When should I do a short sale?
There is definitely a time to do a short sale rather than wait for the value of your property to increase (please note: this information applies to homeowners only. If you are an investor, please contact me for specific information about this process, and its potential risks and rewards).
1. If you are “buried” in the property, it’s time to think about a short sale.
The lenders won’t want to hear this, but they are at least partly responsible for the bubble that we saw in real estate. It was their policies (1% loans, anyone?) that made it possible for ever-less qualified buyers to buy. We don’t like to be told that we cannot afford to buy that dream home, but the fact is that if you bought with a “neg-am,” or an “adjustable,” or an “interest only” loan, or anything else but a fixed-rate loan for which you qualified at the rate it actually was, and also put down a substantial amount of money, chances are that the lender made a conscious choice to ignore prudent lending practices and lend you the money anyway. The point is that the lender, when they lent you the money, accepted your property as the collateral for your loan. He’s taking the risk that the property won’t go down. So now that many properties have declined by 40% (in some cases, 60%!), the lender’s chosen recourse is the property. When you do a short sale, the lender actually gets what they bargained for when they lent the money, because they accepted the property as collateral for the loan. They bet it would go up, and it went down. Too bad.
All this goes to say that if you need to do a short sale because you are buried in the property, oh, well. The lender has no real right to gripe.
2. If you cannot make the payments on your loans, you should consider a short sale.
Many loans are now adjusting so that borrowers cannot make the payments, and the lender chose to qualify them for the loan at the start rate, rather than the fully-indexed rate. That is the lender’s problem. If your lender (or broker) qualified you for your loan, telling you that you would be able to refinance later, or if they qualified you and told you that you could sell once the payments began to go up, and make money, that was bad advice. Perhaps you shouldn’t have taken it, but you did, and the lender bears as much responsibility for giving the advice as you do for taking it.
So don’t be upset about short-selling your property.
It’s all about timing. If you purchased your home prior to 2003, and if you haven’t refinanced, you probably ought to “ride it out;” if you bought your home in 2005-2006 (and early 2007), you should probably think about selling, unless you plan to keep your home for at least 10 years.
Short selling your property will affect your credit. Lenders don’t like to lose money, and they will hit your credit score–but generally less than if you just walk away.
You will have to prove “hardship” to the lender, or they may try to make you believe that your only option is to “stay and pay.” That is not true. You can walk away, and the lender will then be forced to accept your decision that you have to improve your current financial situation in the only way remaining to you. Yes, you will have a “black mark” on your credit, but which would you rather do? Pay the payments on your now $300,000 home as if the value were $500,000? Your total of payments will be more than $400,000 greater over the life of your loan if you do that (with my assumptions). It makes no financial sense. If you need to short sell your property, then do it. If the lender stonewalls you, then your only option may be to walk away.
If you need specific information, see my contact info.
