Need Advice - Bank Approved Short Sale But Wants Promissory Note

[Dawn Vought]

I am hoping for some viable suggestions on this. Here are the facts (with numbers rounded):

-I own in my personal name an investment SFR in Birmingham, AL.

-Remaining mortgage (principal) on house is $57,000.

-Local bank (Cadence) is the investor. I am dealing with RoundPoint Mortgage as the servicer.

-Bank is saying with mortgage and fees, $62,000 is owed.

-I had a financial hardship starting in November 2011 (laid off from a good paying job for lack of work), which has caused me to be net negative every month since that time. Long story, but I'm still net negative each month with low income. Primary expense is the mortgage on my personal residence in NY. Have cut out all other non-essential expenses. Have been trying to get my personal mortgage modified for a year, but have been rejected because I have a good amount of equity in my personal residence.

-Continued to pay investment property mortgage until financially I just couldn't anymore (paid until October 2012).

-Property is vacant, and has been badly vandalized (typical for that area).

-I put the property up for short sale in June 2012.

-Highest offer is $8,500, which would net the bank $7,200.

-Bank came back and recently approved the short sale for $8,500, but have said (after some negotiation) that it is contingent on me signing a promissory note, unsecured by anything, for 50% of the deficiency (about $25,000). If I make payments of $400 per month for 63 months, the other 50% of the deficiency will be forgiven and a 1099 issued for the forgiven amount. If I miss any payments, the forgiveness is canceled.

-I'm not concerned about the 1099 (which will be issued regardless of the way this is resolved). My CPA will get that addressed with not too much impact due to basis/expenses with this property and others.

-Being that I am net negative every month (at the moment), I know I would not be paying the $400 per month they are proposing, thereby voiding the deal. (I'd be paying them $0.)

-I've also offered them a Deed-In-Lieu, but based upon conversations with the rep I have been dealing with, they would not approve a DIL without a similar promissory note being put into place.

-I have about $50,000 out between a few different lines of credit that I tapped into to try and keep up with all of the vandalism, thefts, and fraudulent contractors and property managers I have dealt with over the past 6 years for all of my Birmingham rentals. The $50,000 was supposed to be paid back over time by the profits on the rentals that never happened.

-Almost all of the rental properties in Birmingham have either been foreclosed, sold cheaply to stop the bleeding, or are in the process of DIL or short sale. I still have one that's been vandalized but there isn't a mortgage on it. I'm trying to get it sold with owner financing so I can stop having expenses related to it, but basically the $50,000 in LOC I will keep making minimum payments on with the minimum money coming in related to two others I sold recently for cheap and am holding financing on.

-I have 3 other SFR rentals in the Kansas City, MO area that are underwater but have tenants. They may break even, be a little negative, or be a little positive ($2,000) at the end of the year. That bank rejected earlier attempts to get those mortgages modified, and I have one tenant there who is not paying currently due to a hardship of her own.

-My primary home in NY has about $270,000 in equity. I prefer not to go into too much detail, but can't just sell my house, as I have other obligations and ties here, and also have to live somewhere (which $270,000 wouldn't enable me to do in my area).

Is it "better" to have the bank foreclose on the SFR in Birmingham or do the short sale and sign an unsecured promissory note which will not be paid? I almost think that the banks have you fill out all of that short sale/modification/deed-in-lieu paperwork just to be able to more easily come after you. Any suggestions would be appreciated.