I received a telephone call a few days back from a homeowner who was a little foggy about what to do and wanted to brainstorm some pre-foreclosure options. This individual has a strong income, yet has some unique challenges with respect to his mortgage. The interest rate is continuously changing (as is the amount of the mortgage payments), and the prospects for his future income are somewhat uncertain.
This borrower wanted to know whether he should participate in a strategic default. A strategic default is when a borrower intentionally (or strategically) defaults on his or her mortgage. Generally strategic defaults occur when borrowers owe more on their mortgage than the property is worth and are willing to walk away from the property once the property is foreclosed.
The decision about whether to participate in a strategic default is a personal one, and it is not the job of a real estate agent or Broker to advise a borrower with regard to this matter.
That being said, depending upon a borrower’s unique situation, there may be some specific advantages to participating in a short sale versus allowing a property to go to foreclosure.
However, if the borrower opts for strategic default and is participating in a short sale, this can sometimes make for a more difficult short sale negotiation process. There may be more delays on behalf of the bank as the bank studies the seller’s finances in more detail. Additionally, banks may ask for cash contributions if they suspect that the seller has money and no legitimate hardship.
If you are involved in the purchase of a short sale where the seller is defaulting strategically (and many times you will not know), be prepared to play the waiting game. Some things are worth the wait, and some things are not. Of course, at the end of the wait, you may get a really great deal on a really awesome property.