First, most banks will not consider a deed in lieu of foreclosure until the property is on a multi-listing for at least 90 days without an offer or a contract of sale. The short sale process is also lengthy, taking up to six months for some banks to approve it. To do a short sale, you list the property at market value with a real estate agent who knows that you are looking to short sale it. Then, if you get an offer at that price or less and you accept it, then paperwork (a lot of it with bank statements, income tax returns, w-2s, etc.) goes to the bank along with the contract of sale you signed with the potential buyer. Then you wait to see if the bank approves the short sale package and the price. You also need to keep the house as your homesteaded residence, otherwise, you are going to be receiving a 1099 (income) which will reflect the difference between what you owed on the house and the amount of money that you received through the short sale--considered ordinary income as debt forgiveness. Oouch. If the property is homesteaded, then under the Forgiveness of Debt Act (thankfully extended through Dec 2013) you can be forgiven that 1099 debt-- but you need to look at IRS 982 form and see if you would qualify.
You need to decide which way to go on this, and a foreclosure attorney would be very helpful in helping you determine the best way to proceed.
This communication is not intended to create an attorney/client relationship. It is always recommended you consult an attorney in person to discuss your case. Leonore M. Greller, Esq. is a Supreme Court Certified Civil Circuit and Family Mediator and a Qualified Residential Mortgage Foreclosure Mediator and Arbitrator.
In order to get an answer to this question, you need to have a bankruptcy attorney/foreclosure attorney review your entire financial picture in accordance with your goal. Either a short sale or a deed in lieu, which means you would give them the deed, would be better than just letting it go to foreclosure. You also want to get them to agree to waive any deficiency judgment - a good reason to talk to a bankruptcy attorney, or you could still wind up owing money, even if they take the house. If it doesn't sell for the full amount you owe, they can get a deficiency judgment and pursue that against you unless you take care of that.
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This is very common here in Indian River County. I would suggest you contact a local attorney to discuss how the foreclosure/short sale works. Sometimes a deed-in-lieu is used, but each situation is slightly different. Our main goal is to use several techniques to avoid any deficiency owed to the banks -