In this down real estate market, loan modifications, short sales, feeds in lieu, foreclosures and bankruptcy are terms you here thrown out in news articles. Many Portland real estate owners have had personal experience with the difficult real estate market, having been forced to make tough decisions about how best to deal with properties they could no longer afford to keep. Below are the basics of these options and some of the impacts these choices could make. Because each of these options involves a multitude of factors above and beyond the scope of real estate, I advise all my clients to speak with a professional who can advise them about which option may suit them best.
Just to clarify, I am NOT giving out legal advice. I am NOT a lawyer.
Here are some options for distressed Portland real estate owners:
A Portland real estate owner who needs temporary relief to retain his or her property may consider seeking a loan modification. Many lenders may be willing to alter the terms of a property owner’s loan, either temporarily or permanently, in order to allow the borrower to continue to own the property. The biggest advantage of a loan modification is that it allows a real estate owner to keep the property, rather than being forced to sell the property or allow it to go into foreclosure. A loan modification can be challenging to obtain. They may take many months to go into effect, and often require the borrower to repeatedly contact the lender in order to move the process forward. In these tight lending times, lenders have very strict qualifications for Portland real estate owners seeking loan modifications, and may not be willing to consider loan modifications for properties other than principal residences.
When the proceeds from a sale of property are not enough to cover underlying encumbrances against the property and all other costs associated with the sale, this is called a short sale. The sale of the property will come up short of what is still owed. A Portland real estate owner may consider entering into a short sale when he or she would like to sell a property, wants to avoid a foreclosure, and has experienced a hardship that may encourage his or her lenders to accept less than what is owed against the property. A property owner may consider a short sale simply for business purposes – he or she cannot justify throwing more money into a property that will not be worth what is owed against it in the foreseeable future. A Portland real estate owner will benefit from a short sale in that he or she will be able to sell the property and cut his or her losses. While all this sounds great on the surface, a short sale can have a negative impact on the seller’s credit, may result in continued liability to the lender on the loan against the property, and could have adverse tax consequences.
Deed in Lieu of Foreclosure
A deed in lieu of foreclosure may be used by a Portland real estate owner to cut short the timeline associated with a foreclosure, and to negotiate relief from the shortfall between the value of the property and the balance on the underlying loan (the “deficiency”). Because a deed in lieu of foreclosure is negotiated between the property owner and lender, it may not have the same outcome as a foreclosure, and may not benefit the Portland real estate owner any more than would a foreclosure. If a borrower can convince a lender that deeding the property back will save the lender from expending time and money in a foreclosure, in return for a release from any “deficiency” liability then the property owner may choose this option instead of foreclosure.
Foreclosure is the typical end result in a situation in which a Portland real estate owner defaults on an underlying loan against property, and is unwilling or unable to bring it current. While some property owners find themselves facing foreclosure because they have experienced a hardship, others may have no better option than to allow the property to go into foreclosure. If one were able to avoid any post-foreclosure liability to the lender, foreclosures may be beneficial. However, as with any other option, foreclosure will undoubtedly have a negative impact on the Portland real estate owner’s credit, which will impact his or her ability to obtain financing in at least the near future. As with many of these options the owner may be subject to tax liability in certain situations.
In bankruptcy, a property owner may be able to restructure debt, or may even be successful in doing away with the debt entirely. While bankruptcy has a negative impact on a Portland real estate owner’s credit, it may be the only way that a real estate owner can retain his or her property, save equity through a homestead exemption, or deal with significant debt. People consider bankruptcy who have significant debts and/or are attempting to salvage equity in a property.
Which option is best?
Each of these options may work for one property owner, but not another. For instance, each option may have different tax consequences for different Portland real estate owners, depending on the type of underlying loan against the property, the use of the property, the amount of the shortfall between the value of the property and the amount of the loan, and so on. Although many Portland real estate owners may qualify under an exception to federal tax liability for any forgiven debt, those who own rental properties or who took equity out of the property may not. Tax consequences will undoubtedly impact which option is chosen by a real estate owner, assuming the property owner has any real choice. In addition, each option may result in a different liability owed to a lender. If a property owner knows that he or she will avoid liability owed to a lender in a foreclosure, but the lender will not agree to cancel the full debt in a short sale, the Portland real estate owner may decide to allow the property to go into foreclosure. A real estate owner will also base his or her decision as to which option is right for him or her based on the impact that decision will have on his or her credit. Unfortunately, in any distressed situation, a lender will make a negative credit report to the credit reporting agencies, which report will negatively impact a Portland real estate owner’s credit score. Opinions do differ as to the impact each of the above options will have on a property owner’s credit score. Some argue that a foreclosure or short sale will have an unknown timeframe on the impact a person’s credit, while a bankruptcy will only impact for a specific period of time. Another opinion is that a short sale is better than foreclosure from a credit standpoint. And still others argue that a foreclosure will not be overly detrimental, as the property owner may be able to qualify for a new loan only one to two years after the foreclosure takes place.
A distressed Portland real estate owner faces a tough decision regarding how best to address his or her situation. Because this decision involves many variables, and can have a number of outcomes, distressed property owners should seek counsel from professionals such as attorneys, tax advisors and others regarding how best to protect themselves and their assets. As a estate brokers, and a frequent first point of contact for distressed owners, I have a list of contacts that you may want to talk with in order to make an informed decision as to your next step.
This column contains general information only and must not be construed as legal advice. I am not a tax, real estate or any other kind of attorney nor do I play one on TV.
He can be reached at 503.961.2181 or by e-mail at firstname.lastname@example.org
Originally posted on West Linn Real Estate.