Yesterday, a fellow investor sent me the following email regarding Short Sales Vs. Deed In Lieu:

I have a client that I am working with on a short sale for their house.  Before talking with me they had already started the process with their first mortgage holder for a "deed in lieu of foreclosure". The lender has told me that they will consider either the deed in lieu or a short sale but not both. If I start the short sale process they will stop the deed in lieu process. The first mortgage holder will provide an initial readout on the deed in lieu on 12/29. My inclination is to wait on any short sale discussions until that time so that the homeowner will have that information from the lender before we start any short sale discussions.

Can you provide a summary of the advantages and disadvantages of a short sale vs a deed in lieu of foreclosure? I would like to provide some information to the homeowner so they can decide how to proceed. The other detail on this situation is that the homeowner also has a second mortgage. No discussions have taken place with the second mortgage holder so far. The house is not worth what is owed on the first.

This is a great question and I thought I would share what I know about Short Sales Vs. a Deed In Lieu.

  Deed In Lieu Of Foreclosure:

A "deed in lieu of foreclosure" is when you voluntarily give your house back to your lender and move out. In exchange, the lender stops the foreclosure and agrees not to sue you for more money if the house is sold for less than the amount you owed.  Since a DIF does not wipe out junior liens (i.e. 2nd mortgage or other liens), banks will usually NOT accept a DIF because they do not want to inherit the junior liens against the house. Also, you will not receive any money for your house when you use a DIF.

Bottom Line:In general, to take advantage of this solution, you must only have one mortgage. If you have a 2nd mortgage, 3rd mortgage, etc, most banks will not accept a DIF.

  Short Sales:

A "short sale" is an agreement with your lender to accept less money than they're owed as full payment for your loan. This solution often makes sense when you owe more than the property is worth. For example, if you owe $500,000 but your property is only worth $420,000, a short sale may be your only option.  Rather than trying to negotiate a short sale yourself, often times its better to call a professional who is experienced in negotiating with lenders.  A short sale requires selling your property to an end buyer who will live there, or an investor who will negotiate with your lender on your behalf. There are no guarantees that the lender will accept the short sale. Keep in mind that your bank does not want your house back! It is considered a non-performing asset and they cannot have too many on their books! They want to work something out with you.  As part of the short sale agreement, the lender prohibits you from receiving any proceeds from the sale. In other words, the investor cannot give you any money for your house. However, the investor may be able to give you some money under a "Bill of Sale" for household items such as furniture and personal effects such as jewelry or art.

Bottom Line: To take advantage of this solution, you need to have the following:

• A Hardship
• Owe As Much Or More Than Your House Is Worth
• A Realtor Or Short Sale Negotiator That Knows The Process And Paperwork Required By The Bank(s)

So to answer the investors question: I would first get all the financial information from the homeowner.  I would want to know all about their financing (loan structure), and why they is going into foreclosure (his hardship).  I would also take into consideration the local market and see if there is ammunition to take to the bank when negotiating my offer!  Most investors don't realize how much work a Short Sale is and selfishly try to discount the home only to fail, when in fact all they are doing is wasting valuable time that the homeowner really can't spare.  In my opinion, the bank will not allow a Deed In Lieu of Foreclosure because there is a second lien on the property, and a Short Sale will be this homeowners best option. (I would also check into a Loan Modification to see if that would be your homeowners best option...but thats for another case study!)

This is Cody Sperber Saying Get Creative And Good Luck On Your Future Real Estate Investing Adventures!

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