Should I do Short Sale???

[Anonymous]

Hello,

I own two condo's purchased at the height of the real estate boom.  Each has a $75,000 mortgage.  I tried to sell them initially without any luck, so I have been renting them for a while.  I am up to date on my mortgage payments, but even with the rental income, I am losing almost $10,000 a year when I net out my expenses (Insurance, taxes, mortgage, maintenance) and rental income. 

My dilemma is that I will be losing this $10,000 each year for the rest of my life because these units cannot be sold because the value of each unit is $20,000!  This is due to all the foreclosures and short sales in that community.  It doesn't make sense to lose this money every year.

I tried to modify my loan with Wells Fargo to make it more affordable and they denied me.  So I'd like to get rid of these condo's so I can save that $10,000 a year. 

My question is, what is the best way to get rid of the two condo's that would have the least impact on my credit and borrowing future?  My credit is now 800 and I have no negative items on my file.  I have a 20+ year good history of credit and I am up to date on the payments of these two mortgages.

Should I do a short sale, or foreclosure, or deed in lieu, or some other way?  What is the credit impact on each? 

Lastly, how long will these negative incidents be on my credit file and effect my credit score?  Will this always effect me for the rest of my life?

Please help!!!

[fused]

Welcome to the forums!

From a FICO scoring standpoint, a short sale, foreclosure and a deed in lieu are about equally bad. If you choose any one of these three options, it will likely show up on your reports as a "charge-off like" negative trade line, depending on what your lender sends to the CRAs (credit reporting agencies). Keep in mind your scores would probably drop quite a bit for two reasons: one for the new entry of a negative trade line, two, for the balances owed. This negative trade line could stay on your reports for up to seven years from the time you first went delinquent and never caught up and returned the account to good standing. Goood luck!

[Anonymous]

All will hit your score down in to the lower 600's more than likely.  A short sale would be the easiest route and probably the quickest to recover from (especially if you stay current until then.

That said, if you are loosing 10K per year on 2 properties that are currently only valued at around 20K each, you are doing pretty good.  Investing is just that, investing/gambling and to be succesful you have to weather the good and the bad.  You will be de3troying your credit and your future ability to get financing of any sort if you do any of the options you are discussing.  You may also have other tradelines cut, closed, or find your current credit card rates hiked to the maximum rate allowd under your contract.  So if your credit is important to you, this is not a wise move.  Of course hindsight is great, but buying into investment properties unless you can afford to meet the payments even under duress is a dangerous risk (which you are now obviously aware of).  If I were in your shoes, I would continue to pay the notes and get the loans paid down as quickly as possible.  Continue to rent them for as much as you can get out of them. And just keep working to get your expenses on them as in line as you can.  Check out alternate insurance plans, see if some minor remodeling may bring you higher end renters, if you have a primary residence that is in good standing with lots of equity, consider taking a mortgage out on the main home to pay off the investment homes.  Then you could just hold them as rentals until the property value increases to make it worth a sale. 

In any case, if you do have to get rid of them, a short sale is by far the best option.  It is still likely to tank your score, have other consequences when other creditors see the short sale appear, and it will be a long and arduous road to get a deal done.  Even more so if your financials show you can afford the payments as they are becuase even with a short sale, they want to see why you need the help and usually justy a loss in value (even rental value) does not qualify.

[Anonymous]

Mickie's point is, as usual, dead on.  You'll stand to save the $10k/year at the expense of everything else. 

The current lending guidelines as relates to short sales is that you are basically on the bench for 7 years---every Realtor seems to think it is two years, but that is subject to a laundry list of conditions and significantly increased down payment requirements. 

Current is probably the key word.  All indications are that Fannie/Freddie are removing the distinctions between pre- and post-foreclosure events.   In a nutshell, 5 years from now, I really don't anticipate a lending market that distinguishes as much between short-sale and foreclosure as much as paid in full / not paid in full. 

In your shoes, I'd be talking to my financial team...the accountant / financial planner / attorney.   Depending on you, your income and assets, what you should do will definitely vary.

[GregB]

Excellent info so far.

If the huge penalties stated above have not scared you out of walking away, I can think of two further considerations.

Make sure that the creditor can not come after you for the deficiency on the mortage. I assume that is part of the short sale process but I also understand it varies by state law.

Make sure that the IRS and your state don't hit you for taxes on your profit. I believe there is no income tax reported on a PURCHASE mortgage but check it out first.