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) Find a Realtor: I'm using a realtor. I called a bunch of places that claimed they specialized in short sales, but most of them were referral services. My CPA advised me to run, if anyone asked me for money up front, and a bunch of them did. That seemed like sound advice, and I found that to be the general consensus among the professional community. I consulted my CPA, and my real estate attorney, and both of them advised me that a realtor would be the best person to handle my house short sales. Besides, they're used to talking with lenders. I chose to go with a real estate agent who is also happens to be a broker. I feel safe in using a person like this, because she has a "fiduciary duty" to look out for my best interests, and even more so because she is a broker. That's in the real estate laws!
2) What's the Home Worth Today? Get a good valuation from your realtor. In reality, when you meet to talk, she should already have the comps ready to hand you. Don't waste your money on a official appraisal as it won't be used anyway. This is one situation where you want to be incredibly realistic, even pessimistic about the value, and not succumb to emotional attachment for the house. The more upside down you are in the loan, the greater chance for success in your house short sale.
3) Judgement Time: This is where you determine if you need a house short sale. Take your total loan amount, and subtract the present value of the house. Not what you think 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 for you just to break even with the amount you owe on your loan. No profit, no realized appreciation. Compare the Number of Years to Break even with Yearly Cost to Keep the House. Can you hold out for that long? Does it still make sense to hold on? Or would letting it go make more sense?
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: $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.
So in this example, the choice is not a difficult one. There comes a point to where hanging on, just doesn't make good sense. As most experienced traders say, "Know when to say quit, so you can live to trade another day.
1) Find a Realtor: I'm using a realtor. I called a bunch of places that claimed they specialized in short sales, but most of them were referral services. My CPA advised me to run, if anyone asked me for money up front, and a bunch of them did. That seemed like sound advice, and I found that to be the general consensus among the professional community. I consulted my CPA, and my real estate attorney, and both of them advised me that a realtor would be the best person to handle my house short sales. Besides, they're used to talking with lenders. I chose to go with a real estate agent who is also happens to be a broker. I feel safe in using a person like this, because she has a "fiduciary duty" to look out for my best interests, and even more so because she is a broker. That's in the real estate laws!
2) What's the Home Worth Today? Get a good valuation from your realtor. In reality, when you meet to talk, she should already have the comps ready to hand you. Don't waste your money on a official appraisal as it won't be used anyway. This is one situation where you want to be incredibly realistic, even pessimistic about the value, and not succumb to emotional attachment for the house. The more upside down you are in the loan, the greater chance for success in your house short sale.
3) Judgement Time: This is where you determine if you need a house short sale. Take your total loan amount, and subtract the present value of the house. Not what you think 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 for you just to break even with the amount you owe on your loan. No profit, no realized appreciation. Compare the Number of Years to Break even with Yearly Cost to Keep the House. Can you hold out for that long? Does it still make sense to hold on? Or would letting it go make more sense?
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: $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.
So in this example, the choice is not a difficult one. There comes a point to where hanging on, just doesn't make good sense. As most experienced traders say, "Know when to say quit, so you can live to trade 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 what I learned and how I dealt with my house short sale!
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