November 24, 2017

The Perils of a Short Sale, Cash for Keys and Deeds in Lieu

stop and think signConsidering a short sale, deed in lieu or cash-for-keys offer for your underwater home?

This week The Charlotte Observer reported that 46.6% of Charlotte homes have “negative equity.” Some call this an “underwater mortgage” but no matter your term of choice, it means that homeowners owe more to their mortgage companies than the homes are worth.

That same article went on to describe the plight of many homeowners who are “effectively underwater” which means the proceeds from selling their home would be too low to recoup the sales costs and also put a down payment on a new property.

Many distressed homeowners will consider a short sale or deed in lieu or cash-for-keys offer, so today’s post addresses the perils of each. A more extensive examination of mortgage issues is in my white paper for distressed homeowners, which you can download here. 

A cash-for-keys offer usually uses a deed in lieu

As with a short sale, 90%+ of our clients have other debts in addition to the mortgage debt that’s addressed in a deed in lieu/cash-for-keys offer, and those debts remain after a deed in lieu or other “mortgage fix.”

For these people, a deed in lieu is at best a Band Aid when a tourniquet would be more appropriate.  Moreover, this BandAid will not resolve their overall financial picture and may well make it worse.

For the borrower, deeds in lieu are similar to short sales in that a wide variety of facts must be considered in order to make a decision about the legal, tax and credit consequences. Facts to be considered include:

  1. the original documents related to the mortgage and the documents relating to the deed in lieu (typically, both drafted by the lender),
  2. the character of the real estate securing the mortgage (primary residence or investment property),
  3. in what state the property is located, and what exemptions the borrower can claim, and
  4. the borrower’s overall financial circumstances.

Is cash for keys a short sale or a deed in lieu?

Technically, it could resemble either according to the particular offer extended.  Normally, I would say deed in lieu. However, a creditor might say to the debtor “Bring us an acceptable short sale, and we will pay you $X from the closing.” Therefore, it probably would apply to both.

Let’s speak clearly: a short sale works great for the banks and mortgage companies, and the realtors love them because they generate a commission. Short sales are not so great for the debtors. In fact, they can be downright disastrous. That having been said, there are instances in which short sales can be good for debtors. Careful analysis of each situation is necessary.

Some programs are not in the best interests of homeowners

What bothers me about the way these programs is described is the way  “fresh start” language is bandied about. Only a bankruptcy can give a true fresh start. Further, they imply that a deed in lieu will not negatively affect the borrower’s credit. This is simply untrue.

[tip]Deeds in lieu are a matter of public record and will be picked up by the credit bureaus, and result in a serious hit to the borrower’s credit score; as much as a 250 point drop, from what I read.[/tip]

While homeowners in distress have similarities, each case must be weighed for its unique financial and emotional considerations. A qualified bankruptcy lawyer or real estate attorney should be consulted before accepting any creditor’s offer.