When It Isn't Worth Selling a Property Before Foreclosure: A Unique Scenario

Typically, it is optimal for a seller to sell their property before it goes into foreclosure to avoid any negative impacts on their credit and potentially financial consequences. However, there are unique situations where selling the property beforehand might not be the best decision. This article explores the scenario where a seller, whose credit won't be affected, might choose to let a property foreclose.

The Standard Rationale Against Selling Before Foreclosure

The standard advice for a seller is unequivocal: Never sell a property before foreclosure if it doesn't impact your credit. Given that foreclosure can have significant legal and financial repercussions, it's generally advisable to sell the property before the foreclosure process starts.

A Unique Exception: When Credit Impact Is Zero

There is a special case where selling the property before foreclosure might not be the best option. This situation arises when the seller is not listed on the mortgage or loan. In such a case, the credit impact on the seller is zero, and there are no legal consequences for the lender's foreclosure either. However, the individual who took out the loan will still suffer the financial and credit consequences.

Therefore, if the seller cannot sell the house for enough to cover the mortgage/loan, it might be strategically advantageous for the seller to let the property go into foreclosure. This decision can be made based on the financial status of the lender and the property's equity.

Elaborating on the Scenario: A Case Study

Consider a specific case where a property is valued at around $230,000 to $240,000 but the asking price is $230,000. A potential buyer initially offered $219,000 in cash. However, after an inspection, the buyer lowered the offer to $200,000 due to noted issues such as a roof, HVAC, etc. The seller has a month before the house faces foreclosure and has received no other offers. Additionally, the property belongs to the seller's father, who is in a geriatric center, meaning the credit hit from a foreclosure won't affect the seller.

In this scenario, the seller must weigh the decision between negotiating with the buyer and letting the home go into foreclosure. Does it make more sense to seek a deal or let the property foreclose?

Factors to Consider When Deciding Between Selling and Foreclosure

Before making a decision, the seller should consider the following factors:

Current Financial Status of the Lender: If the lender is in a poor financial state and likely to foreclose regardless, negotiating with the buyer could result in a faster and more favorable settlement. Property Value and Equity: Evaluating the property's current value and the remaining equity can help determine whether selling the home at the current market price is better than letting it go into foreclosure. Personal Financial Goals: The seller should consider their personal financial goals and what is most beneficial in the long term. For example, maintaining a good credit score versus providing immediate financial relief. Legal and Financial Consequences: Understanding the potential legal and financial consequences associated with both selling and foreclosure can help in making an informed decision.

It's crucial to seek professional advice from real estate agents, lawyers, and financial advisors to ensure the best course of action is taken.

Conclusion

While it is generally advisable to sell a property before foreclosure to protect your credit, there are unique scenarios where letting the property go into foreclosure might be more advantageous. This can be particularly true when the seller is not on the mortgage or loan and credits won't be affected. Each situation is unique, and careful consideration of multiple factors is necessary to make the best decision.