When a New Home Purchase Traps Owners in Two Mortgages

Real estate, Money

When the market took a hit in 2008, so did the value of homes across America.  The bad news was obvious: all the sweat equity and financial resources put into residential properties was lost over night and in most cases, was irretrievable.  However, there was also some good news:  homes that were otherwise out of reach for consumers were now available through foreclosure and short sales at bargain basement pricing.  And a number of families and investors took advantage of this rare opportunity.  However, they soon discovered that although they were able to quickly find the property of their dream (or “right now dream”), selling their underwater home would not prove easy.

Many of these homeowners found themselves owning two homes, with two mortgages. What are the options in this situation?

There are practical solutions, such as renting out the unsold property to cover the mortgage and related expenses or at least the lion’s share until the market recovers sufficiently to gain more equity.  However, if being a property manager is not of interest or the burden of having another property proves too overwhelming, one can short sale the property, try to give the property back to the lender, file for bankruptcy or allow the property to go through foreclosure, amongst other options.

What You Need to Know

With regard to a short sale, some things to be aware of is that:

  1. The lender must approve the sale because you are seeking to sale the property for less than the property is worth;
  2. There may be tax liability that arises from short sale event.

The short sale process can also be long and drawn out – similar to the loan modification process,  as the lender will require documentation of your finances and proof of hardship, but for some, it is the best option to preserving their credit worthiness when compared to all other routes.  In the event a short sale fails, you may be able to give the property back to the lender, which is technically referred to as a Deed in Lieu.  Like a short sale, a Deed in Lieu is lender approved and generally follows the same drawn out application process that may end with some tax liability.

Sam’s Story

Take into consideration the story of “Sam.”  As previously stated, selling underwater property requires permission from the lender and this permission is not always easy to obtain.  Sam listed his condo for a short sale because it was underwater and he had to leave the state for new employment, but when he obtained an offer on the property, the lender did not respond to the offer and the buyers walked away. Frustrated, Sam eventually submitted a hardship package to his servicer.  Sam continued to pay his condo dues and utility bills even though he had moved across the country to start a new job.  The servicer responded by selling Sam’s loan.  Sam had to start all over again and resubmit his hardship package to the new servicer.  Working with the new servicer proved to be more frustrating than he expected.  Eventually Sam sought the assistance of an attorney who spent more than a year communicating with the servicer in an attempt to obtain a Deed in Lieu for Sam.    Finally, after more than a year of weekly communication and mountains of paperwork, and complaints to various government agencies,  the servicer agreed to take a Deed in Lieu.  While he is glad to have this behind him, he is left to wonder why he had to pay an attorney to accomplish a seemingly simple process.

Sam’s story is a familiar one to consumers.  That is why some simply allow their home to go through foreclosure, opting not to deal with the lender all together.  Allowing the property to go through foreclosure is also a solution, but make sure you are aware of whether the property is located in a judicial or non-judicial foreclosure state.  Judicial foreclosures are had through a court and allow for deficiency judgments, whereas a non-judicial foreclosure occurs through a number of notices posted to the property and ultimately an auction sale of the property that does not result in deficiency owed to the foreclosing lender.  Like a short sale and Deed in Lieu, there can be tax liability and your credit report will suffer.  For those that qualify, a Chapter 7 bankruptcy may be the best option – especially where all other attempts to sale or give the property back to the lender have failed.  Filing for bankruptcy provides consumers with immediate relief from the contractual debt, but because the property lien survives discharge of the debt (meaning the property remains in your name), depending upon how long it take for the lender to take the property back or sell it, there may be some lingering financial obligations, such as HOA dues and assessments.

Land Contract

Another solution is to enter into a land contract for the sale of the property.  A land contract is an agreement whereby the purchaser pays the owner of the property over time and lives in the property under the agreement. The Deed of Trusts remains in the name of the owner until the owner receives payment in full under the agreement.  Note though, like all other alternatives discussed above, entering into a land contract for the sale of your property comes with potential consequences.   Take the story of “James” who entered into a land contract  for the sale of his condo with specific payment terms and requirements that the purchaser attempt to obtain financing at least once per year and timely pay all condo fees.  James applied the payments received from the purchaser timely, but the purchaser submitted his payments later and later each month and some months not at all.  James attempted to have purchaser removed from the property for breach of contract, but the court did not agree that the “late” payments constituted a “material breach” of the contract – even though the purchaser did not, as agreed, attempt to obtain financing to purchase the condo and eventually stopped paying his condo fees.  Finally, after the HOA eventually put a lien against the property, James consulted with an attorney and was told that removing someone from property under land contract is a difficult and expensive task.  James eventually filed for Chapter 7 bankruptcy and surrendered the property and the land contract.  These agreements can be complicated and should not be entered into lightly.

Every day, our office meets with clients to help them navigate this maze of alternatives.  There is no such thing as one size fits all when trying to determine which course of action is better than the others.  This is why we highly suggest individuals consult with a reputable and knowledgeable debt attorney that really understands and can explain the pros and cons of each course of action.  And while the internet is chock full of information, not all of it is reliable.  That is where resources such as www.avvo.com come into play.  Not only can you find an attorney that is best for you, but you can also ask questions of attorneys that are generally at the top of their game – for free.  The best defense is a good offense, so making sure you have all the information need to make an informed decision will lessen the chance of unexpected surprises.