I own two properties -- my condo and my house. I live in my condo and it is a very manageable mortgage with Chase. After everything shakes out, I only want my condo.

I also own a house in Hawaii which is listed for sale with a realtor. The mortgage and HELOC on the house are totally unaffordable and have drained every penny out of me. The mortgage and HELOC on the house are both with Wells Fargo. Even if I was to rent out the house, I'm still losing -$1000 a month which I have to cover out of pocket. Without rental income, I'm out -$3500 a month (max rent for the house is $2500).

Selling the house for market price (which is getting lower by the day as sellers are dumping their homes) and after paying the realtor commission, I'm short -$30K out of pocket at closing, which I don't have. I don't have savings, no 401K, no IRA. I'm also facing an out-of-work scenario in July, since my job contract hasn't been renewed.

So, I'm trying to figure out what to do. I learned from before when I did a short sale on another property in 2012 that it's a bad idea to throw good money after bad, waiting for the market value to rise. I do not want to throw good money at this house.

Possible Options

1. Somehow get $5K to pay for the repairs to get it rental-ready, and rent it out. Hawaii law does not allow you to terminate a lease when a house is sold, so renting it out will limit the field of potential buyers. Even with rental income, I'm out-of-pocket -$1000 per month. For the months without a renter, I'm out -$3500 a month.

2. Don't rent it. Don't make payments on the mortgage or HELOC either. Continue to try and sell it for an above-market price that covers the mortgage note, HELOC, and realtor commissions. Eventually (2 months probably), the bank will start threatening foreclosure. I can talk with them about foreclosure or short sale possibilities, maybe delay it for a few months, meanwhile the house is still listed for sale. Best case: the house is sold and I walk away free-and-clear. Worst case: the house is short-sold or foreclosed.

3. Something I haven't thought of?

My questions

1. What would you do? I'm leaning to option #2, but am open to ideas.

2. Will Wells Fargo who holds both the mortgage note and the HELOC on the house be likely to agree to a short sale and forgive the balances of both the mortgage and the HELOC?

3. With a foreclosure or short-sale on the house, what happens to my condo that I live in?

Thanks.

Loren Clive · Answer

I don't think you get any kind of cash incentive to do deed-in-lieu. Upside with the short sale is that you could charge buyer extra for appliances. Tell your realtor you'd like to do a short sale.

Then you're the lowest listed on market and your problem is solved.

Scott K. · Answer

Thanks everyone who replied. I have thought this out quite a bit, and I have done a short sale before. But I don't claim to know everything or to even know what I think I know.

To answer some questions:

1. There are no other liens on the house in Hawaii. Just the primary mortgage note and the HELOC. Both are with the same lender, Wells Fargo.

2. I don't care about my credit. I have lousy credit after the short sale from 2012 anyway. I'm not buying a car or another house. I have no desire to take on any more debt. Ever. Never ever. So, I'm not too concerned about having bad credit for awhile.

3. Like I did with my short-sale of a condo in 2012, I put a condition in the contract that the lender would not hold me responsible for deficiency, and they agreed to it. The realtor thought this was strange to put in the contract, but I felt it should be there. I would do the same with this house.

4. I'm actually not underwater on this house. But after you factor in the realtor commission and closing costs, I'd be short -$30K at closing which I don't have.

New questions:

1. I've never heard of a "Deed-in-Lieu (of Foreclosure)". What are the conditions for this to be available to me? What is required of me? What are the advantages/disadvantages over short-sale or foreclosure? Do I need to have my lawyer file for this? Do I need to miss some mortgage payments to trigger this discussion with Wells Fargo? I remember having to miss 2 mortgage payments before Wells Fargo would discuss the short sale for that other condo I had.

Scott K. · Answer

Big Island, Kona side. There's normally 3-4 houses for sale in my subdivision. There's now SIXTEEN (16) for sale! And they are dropping their prices fast.

The biggest drop was yesterday, one of the houses dropped their price -$50,000.

It's true the market for less than $400K homes in Hawaii is hot, but the homes in the mid-high $550K-$600K is not selling, not in Kona. In fact, there's too many of us that bought these homes and we're all trying to dump them at the same time.

Loren Clive · Answer

Anyway, the short sale is the way to go if you're really underwater. Wells Fargo may even give you a cash incentive to do the short sale!

None of my short sale clients have ever received the dreaded 1099 from the IRS on their tax returns.

Loren Clive · Answer

which island is your property on? The market here in Maui is smoking! I don't buy that homes are losing value by the day.

Ron S. · Answer

You've thought it out pretty much from what you wrote. You should be cognizant of the deficiency rules in Hawaii in case they foreclose judicially (Court action). They could come after you and would considering you have another home. It's easy to get a judgment and put that abstract on your leftover property.

One possible option? Deed in lieu? Giving title back to the bank. It's not as easy as signing over the deed but, with lender cooperation and approval its the same effect.

With a short sale, they may still be able to collect a deficiency. Just make sure if they approve a short sale or a deed in lieu that you include language in the approval that they won't pursue you for any deficiency.

Jay Raught · Answer

Can you find anyone willing to Subject To? Any military nearby?

Justin White · Answer

HI Scott,

Sounds like a sticky situation.

1. I am with you in thinking it is a good idea to NOT make the payments to the 1st or 2nd mortgage on the property. I know from experience the lender will not even start the negotiation process for a short sale until there are a few backed payments. As for the bank threatening foreclosure, that process is very lengthy and they would rather negotiate either a short sale or Deed in Lieu of foreclosure, but in order to get to that position, you will have to stop making the mortgage payments. I personally would push for the Deed in Lieu, this would be easier for you as the seller of the property, less hassle overall compared to a short sale.

2. In my experience, the 2nd lender during a short sale takes such a nominal amount it shouldn't really make a difference. From the negotiation standpoint, this makes it much easier! Rather than having two points of contact for the short sale negotiation, you will most likely only have one.

3. Well your credit will be killed with any of the outcomes if you take the 2nd route because you arent making the payments. As far as I am aware, and I am not an attorney, the lender can only try to come after the collateral that is secured by the loan. Which would not be your condo. Assuming you arent trying to refi or buy something on credit like a car or get student loans, only your credit will be affected.

Do you know if there are any other liens on the property? If there is a Federal IRS lien on your hawaii property, that will need to be paid off in escrow or taken into account for the short sale negotiation.

Hope this helps

Foreclosure or Short sale on 2nd property with 2 loans?

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