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Deed-In-Lieu vs Short Sale?

Discussion in 'General Appraisal Discussion' started by LA Woman, Jul 11, 2011.

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  1. LA Woman

    LA Woman Member

    0
    Jul 18, 2007
    Professional Status:
    Certified Residential Appraiser
    State:
    California
    I have been seeing more and more situations where the banks are doing a deed in lieu of foreclosure instead of a short sale. My market area is REO and Short Sale driven and short sales have overtaken the REOs in many neighborhoods as the predominant type of sale.

    I'm wondering how this better for either the homeowner or the bank to not do a short sale? Is there a difference for the homeowners tax wise or ?

    Anyone else seeing this in their markets?
     
  2. Mountain Man

    Mountain Man Elite Member

    12
    Jan 15, 2002
    Professional Status:
    Certified General Appraiser
    State:
    Georgia
    1. It can be better for the lender. Foreclosures cost a lot of $$$ because of attorney fees, advertising, certified mailings, court cost, etc. Add to the problem properties are often vandalized by the owner. If they can work out a short sale, they may get the asset in better condition with less cost.

    2. Tax consequences can be significant for the homeower. If it was an investment or second home, the owner will be hit with a tax bill for the difference forgiven as it's considered to be "income". But if it's foreclosed, there may not be tax consequences. So I wouldn't advise anyone work out a short sale if it's not an owner occupied primary residence.
     
  3. LA Woman

    LA Woman Member

    0
    Jul 18, 2007
    Professional Status:
    Certified Residential Appraiser
    State:
    California
    Deed-in-Leiu vs Short Sale (Advantage for Bank?)

    Maybe I'm not understanding or didn't pose my question clearly,
    Why would they do a deed-in-leiu instead of a short sale assuming it was owner occupied? All of them that I have seen were owner occupied.

    I'm assuming that a DIL is better for the owner since they can't come after you for the difference and I assume that a DIL may be less of a hit on someones credit score.

    But how is it better for the bank? What is their motivation? Is it just that the time it takes to do a DIL is less than a short sale and they can get the property back on market quicker/easier and resell? Are there positive tax breaks for the bank on DIL vs Short Sale?
     
  4. Walter Kirk

    Walter Kirk Senior Member

    9
    Jun 24, 2003
    Professional Status:
    Licensed Appraiser
    State:
    New Jersey
    A deed in leiu may relieve the owner of liability for deficincies in some markets. Short sales allow the bank to generate a percentage of the mortgage balance owed without the expense of forclosure, marketing and other costs relating to the sale of the property.

    Each has its benefits and a lawyer should be consulted in either case.
     
  5. Mountain Man

    Mountain Man Elite Member

    12
    Jan 15, 2002
    Professional Status:
    Certified General Appraiser
    State:
    Georgia
    Not necessarily, it depends on what you negotiate if they can come after or not for any deficiency. Yes it's a little better than a foreclosure on the credit rating, and same for short sale. It's can help them recover sooner.

    I don't know of any tax breaks, but there is federal regulation that may determine if they can accept a property by DIL or approve a short sale.
     
  6. Mike Kennedy

    Mike Kennedy Elite Member

    38
    Sep 28, 2003
    Professional Status:
    Certified Residential Appraiser
    State:
    New York
    NOT A RECOMMENDATION FOR THE INFO SOURCES... NO OPINION ABOUT THE COMPANIES STATED OR IMPLIED:

    Comparison of the two alternatives article

    http://www.lendingtree.com/smartbor...your-mortgage/what-happens-cant-pay-mortgage/

    and ..........

    http://homebuying.about.com/od/4closureshortsales/qt/060907SScredit.htm

    and .....

    http://www.personalfinanceanalyst.c...eu-of-foreclosure-which-is-the-better-choice/
     
  7. Restrain

    Restrain Elite Member

    7
    Jan 22, 2002
    Professional Status:
    Certified General Appraiser
    State:
    Florida
    The problem is often that a similar home as a short sale home can be bought for less out of foreclosure, making it very difficult to do a short sale. Then you have the unrealistic expectations of the lender when trying to do a short sale. You tell the lender that the short-sale value of a home is 50% of the outstanding note and they gasp. Then they realize that if they move to foreclosure, they have insurance coverage and tax factors that actually cut their losses significantly less than allowing the home to sell as a short sale. If they do a deed-in-lieu, it can track internally as a foreclosure, with all the factors above coming into play, making it more attractive for the lender.

    However, as to the homeowner, it is far better to do a deed-in-lieu as it does not show up on the credit as a foreclosure if a short sale cannot be worked out.
     
  8. Mile High Trout

    Mile High Trout Elite Member

    2
    Feb 13, 2008
    Professional Status:
    Certified Residential Appraiser
    State:
    Colorado
    They also can call deed in leu a "cash for keys" approach.

    But with so many people being foreclosed and shorting, it's not as common anymore.

    Lender or related party used to offer modest cash like 1-2k to borrower to start up a rental or something elsewhere if the borrower would hand the keys, sign ownership back, and walk. Sometimes with a modest bill due based on market expectations.

    During the initial hayday of declining markets, cash for keys was more common as lenders anticipated an immediate margin of the borrowers moderate loss and their principal contributions vs the mainly stable markets. As markets destabilized further, lenders moved off that position oftentimes and felt it was better to have the borrower work with Realtor and other to sell on short, while still occupying the property for a longer period. Lenders were holding way too many properties and once the influence of lender held valuation became more widespread the margins which effected a beneficial position to the lender for cash for keys was nullified by declining market prices. Lenders may have felt one congruent process was just a more maneageable approach than handing everyone 2k and taking everything back for a liquidation sale right away. Remember when homes were sitting 2 yrs+ before even coming on market as LO offerings?
     
  9. Mr Rex

    Mr Rex Elite Member

    86
    Jan 12, 2004
    Professional Status:
    Certified Residential Appraiser
    State:
    North Carolina
    Mile High beat me to it, but Cash for Keys is cheaper for the lender. They actually pay the borrower to clean their crap out and get out. Saves time and money versus a Sheriffs sale/foreclosure, the property is typically not torn up an in near marketable condition etc etc. We clean out foreclosures, and we typically make more money on the ugly full of trash ones (at the lenders expense) but love the cash for keys ones, as its like cleaning an apartment where the renter wants their deposit back.:)

    BTW, MHT, around here cash for keys are more prevalent now than in the past FWIW.
     
  10. Mile High Trout

    Mile High Trout Elite Member

    2
    Feb 13, 2008
    Professional Status:
    Certified Residential Appraiser
    State:
    Colorado
    Interesting news.

    May have came full circle - lender realized that some people actually do take everything, including the kitchen sink!

    What are they paying cash for keys though? Is it based on income, property value, or the fair approach to finding another living environment?

    I would not be surprised to find cash for keys is distributed by middle men who charge 40% to distribute the funds! HA!

    There you go AMC's another avenue of profit - go fetch!

    Cash for keys now offered by KeyLogicIt.
     
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