House Short Sale: Is it Time?

Introducing the short sale. It's the exit strategy for upside down mortgages. In the following article, I written about how I decided if I needed one. I show you how I went through all of my numbers and what my deciding factors were. You can follow along with your own situation and get a pretty good idea where your at.

"Do I really need a short sale?" That's the first question you should ask yourself. If your not familiar with all the options, check out this article on my blog called, "What are My Options?" and educate yourself. If none of the alternatives seem right for you, and you want to avoid foreclosure, read on! Keep in mind, I'm not in the real estate or mortgage business, I'm just a regular guy who got caught up in the same situation your in now. Here's how I determined my positions:

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 short sale. 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) 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) 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

* 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 for 12.5 years 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 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."