Navigating an upside-down home value. The ins and outs of short sales.

There are more than 14,000 homes on the market across the Wasatch Front. Over 25% of these are short sales. Why are there so many short sales on the market? There are some misconceptions about the purpose of short sales, which can lead to frustration, loss of money, and even getting scamed. It is important to be educated, patient, and compliant when considering a short sale. 

Short Sale Graffiti

The market has continued to dip, increasing the number of people with hardships. This has been a major cause for increased short sales on the market. However, another theory suggests the popularity of short sales is increasing because it is becoming more common. Malcolm Gladwell in his book Tipping Point wrote about a strategy to decrease New York's crime rate. This strategy was based on ‘The Broken Windows Theory.' In essense, trouble makers are more likely to break a window of a house, if another window is already broken. Similarly, the leaders in New York believed that graffiti in the city would promote more graffitti. As graffiti increases the value of the neighborhood goes down and crime increases.

We are experiencing short sale graffiti in the housing market. Because there are so many short sales on the market more individuals decide they want to short sale their home. Years ago, if you were the only one putting your home up as a short sale you would have thought twice about doing it. Just like with the broken windows, you wouldn't want to be the only one harming your neighborhood. You might have found a way to make your payments or rent it out. Because there are so many short sales in the neighborhood it is easier, psychologically, to short sell your home. This is a downword spiral that continues to run down our economy.  People who would not have done a short sale years ago, even if they were in the same circumstance they are today, are doing a short sale.

Short Perspective versus Long Perspective

Almost every week I get at least one call from someone effected by a short sale graffiti environment. The call usually starts like this, "Dave, I'm thinking of doing a short sale. I'm upside down in my property and it makes me sick how my property values are going down. I need to get rid of my house." This is the short term perspective. Someone is trying to get rid of what they perceive as financial pain. This person is not a good candidate for a short sale, and they hate being told this. This person needs to think long term.

The first and only question a long-term thinker will ask is: "How can I take advantage of the current market?" Long term thinkers are renting out their home with negative equity and waiting to qualify for a home so they can count the rent as income. These long term thinkers know that their house value will return to a level where they can sell it down the road. They don't care if it is 5 or 10 years. There is nothing they can do about the timing. They take advantage of today's market by buying a home at today's low pricing and interest rates. These long term thinkers help get rid of short sale graffiti and they will be rewarded financially for it in the long term. 

Too Short to Short?

Many people attempting a short sale should not be doing one. Short sales are only for people that are in a situation where the home will inevitably end up as a foreclosure. Here are some thought that indicate you should not be doing a short sale:

• I feel like I'm not getting ahead.
• My payment is too high and I can't refinance at todays rates.
• I'm upside down 100k in my home and that's way too much.

All of these feelings are no fun....but they aren't good reasons to do a short sale. 

This is what the bank is going to look to see if they will consider a short sale. It is important to remember that any attempt to artificially create these circumstances in order to short sale is erroneous thinking.

• Is your house payment above 31% of your gross monthly income?
• Has your income been significantly reduced or has there been a loss of income?
• Does your bank account have less than $5,0000 in it?
• Has there been a divorce, increase in medical bills, or other significant increase in financial demands? 

Short Sale Outomes

There are many different factors that effect the outcome of your short sale. Some people are frustrated with the process because there are no guarantees. For example the bank (or investor) is a large factor. What have past short sale hopeful experience with that bank? How long you have been in default is another factor. During the process a lot of the outcome will be determined by the negotiator and your agent. Can your agent get a good buyer for the home at the negotiated price? It will also depend on you. Are you able to get all the documents the bank needs promptly?

Here are some possible outcomes from attempting a short sale.

• Borrower is forgiven of debt and completes sale.
• Borrower is released from liability, but is required to contribute to the sale of the home. Sometimes this involves bringing money to the closing table.
• Borrower completes the short sale but isn't released from liability.
• Borrower completes short sale and is required to bring money to closing table and isn't released from the obligation.
• Borrower completes short sale but is required to sign a note.
• Borrower gets the sale approved but cannot find a buyer at the bank's price and gets foreclosed.
• Short Sale fails and Foreclosure happens.

Short sale scams

Once you are in default you are on scammers radar. I outlined Loan Mod scammers in a previous post, but short sale scammers use very similar tactics. They claim to want to help you and save you from foreclosure. Some will even guarantee you results, but remember there are no guarantees with short sales. Some will charge an upfront fee while others will offer to give you money after the sale. 

Scammers may claim that they have attorneys, title companies, and lenders working with them and that what they do is completely legal. Then they will ask you to sign over your house to them or an llc or a trust, or they'll as ask you to sign a contract giving them exclusive rights to buy the property. They eventually negotiate a short sale with a low offer and find a buyer who is willing to pay $20k to $100k more than what they bought it from you for. If they didn't get a letter stating you were being forgiven of the difference the bank may come after you 6 years down the road for that 50k that the scammer just made off of you. Some will even have the nerve to offer you some of the money they make. Guess who most likely will go to jail...you. Yes you have the highest chance of going to jail for fraud. You sold the home, you shorted the bank, and you got money from the guy that was supposedly helping you.

What's the right way?

If it is inevitable you can't keep your house, have a real estate agent that has short sale experienced or who hires someone with short sale experience to help you. These individuals may have a designation such as HAFA certified, CDPE (certified distressed property expert), or both. They also have sold at least 12 short sales. There are many who claim to be short sale experts, but request to see evidence to support this claim. The agent will not write your hardship letter for you, but will give you a list of items you will need to gather. They will not charge you any fees. They will receive a commission only AFTER the deal is done and it will be paid by the bank. They also will not tell you to stop making your monthly payments. Find the highest and best offer from a buyer, and complete your paperwork fast to increase your chances of a successful short sale.

The Short of it.

Those who strategically default and short sale their home will not be better off years down the road. I believe those who take advantage of the market will have a clean record and will be $30k richer in 3 years than someone who does a short sale today. Those who inevitably are heading to foreclosure can potentially find some relief and have a chance to get back on their feet. That's what the program is for.