Recently, I had the honor of being interviewed by realtor.com regarding a sobering statistic: Indiana is currently the number one state in the nation for foreclosures.
As an identified expert in this field, I want to pull back the curtain on what navigating a complex real estate crisis actually looks like.
In my experience, 99% of the people facing foreclosure are simply good people to whom bad things have happened. The root cause is almost always financially related, stemming from life-altering events such as:
- Death of a spouse or family member
- Divorce
- Unexpected job loss or sudden job transfer
- Severe medical issues
- Business failures
When you find yourself in this situation, doing nothing is the worst option. Instead of letting a property go to foreclosure—which devastates your credit—we often look to a short sale.
A short sale is a process where we negotiate with your underlying mortgage lender and any other creditors tied to the property. The goal is to get these creditors to accept less than the full amount owed and, crucially, to release you (the borrower) from the remaining financial obligation.
To illustrate how intricate this process can be, here is a recent case study of a short sale that took approximately 16 months to complete.
“ I preface by saying that I am not an attorney, CPA or financial advisor so the following information is based on my experience only and not intended to be legal or financial advice. “
The Case Study: A 16-Month Marathon
A homeowner approached me while facing active foreclosure. After reviewing their situation, we determined a short sale was the best path forward to salvage their financial future. However, this property was entangled in a web of debt.
Attached to the home were three distinct liens:
- A First Mortgage (investor: Fannie Mae)
- Tax Liens (from the Indiana Department of Revenue)
- A Commercial Loan Lien
- HOA Lien
- Utility Lien
Here is how we tackled each obstacle, and the massive hurdles we had to overcome along the way.
Phase 1: Initial Negotiations
We started by negotiating with the primary mortgage lender. Fannie Mae agreed to a payoff amount and, most importantly, agreed to fully release the homeowner from the remaining debt for less than what was owed.
Next, we tackled the Indiana Department of Revenue (IDOR). We successfully negotiated a partial release for the tax liens. It is important to note that a partial release means the lien is removed from the property so it can be sold, but the taxes themselves do not magically disappear. The borrower still owes that tax debt, but we were able to work out a separate arrangement for that.
Phase 2: The Roadblock
The commercial lien holder was our biggest problem. They agreed to take a reduced payout from the sale, but they outright refused to release the borrower from the remaining balance.
This triggered a massive issue with the first mortgage holder. Fannie Mae stated that they would only approve the short sale and release the borrower if the commercial lien holder also agreed to a full release. The commercial lender wouldn't budge, effectively stalling the entire transaction.
Phase 3: The Bankruptcy Pivot
Because the commercial lender refused to cooperate, the borrower was forced to file for bankruptcy in the middle of our short sale transaction. This is a drastic but sometimes necessary step to protect the homeowner and force the hands of stubborn creditors.
Phase 4: The Curveball
As if bankruptcy wasn't enough, right in the middle of this process, the first mortgage underwent a service release. This means the loan servicing was transferred to an entirely new company or investor. When this happens, all previous momentum stops. We had to start our negotiations and paperwork all over again with the new servicer.
Phase 5: The Resolution
Ultimately, the bankruptcy strategy worked. The commercial lien was stripped off the property by a court order. Because of their earlier refusal to cooperate, that commercial lender received absolutely no money from the sale.
With the commercial lien removed and the new servicer brought up to speed, we finally got the short sale officially approved. We secured a buyer, closed the transaction, and successfully got the homeowner out from under a crushing property. Keep in mind that even though a bankruptcy that is properly “discharged” and removes the debt, the homeowner still has ownership liability until the house is sold.
Do You Need Help?
This was a long, arduous 16-month process. Short sales are not for the faint of heart, and they require a deep understanding of real estate, negotiation tactics, and lender requirements.
If you are reading this and finding yourself confused by terms like partial release, service release, or liens—that is exactly why you need an expert in your corner. If you or someone you know is facing foreclosure and you have questions, please reach out to me. I am here to help you find the best possible solution during a difficult time.