Yesterday, "Tom" called me and I advised him to get his house into foreclosure so he would lose it.

I also advised Tom to see a lawyer and not to listen to me. I always advise people do this as a lawyer has the credentials and the professional liability insurance. I'm just some guy who knows a thing or three. But that's another story…let me get back to Tom and why I told him that if were me, I would let the house go. I wouldn't do a short sale. I wouldn't do a deed in lieu.

Tom was incredulous. But once I explained, he agreed that I was right.

Here's the story.

Tom has two houses. One he  has owned a long time. It is located somewhere like New York or California that has seen a very steep runup in prices over the years. So he has amassed a lot of equity. Along the way he refinanced and paid off vehicles and credit card debts so he has no debt.

Tom also has this other property, a house that he was renting out. But rentals are tough in the best of times. Managing, tenants, problems. And these aren't the best of times. So Tom ends up upside down to the tune of $100,000.

He wanted to know if he should do a short sale or deed in lieu of foreclosure.

Let me explain that there are two types of foreclosure in states like California. By far the most common is non-judicial foreclosure. That means the property goes to a trustee who sells it at a privately-run auction. There is no court involvement.

Judicial foreclosure follows a different path. The court awards a judgment. The property is sold. There is a redemption period in some cases, meaning the homeowner can buy back the property in a certain period of time.

People in states like California are accustomed to non-judicial foreclosure. The documents they sign when they get their loan include a note and a deed of trust. The deed of trust is like a mortgage in practical terms. But legally it gives the private trustee the right to sell the property without a court order.

However…there are some instances when a lender will pursue judicial foreclosure. Yes it is more complicated. Yes it is more expensive. Yes it can take longer than non-judicial foreclosure. But the advantage from the lender's view is that they can pursue a homeowner for a deficiency judgment with non-judicial foreclosure. A lender in a state like California that uses a deed of trust instead of a mortgage will usually pursue a trustee sale, which is non-judicial and private. But that is not always true.

So let's get back to Tom. In his state, if the lender finds out that Tom has significant assets, the lender may decide to pursue Tom through non-judicial foreclosure. He is a sitting duck if they do. The house in question is non-owner occupied. He refinanced so it is not a "purchase money" loan. He lacks any protection against their going after him for their financial losses.

So I advised him to just let the house go. Don't talk to the lender. If he does, they will ask him for a financial statement. Why get into that? That can tip off their legal department that he has assets worth going after. They could decide to play hardball with him. On the other hand, if he just lets it go, they will file a default notice and then a trustee sale notice and the property will slip away quietly into the night to join a long list of other bank-owned REOs (real estate owned by the bank).

And once they do a trustee sale, they cannot go after Tom's personal assets for their financial losses. That is only possible with judicial foreclosure. So sometimes, as in Tom's case, it is best to let a house go into foreclosure.

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