Strategic Default ... Is That Really A Good Idea?
In Northern Nevada, like many other areas in our nation, the economic collapse has been so far reaching that certainly everyone reading this knows someone that has been Foreclosed on, been involved with a Short Sale, or had a Notice of Default filed on them. Unless you check the public records to stay current with the Market, you might not know who they are, but the downturn effect of the global economic decline of recent years has had a far reaching effect and they are everywhere.
The Market is not selective about who it impacts. It is far reaching and has impacted those with large and small financial wherewithal. It comes down to cash flow and staying power. Some are placed in the predicament of losing their home due to job loss, divorce or relationship termination issues, illness and medical bills, etc. Those situations initiate legitimate interruptions in cash flow beyond their control. Diminished cash flow for an extended period causes savings to get spent, and the house payment becomes unbearable or impossible.
In such situations, there are opportunities available to help including HAMP, or HAFA, that will help with a loan modification, or an expedited Short Sale process that helps the Seller move after the sale. These are designed to help the defaulting borrower that is in a legitimate financial bind. A resetting adjustable rate loan can also contribute to a legitimate defaulting situation for a borrower.
There are those, however, that are simply walking away from their property. They are still employed, still have a good cash flow, savings, assets, and yet they choose to default on their payment because they owe more than the property is worth. This is known as a Strategic Default. Given the impact on credit, and other considerations, they were very rare until recently. Some property owners are under the impression that if they let their property go the lender won't come after them for the deficiency because of a neighbor's experience.
The Strategic Default borrower is taking a big risk. A legitimate Short Sale, or Modification borrower must prove financial distress. They are effectively judgment-proof. The Strategic Default borrower has assets and cash flow and is ripe for a Deficiency action if they are foreclosed on. They can also be subject to paying income tax on the debt relief. Some lenders may have up to six years to collect on the debt. Who wants to worry for six years? Be very careful if you are thinking of simply walking away from a property. Talk to your attorney and CPA for unexpected or unintended consequences.
Our advice: Though it may seem like "financial strategy" to default on an underperforming property, it can be an abuse of the times if the intent is to piggyback on those that have defaulted through no fault of their own. This borrower is contributing to the continued decline of the market thus hurting everyone - neighbor, community, etc. If you can't make the payment that is one thing, if you choose not to make the payment ... think about it. Is it worth it if you are sued for a deficiency, and/or have to pay tax on the debt relief? What are your alternatives? Talk to a real estate professional for options - you might be surprised at what you can accomplish without a foreclosure.
Priorities change - sometimes from within, and in times like these, often from external influences. Dollars aren't the only reason for decisive action - evaluate your entire situation before you act. Real Estate isn't an overnight investment - look at the long run when making your decisions.
When it comes to choosing professionals to assist you with your real estate needs... Experience is Priceless! Lisa Wetzel & Jim Valentine, CDPE, SFR, RE/MAX Realty Affiliates, 775-781-5472. carsonvalleyland@hotmail.com, www.carsonvalleyland.com
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Lisa Wetzel and Jim Valentine are the authors of this blog. Lisa, Jim and Jessie are experts in Carson Valley , Carson City and the tri-county area of Douglas County , Carson City and Lyon County. Call our team anytime at 775-781-5472 or 775-781-3704. To Search for Homes go to: Carson Valley Listing Book or visit our website at www.CarsonValleyLand.com
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