How realistic is this short sale scenario (short sale with HELOC)?

Question

I have a meeting with an attorney/real estate agent next week but am looking for some feedback in the meantime...wondering if this scenario could work:

We own a home in AZ...owe about $113000 on the mortgage through US Bank. House is probably worth 75-80,000. There is PMI. We have a HELOC with BOA for about 99,000.

Our plan is to relocate to VA this summer to rent a house from family so that we can get the rest of our debt in order. Could rent our AZ house as a last resort but in the next few years that will become unmanageable (HELOC payment will increase to pay off and we can only request forebearance on student loans for so long).

I'm hoping that the 1st lien would go fairly smoothly even with the PMI since we don't owe a ridiculous amount. I would even be willing to contribute to the PMI loss over a period of time.

As for the HELOC I am wondering about the possibility of turning that into an unsecured debt to pay off interest free over 10-15 years with a promissory note (they can even hang the threat of a deficiency judgment over our heads if we default on that note). If they wrote it off they get nothing and then we have a tax issue to deal with. I am okay with honoring the debt we are obligated to pay...just would like to restructure so we can get out of the house. At least both parties benefit.

Does this scenario sound crazy or think it might work? Does anyone go into negotiations willing to pay their share?

Joel Owens · Answer

Have you missed payments on your mortgage yet?? If so your credit is already dinged. Who is the HELOC with a local,regional,or national bank?? It will make a difference in negotiating. As I said foreclosing WILL NOT release the debt of the HELOC just the lien interest they had on the property as collateral which is worthless as the property is underwater in value. You can get a HELOC to do a promissory not but why would you?? If it forecloses the HELOC gets squat as if your lucky there will be enough to pay off the first if that.If they work with you they get a payoff to release the lien interest as a short sale. The key will be what the first mortgage will or will not do and what they will allow junior lien holders to get as a payoff in a short sale.Typically they offer junior lien holders 1,000 and then the juniors want 30 cents on the dollar.It is a negotiating process of back and forth. If you are in a fast foreclosure state a first isn't going to give juniors a large chunk of the purchase price when they can foreclose and get almost the full balance owed to them. Ideal situation would be for HELOC to accpet 10 to 20 cents on the dollar and write the rest off.Before signing anything make sure the HELOC is not just releasing the lien interest for 20k but forgiving the rest of the debt in writing as well. Do not believe anything that is not in writing.I have seen banks lie through their teeth before saying they would not pursue a seller after a short sale for a deficiency and the letter was to come from another department higher up. They closed and the letter never came.

Sheila S. · Answer

Both husband and I are on the loan...no options there. We each have student loans...his for a bachelors, mine for my masters. Don't really have any issue with paying $500-600 a month on a note as long as it means we're out from under the house. As for the other debt I have been able to work out interest-free payment arrangements and those numbers are going down. In a few years those will be paid off, but the HELOC will be called in and those payments will have a sizable increase. The move back east is definite and we won't be able to afford rent, AZ mortgage, and the HELOC. If we have to foreclose we will but looking at every other option before that. Our ideal situation is that the revolving debt is paid off and we just have to worry about rent and paying off a note on the HELOC. My main question still stands...is it possible to get the HELOC lender to release the lien with a long-term promissory note? Just want to know that it isn't unheard of.

Joel Owens · Answer

Sheila - I do commercial real estate now but was doing short sales 4 years ago when they were just starting to happen. The FIRST question is WHO is on the loan?? Not on the title but the loan?? If for instance you have a husband and they have great credit and you are on the loan and not them then you have options. You need to understand HELOC laws and recovery procedures for your state.Just because a HELOC releases the lien on your property for a certain amount does not mean the rest of the debt is not sold off to another collector.Likewise if you foreclose it does not wipe out the debt you owe just the lien on the property. Who has the student loan?? Is it you and your husband or just one party?? The benefit to a short sale is it stays on the credit for less time than a foreclosure or a bankruptcy. The student loans and IRS taxes are generally 2 items you cannot get wiped out in a chapter 7 bankruptcy. From what you have described it sounds like depending on how much debt you are carrying a ch 7 would be best to wipe out everything and then pay off the student debt over time to get debt free. Promissory notes are a constant reminder of a deal gone bad and you get no emotional closure to move on with your life. As far as the taxes go there is an insolvency form that at the time the debt was forgiven you liabilities exceeded your assets therefore you owe no taxes on the forgiven debt. Publication 4681 form 982 No legal advice

Sheila S. · Answer

As for maintaining our lifestyle by using the HELOC really that just meant paying regular bills, paying off debt, managing car payments, etc. as well as dealing with the added expense of an extra person in the house. We do not travel, buy things for the house, etc. Had we had any indication that our home value would plummet we would have figured something else. Unfortunately, we were young first time homebuyers with no experience in this field. I know that isn't the fault of the lenders but I am trying to do the right thing before I have to choose to let it all go.

Sheila S. · Answer

I am starting with an attorney who is also a realtor. Her entire practice is devoted to short sales. This is a link to her info if anyone has some feedback on her qualifications. http://offeringshortsalesolutions.com/about/suzanne Currently we are only paying interest on the HELOC and student loans are in forebearance. As those payments increase our risk of foreclosure will be greater which is what I want to stress to the lenders. Hopefully they will choose to let me out now knowing I'll make payments instead of facing foreclosure later on. At that point I'll only be looking out for myself, even if that means BK. Have promissory notes in large amounts for an extended period been done before?

Jon Holdman · Answer

Remember that in any negotiation the first offer is not where you will end up. Almost certainly the final outcome of the negotiation for you will be worse than whatever offer you make at the start. So don't go into the negotiation with the statement you're willing to accept a promissory note for the full amount. From what you describe, some really painful choices are needed to get out of this situation. You made a lifestyle choice (giving up $50K in income yet keeping your standard of living where it was with the $50K rather than making the changes dictated by your new, lower family income) that dug a deep, deep hole. A serious credit hit and perhaps bankruptcy are in your future. In project management standard advice is if you're going to take a slip on your project, take a big slip. Don't come in once a month and say "we're going to be one week later than we said last month". Figure out how late you're going to be and acknowledge that all at once. In your case, that means figuring out where you're really going to have to be to more ahead with your lives. That may mean a foreclosure and bankruptcy to wipe out all this debt. And lifestyle adjustments to make your expense and income match. An interest free, $99K loan to be paid off over 10 years is probably not in your future. Probably be more productive to just try to get this debt wiped out. The IRS also has a way to avoid the tax bill be proving insolvency. I don't know the details, but a CPA would. And you can research the topic on the IRS web site.

David Beard · Answer

You need to make sure that the agent you're working with is VERY EXPERIENCED in short sales and the lender negotiating process, particularly with the two lienholders involved. You have alot of leverage with the HELOC bank, obviously, they're looking at a complete loss otherwise. The attorney needs to be experienced in how the lender will view you as a candidate for various options; bankrutpcy (7 and 13), foreclosure, short sale, with or without reaffirming the HELOC debt with an unsecured promissory note. The key is to subtly or directly threaten the lenders with the scenario that would cause them the greatest loss, so that you can negotiate the most favorable outcome for you in which you want to minimize a tax bill, salvage your credit, be rid of the house, and not be dogged by deficiency judgments or large promissory notes.

Richard Martin · Answer

Sheila: I know you want to do the right thing but the systems in place doesn't make it easy. I have had many clients as deep or deeper in debt than you are. The last figure I saw shows about 34% of home sales in Maricopa county are Short Sales. You are not alone. There are many fine Realtors in AZ with lots of experience doing Short SAles. Meet up with one of them. But before you do anything have your agent connect you with a CPA or attorney that specializes in Short Sales. I don't see exactly where in AZ you are but your house should sell quickly, your agent should get the needed lender approvals quickly allowing you to move on.

Sheila S. · Answer

No, unfortunately it was used for personal reasons. We lost 50,000/year in income when I chose to stay home with our newborn daughter so that HELOC was used for living expenses. Our home value had jumped to over 200,000 so we figured at some point we could sell and at least break even. Then the value of our house fell even below the initial purchase price which was low. There will be tax implications which is why we are willing to pay what we owe.

Jon Holdman · Answer

You owe $212K on a house that's now worth $75K? Holy cow! Is this your residence? Was all the debt used to buy or improve the property? If so, you shouldn't have any tax consequences for the forgiven debt.