Thursday, December 31, 2009 2:19 AM
It's not a problem unless you HAVE to sell-The short sale dilemma.
Recently, my business partner (and Mom), Kathy Frisbie, brought to my attention a call she received from a former client in distress. Apparently, he was extremely upset about the value of his home and wanted to do a short sale. He had just signed what he thought was a listing agreement (with some fly by night that happened to send a postcard that day). He was nervous and had unanswered questions:
How would this affect my 820 credit score? How soon will I be able to buy again? What if it doesn't sell and is foreclosured? The "agent "advised him to stop making payments.
We did a Comparative Market Analysis for him and determined that he was approximately $25,000 upside down in his 1400 square foot ranch... purchased in 2005 for just under $200,000. It was a good deal at the time, and he had obtained and FHA loan, 3% down, with closing costs wrapped in. Not bad compared to those we meet with on a daily basis (whose values are half of what they paid)! She strongly encouraged him to get out of the listing agreement and hang in there. His payment was only $1200/month... you can't rent a nice house for that in Vancouver, WA! Geez, rent it out and move into a small apartment, or get a roommate and stick it out for a couple years. This guy has options!
He wasn't convinced, so she asked me to follow up with him and see if I could make any headway. I am a "Certified Distressed Property Expert" or "CDPE", close many short sales, and interview many buyers in the same situation. I go through my initial short sale qualification questions:
- Have you missed any payments? No, not yet.
- Filing bankruptcy? No way. I just paid off all my bills, AND my truck!
- Have you experienced a reduction in income? No, I just got a raise.
- Are you having trouble making the payments? Not at all.
- Are you being relocated or divorcing and forced to sell? Nope.. worked at the same place for 10 years and never married... but my girlfriend and kids just moved out, which means I will spend even LESS money because I don't have to take care of them.
- Had a death in the family or an illness that you anticipate will cause financial distress? No.
- Okay... hmmm... so under what circumstance do you feel a short sale is appropriate? My house isn't worth what I paid for it!
Huh???? The bad news is... you can't short sale your house. Any bank reviewing these circumstances is going to say absolutely NO WAY will we take a hit just because you don't like the small amount of depreciation you have experienced. The fact of the matter is... you qualify for that house TODAY, which means you don't qualify for a short sale. I am still perplexed by his thought process, but
I explain the repercussions to short sale/foreclosure:
- You cant buy a house for 2-5 years due to the negative impact on your credit
- Your credit score will be negatively affected-possibly 250-300 points if a foreclosure occurs
- Foreclosure can affect your on the job security clearance, your current employment, and future employment opportunities
- Some banks will require you to carry a personal loan for the balance
- There may be severe tax implications-consult your tax adviser for specifics in your state
Former client ended up keeping the listing contract with the other agent (that promised him a short sale under impossible circumstances was possible). They have not received an offer yet after 3 months and many price reductions. They are now WAY below the actual market value of the home. Why, you ask?
- There are many great owner occupied and foreclosure homes available
- There is a time crunch due to the tax credit expiration
- Buyers have just HAD IT with waiting on short sales
- Buyers agents are qualifying sellers agents handling short sales to determine if the situation is good for their buyer-now more than ever (and good for them.... way to look out for your buyers)
What does that mean for my former client? He hasn't made a payment in months, (per his agents instructions so now his credit is ruined). Every dollar the price is reduced, is a dollar that the bank can require him to pay back, and he is 3 months closer to foreclosure. Ouch! When they do get an offer, I'd be really curious after months of waiting... what that bank is going to say? Probably, NO!
In closing, if you don't have to short sale or foreclose... don't do it! People lose money in investments every day. All markets are cyclical and you need a roof over your head anyway. Stay put and ride the tide if its feasible financially.
I tell people all the time, your depreciation is only a problem if you HAVE to sell! Talk to someone who knows what they are doing, and cares about your best interests. Listen to them too! I am specially trained to deal with distressed homeowners, foreclosures, and short sale situations. If you are experiencing hardship and would like to discuss your options... OR you just aren't sure and want to run your scenario by someone honest please call/email me. All consultations are discreet and held in the strictest confidence.