The Upside Down Mortgage Exit Strategy: House Short Sale
If you are like the rest of us, your home has recently dropped in value by a whole lot. There comes a time when you have to ask yourself if it makes sense anymore to continue the monthly agony of pouring money, time and effort into a never ending black hole. It may be time for you to look at some of your exit options, short of foreclosure. Here's how I determined my position, and how I decided if I need a house short sale.
1) Interview Realtors: Find one that you can trust who either specializes in house short sales, or has done at least 30 of them. An added bonus would be a degree in finance, such as an MBA and a real estate brokers license. The license gives them addition legal responsibility to act in your best interest. It might be wise to consult a CPA and real estate attorney as well, but it will be your realtor that creates and finishes the deal. Please make sure you don't get swindled by one the companies that asks you to send them the money up front. A legitimate realtor will pay ALL the fees including marketing costs, and get reimbursed when the lender pays the commission.
2) Find the Present Market Value: You need this to figure out just how upside down you are. Do not spend the money on an official appraisal. They cost $300-$500 and they won't be any good in a few months anyway! Your realtor will give you a good idea of the what the home is worth, and how much it can bring in as a distressed home. The more upside down you are, the better your chances of a successful house short sale. So forget about the nice drapes and all the sweat you put into your lawn. Just let the straight numbers do the talking.
3) Now Do Some Figuring: Here's where I figured out if I needed a short sale. You can follow along with your own numbers: Take your total loan amount, and subtract the present value of the house. Not what it's worth, but how much you can get for it TODAY. This is how much your "Upside Down" in the loan. Then, figure your annual expenses including a year's worth of payments, taxes, insurance, maintenance, and repairs. This is your "Yearly Cost" to keep the house. Now, take the amount your upside down and multiply it by 8%. We will assume the best case scenario. In a FAST appreciating market, this is how much your house value would go up each year, if the housing bubble was over today. (yeah right!) We'll call this number: "Appreciation per Year." Finally, divide the Upside Down amount, by Appreciation per Year. This is how many years it will take just to break even with the amount you owe on your loan. No profit, no realized appreciation. Now look at your Yearly Cost to Keep the House. Is it worth it to keep it for that many years?
Here's an example: A house was purchased with a $800,000 loan. In one year it has depreciated drastically and will sell for only $600,000. (these are real California scenarios!). Should the owner short sell the house?
Upside Down: $800,000 - $600,000 = $200,000 Annual Costs: Includes all yearly expenses = $60,000 Appreciation: Assuming a booming market = $200,000 x .08 = $16,000
Verdict: It will take 12.5 years of appreciation at 8% per year, just to break even with the original value of the property, and to get there, it will cost $60,00 per year! In addition, after 12.5 years of suffering, full ownership of the house is still far away and over $750,000 will have been paid in mortgage payments and expenses.
You don't have to guess what I decided to do. My numbers we're very similar to these. I know I'll take a hit on my credit, but for me, 2 -3 years to rebuild my credit is a lot better than 12.5 years of suffering. I'm going to call it quits and live to fight another day.
1) Interview Realtors: Find one that you can trust who either specializes in house short sales, or has done at least 30 of them. An added bonus would be a degree in finance, such as an MBA and a real estate brokers license. The license gives them addition legal responsibility to act in your best interest. It might be wise to consult a CPA and real estate attorney as well, but it will be your realtor that creates and finishes the deal. Please make sure you don't get swindled by one the companies that asks you to send them the money up front. A legitimate realtor will pay ALL the fees including marketing costs, and get reimbursed when the lender pays the commission.
2) Find the Present Market Value: You need this to figure out just how upside down you are. Do not spend the money on an official appraisal. They cost $300-$500 and they won't be any good in a few months anyway! Your realtor will give you a good idea of the what the home is worth, and how much it can bring in as a distressed home. The more upside down you are, the better your chances of a successful house short sale. So forget about the nice drapes and all the sweat you put into your lawn. Just let the straight numbers do the talking.
3) Now Do Some Figuring: Here's where I figured out if I needed a short sale. You can follow along with your own numbers: Take your total loan amount, and subtract the present value of the house. Not what it's worth, but how much you can get for it TODAY. This is how much your "Upside Down" in the loan. Then, figure your annual expenses including a year's worth of payments, taxes, insurance, maintenance, and repairs. This is your "Yearly Cost" to keep the house. Now, take the amount your upside down and multiply it by 8%. We will assume the best case scenario. In a FAST appreciating market, this is how much your house value would go up each year, if the housing bubble was over today. (yeah right!) We'll call this number: "Appreciation per Year." Finally, divide the Upside Down amount, by Appreciation per Year. This is how many years it will take just to break even with the amount you owe on your loan. No profit, no realized appreciation. Now look at your Yearly Cost to Keep the House. Is it worth it to keep it for that many years?
Here's an example: A house was purchased with a $800,000 loan. In one year it has depreciated drastically and will sell for only $600,000. (these are real California scenarios!). Should the owner short sell the house?
Upside Down: $800,000 - $600,000 = $200,000 Annual Costs: Includes all yearly expenses = $60,000 Appreciation: Assuming a booming market = $200,000 x .08 = $16,000
Verdict: It will take 12.5 years of appreciation at 8% per year, just to break even with the original value of the property, and to get there, it will cost $60,00 per year! In addition, after 12.5 years of suffering, full ownership of the house is still far away and over $750,000 will have been paid in mortgage payments and expenses.
You don't have to guess what I decided to do. My numbers we're very similar to these. I know I'll take a hit on my credit, but for me, 2 -3 years to rebuild my credit is a lot better than 12.5 years of suffering. I'm going to call it quits and live to fight another day.
About the Author:
If you liked this article, then please come visit my blog at HouseShortSale.org. It's free and there's no sign up, just my story about how I dealt with my house short sale!
posted by Debt Consolidation Loan at
3:37 AM
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