Strategic Defaults and Short Sales

Real Estate Agent with Ask4Ferguson - Your House-SOLD Name in Real Estate

Strategic Defaults Running Rampant

I first started hearing and reading about strategic defaults in late 2009. My team would frequently talk to sellers (both non-listed and those referred to us by REALTORS®) who fit this description, and I never knew what to call it until this label was created. I’m very disturbed by the trend my team has seen lately with so many sellers who are strategically defaulting. This article describes what a strategic default is and most importantly our policy (which you may want to adopt in one form or another) for dealing with sellers who are involved with them.

My definition of “strategic default”: A seller who stops making payments, even though they have the financial ability (income exceeds expenses) to do so. The reason for the strategic default in my opinion is irrelevant. It could be with only good intentions: to get their lender’s attention so they will consider a short sale, loan modification, or other type of workout (many lenders will not consider any workout when sellers are current). Many times, sellers have no intention of a workout – they may purchase another house first (sometimes a more expensive house) and then default.


It is my personal opinion that regardless of how upside-down (value vs. mortgage) a house is, if a borrower has the financial ability to pay, they are morally and legally obligated to pay. They borrowed the money and promised to pay it back (that’s why it’s called a promissory note).


Our position? We run away from these as fast as we can. Why? Not only is it not “the right thing to do” (in my opinion) but consider this: If a seller is going to play this game, aren’t the chances much higher that they might falsify their documentation in trying to prove a financial hardship? That documentation is a key part in not only getting a short sale approved, but it what makes the seller’s and your representation of the situation to the lender legitimate. I don’t know about you, but I’d rather not be involved in any potential loan fraud situation.

There is a HUGE difference between “I can’t pay” and “I don’t want to pay”. We choose to work with sellers that are in the first situation and I suggest for your and your broker’s protection, you do the same. It’s also a smart business decision – when the bank catches onto this strategic default, the chances of short sale approval are slim to none. Do you want to be putting your time into a short sale that is not likely to close?


Fannie Mae realizes the problem which is why they are locking out these defaulters for 7 years from any new loans.

Many sellers incorrectly believe that it’s their option/right to “give the property back to the bank” via foreclosure. First off, the bank never owned the property; it’s always been the seller’s property. Failing to make payments is a breach of contract (the promissory note) and the lenders remedy is to foreclose and sell the asset to recover part of their loss. The value of the house has nothing to do with someone’s ability to pay.


Here’s a good test question to ask a seller to help you evaluate the situation: “If there were no such thing as a short sale, only foreclosure or stay current, how much longer would you make payments?” As a follow up, ask “if you had $50,000 of equity, how much longer could you make your payments”. These two questions will give you more insight to what really might be going on with your potential seller.


For some sellers, the ability to pay changes when they realize they are upside-down. Those than can pay but won’t pay are making things worse for those with true hardships.


Feel free to contact me with questions!


Reprinted with permission of Great Lakes Home Solutions



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L. Scott Ferguson

Sunny Florida Real Estate Professional
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