In this day of being upside down in real estate, where everybody seems to be selling short or walking away from their property there are a few things to remember.
If you're facing doing a short sale, you probably bought your property sometime between 2005 and 2008 when you could finance 100% of an inflated value. You might have used a adjustable rate mortgage or even a negatively amortized mortgage where you didn't have to pay the whole interest payment every month and it would be added on to the principal. If you decide to sell today, and the property isn't worth what you owe, there are two options:
- Sell the property for what you can get and write a check the difference
- Sell the property for what you can get and ask the bank to forgive the rest
Today most people expect to use door number two, but there are a few things to remember about that option.
First, back when you took the loan on the subject property, you entered into a long term committment to pay back the money as outlined in your note. Here I'm speaking primarily about California purchases where we use Deeds of Trust. The note is your contract with the bank where all the terms are spelled out. If you are unclear about what you agreed to, you must read your note. It is, in my opinion, the most important document in your loan package.
So, now you want to sell your property, it's not worth what you owe on it, and you want the bank to share your pain. The simple question the bank is asking is what's changed since you entered into the loan, that justifies the bank becoming your partner in this loss?
Here are some of the most common reasons that are looked upon favorably:
- The borrower's income situation has changed. There has been a job loss or change by one of the borrowers, or a downsizing of a position where the borrower's income has been reduced enought that making the payment is impossible.
- There has been a job change resulting in the borrower needing to move, and the house is not worth what is owed on it.
- A rate adjustment has happened and the payment has jumped to one the borrower cannot afford
One that many feel is a good enough reason is that there has been a loss of equity and the borrower doesn't want to continue to make the investment in the property - the throwing good money after bad reason. Not one that the bank tends to look on favorably. They are going to resist sharing your loss because you made a poorly timed investment. You might still be able to get the short sale, even in this instance, if the bank stands to lose less than if they took it to foreclosure, but it's going to be tougher.
I believe that to be successful in a negotiation you should first walk a mile in the other side's shoes, and look at it from their side. Imagine if you loaned someone money, they promised to pay it back over 30 years, and then 5 years later came to you and said they have to sell the property, it's not worth what they owe, and they can't pay the difference. What would you want to know to be okay with saying yes.
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