Strategic Default
Homeowners underwater are looking to make the best business decision on this underwater mortgage. Many have detached themselves from any moral conflict they may have had initially and even buy another home then short sale later. Strategic defaults especially in Arizona have increased significantly over the last year.
Walking away without attempting to mitigate or negotiate a loan prior to foreclosure may not be the best plan. If a homeowner that is underwater attempts to do a loan modification or a short sale and mitigate the loss they may have a better opportunity to negotiate a settlement of a second lien through a short sale. The home may also have a larger loss at foreclosure than it may have had in a short sale.
The bottom line is these decisions are not easy to make and you must consult with a proven and effective real estate attorney, tax advisor and well trained real estate broker or agent. Experience matters and doing things correctly the first time is important.
Proper legal and tax advisement is a crucial element. This will allow you do better understand your options. For example if the property loan or loans are not a purchase money primary residence you may have different options.
Home Equity Lines in short sales
An equity line that is considered purchase money and an equity line used for buying a boat are two different types on scenarios and need to be handled differently. Each state also has different laws about how short sales are handled. We have seen the larger banks settle for pennies on the dollar on home equity lines. For example we had about a $100,000 debt settled for $8000.00 recently and other clients have both settled for more or less depending on the situation and the lender. It appears that Credit Unions and smaller banks are more difficult to negotiate with in our experience.
Investor short sales
Investors considering strategic default must also plan well. It may not be a good choice to simply mail in your keys. What if the home is damaged? Will you be liable for the time period prior to the foreclosure date? We advise all homeowners to leave the home in good condition and not strip the home of appliances and light fixtures. Damage to the home, vandalism and back HOA fees can cause you problems later.
Tax Issues on short sales
Home equity lines and investors be sure to consult your CPA prior to considering a short sale or foreclosure. The IRS wants you to pay and you must have great tax planning and strategy to minimize your risk and lower your tax burden. The tax laws change so frequently that you MUST not depend on a realtor for this advice. You must consult a tax expert.
How to lower your liability when doing a short sale.
We also advise homeowner to stay current on Home Owner's Association fees and to maintain their insurance policy if possible to lower their liability. HOA's can pursue collection regardless of if you foreclose or do a short sale so perhaps you should just stay current with them to avoid any future problems.
Strategic default is clearly a strategy that requires professional advice and planning. Take the time to pursue the information for you to make the correct decision about your home and speak with qualified real estate and tax professionals.
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