Know When Your Beat: 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) Price It: The first step is of course, to determine just how much trouble your in. The worse the situation, the better your chances of a successful short sale. Most realtors will help give you a current fair market value for your house, and what the short sale price should be. Don't waste you money on an appraisal, they won't do you any good here! Be realistic, and be aggressive in lowering the price. Don't let emotional attachment to the house set the price. You'll be even more emotional if you can't sell it! The goal is to be relieved of the debt with a successful short sale.
3) Get Out the Calculator: Here's how I decided whether I needed a house short sale: 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 pretend that the market has returned to normal appreciation today.) 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. Finally, compare how many years it will take to break even, with the cost of keeping it each year. Can you hack it? Is it worth it to keep it for that many years?
For example: You bought a luxury condo with a $9,00,000 loan. In one year it has depreciated drastically and will sell for only $700,000. Should you put the house on the market for a short sale?
Upside Down: $1,000,000 - $800,000 = $200,000 Annual Cost to Keep the Property: Includes all yearly expenses = $60,000 Appreciation: In a good market = $200,000 x .08 = $16,000
Conclusion: It will take 12.5 years of appreciation at 8% per year, just to regain the depreciation or loss of the original value. It will cost $60,000 a year for 12.5 years just to break even. Most of the accruing interest still won't have been paid off and full ownership won't be any closer after 12.5 years of suffering. In 12.5 years, $750,000 will have been paid in mortgage payments and expenses, just get back to the original loan value.
So there you have it, and its your decision to make. It it worth the 2-3 year credit hit to get out from under the house? You have to know when to throw in the towel, and when to fight it out. Either way, we'll make it though this mess together!
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) Price It: The first step is of course, to determine just how much trouble your in. The worse the situation, the better your chances of a successful short sale. Most realtors will help give you a current fair market value for your house, and what the short sale price should be. Don't waste you money on an appraisal, they won't do you any good here! Be realistic, and be aggressive in lowering the price. Don't let emotional attachment to the house set the price. You'll be even more emotional if you can't sell it! The goal is to be relieved of the debt with a successful short sale.
3) Get Out the Calculator: Here's how I decided whether I needed a house short sale: 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 pretend that the market has returned to normal appreciation today.) 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. Finally, compare how many years it will take to break even, with the cost of keeping it each year. Can you hack it? Is it worth it to keep it for that many years?
For example: You bought a luxury condo with a $9,00,000 loan. In one year it has depreciated drastically and will sell for only $700,000. Should you put the house on the market for a short sale?
Upside Down: $1,000,000 - $800,000 = $200,000 Annual Cost to Keep the Property: Includes all yearly expenses = $60,000 Appreciation: In a good market = $200,000 x .08 = $16,000
Conclusion: It will take 12.5 years of appreciation at 8% per year, just to regain the depreciation or loss of the original value. It will cost $60,000 a year for 12.5 years just to break even. Most of the accruing interest still won't have been paid off and full ownership won't be any closer after 12.5 years of suffering. In 12.5 years, $750,000 will have been paid in mortgage payments and expenses, just get back to the original loan value.
So there you have it, and its your decision to make. It it worth the 2-3 year credit hit to get out from under the house? You have to know when to throw in the towel, and when to fight it out. Either way, we'll make it though this mess together!
About the Author:
If you liked this story, come read some more on 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
12:30 AM
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