The "Should I? Shouldn't I?" Short Sale Grid

I frequently have people ask me if they should Short Sale their home. I use this simple grid to help them determine their best option.

I begin by explaining two important factors to consider when evaluating your home: Equity and Cash Flow. I make the grid using Cash Flow on the side, and Equity along the bottom. I explain positive cash flow as any situation where you break even or better. If you can pay the mortgage each month with your income, without using savings, gifts, or increasing your debt, then you have positive cash flow.

I explain equity as the value of the home, minus the amount owed on the mortgage. I offer to conduct an Right Price Analysis (RPA) to help them determine the current market value. I also show them my Crystal Ball to help them see the likelihood of selling their home at the given price. We use this information to determine their equity. If the current market value is less than the amount owed, then they have negative equity.

Now that they understand the dimensions I help them pick which box they are in. The top left box represents a situation where the home owner has positive cash flow, but negative equity. Top right box represents positive cash flow AND positive equity. The bottom row represents situations where there is a negative cash flow and negative (left) or positive (right) equity. Now that the grid is completed we pick which quadrant they are in.  

Any client in a green boxes does not need to Short Sale.

In the top left box you have positive cash flow but negative equity. Home owners in this box should not Short Sale. Primary reason: you can afford to make your payments with your current income. Negative equity is not enough of a hardship for the bank to allow you to Short Sale.

The top right box (positive cash flow, positive equity) seems pretty obvious, but I still get people asking about it. If you have positive equity you can sell your home without shorting the bank. If you have positive cash flow (can make your payment) you do not need to sell your home at all. However, if you are looking to take advantage of the great prices and mortgage rates, you can get a great deal if you want to buy right now.

The bottom right box is hard to deal with. It really depends on the individual situation. Negative cash flow, positive equity. In this box the home owner is losing money each month because they cannot afford to pay the mortgage. However, they have equity in the home. If you can't stand losing money each month, you may consider selling. Of course, with positive equity it won't be a short sale. However, if you can stick it out, and have enough in savings to continue making your payments, it may be better in the long run to keep the home. An individual analysis of your home and financial situation are required to determine the best approach.

More to consider with Short Sales found here.