I Want Out of This House, But I Owe Too Much.
I have often been approached by friends or subscribers that are caught in the same bind that has swallowed up many real estate owners. Their loan is accelerating or being called, the interest rate is adjusting or they just can’t keep up the payments on the three homes they bought.
“Gregg, can you help me quickly sell my home?”
“What should I do? Can you find me an investor? Another lender?"
Some of these folks are still unrealistic in what they think their investments are worth. They are thinking, “I paid $350K for this house. If I could just get my money back, I don’t need to make a profit.”
Remember, what you pay for something has absolutely no bearing on what you can sell it for or what it is worth in today’s market. I have said it before, you lock in your profits when you buy, not when you sell.
I am not a lawyer, and in all situations, you should consult one before making any major decisions. If you are in a crunch financially, you have trouble making the new payments or you are in an “upside down” loan situation (you owe more than the house is worth), here are some the actions you should take:
- Define you situation. Make a very detailed financial summary. Create two documents. One should be a concise and substantiated list of all your assets and associated debt. It should include account numbers with bank names, loan amounts, payments, terms and balances - a full disclosure financial statement. It helps to keep this on a spreadsheet that you can update as needed. Assemble the bank statements, appraisals, market comps, etc. that correlate to the statement (this is what I mean by substantiated). It would be helpful to get an accordion file to keep this information in so you can use it in a meeting if you have to. Do not lie to yourself about market values. Make sure to separate retirement funds that are in an IRA or 401K from other funds. On your real estate holdings, either consult a good Realtor or get an appraisal. Market America Realty can get a BPO (Broker Price Opinion) for you for $75.00. This will be money well spent - a value with no emotion, substantiated by logic.
The second piece of paper should be an income statement. How much cash is coming in and how much is going out? Don’t forget to include insurance and property and income tax payments that may only be made yearly. Make a forecast for any income swings like lost rent or raises.
- Evaluate your situation. If you do the above thoroughly, you will be able to unemotionally review your situation and make clear choices based on facts, not emotions. No one cares how you got here, why you lost your job or why you made poor decisions. What matters is what you do from today on. Your evaluation may tell you that you have four months before you have to default, or perhaps you are already in default.
- Sit down with an advisor or two. I suggest an attorney and a Realtor. Your meeting will help you distill your options and simplify your alternatives. I have one of these meetings at least once a week. The preparation you did will determine if the meeting is productive or not. Putting all your documents together is critical. At this meeting, you will have many of the unknowns explained to you. Many of my clients' fears have to do with not knowing options. Once they are in black and white and you can hear the “worst case scenario,” you can address your concerns and move forward.
- Move Forward. Most of the problems we have with Short Sales and loan modifications comes from the inability of the borrower to put his data together. I have clients that have actually not opened any of the mail sent to them by the bank. I call this the ostrich response – you know, the old head in the sand. Big Mistake. The actual truth will be better than what your imagination can conjure up.
We are not lawyers, we are Realtors. I cannot give legal advice, but I can tell you where to get it. I have put together a package of forms that is very complete, and, once filled out by you, we can sit down and help you decide on the move forward plan. To get this package, CLICK HERE. If you would rather have a confidential conversation about your options, call me at 800-439-1580 ext. 52 or email me for an appointment firstname.lastname@example.org
We can discuss:
Attorney referrals to discuss bankruptcy and what that will mean to you
The value on your house – you can order a BPO through us.
Selling your house
The Biggest Mistake I See in Short Sales by Sellers
Once you have done all of the work to prepare a tight package for the bank (see above), the last remaining piece is the contract to buy the home. Most banks will not look at a Short Sale Package until there is an executed contract to sell the home. What’s the biggest mistake sellers make? They ask too much for their home, so they can’t get that last piece.
If you are under water, it does not really matter how deep, now does it. This is not the time to worry about what a “good deal” your purchaser is getting. What the seller should be concentrating on is getting this situation behind him and moving on with life and reconstruction, not the maximized return for the bank. Get a BPO done, or get two if you wish. The bank will insist on their own BPO anyway. By the way, many Short Sales sell well below the BPO value and are accepted the banks.
What about the deficiency? If you owe $300,000 on your home, the BPO and contract come in at $200,000 and you have no other funds to pay the bank with, the only way for you to sell that home is to get the bank to release you from the promissory note for less than you owe. This is called a Short Sale. You are selling the home short of what you owe the bank. The difference is called the deficiency.
You need to clearly understand the ramifications of this deficiency. I have had sellers tell me the only way they would accept the short sale is if the bank waives the deficiency (actually writes it off). However if the bank does that, they will report it to the IRS, and the debtor will have a taxable event (he will have to pay taxes on the amount waived). If the bank reserves the right to come after him later there will be no taxable event, but he will have this hanging over his head. Oh what to do?
The answer is not simple, but has a lot to do with the personal financial picture that he put together in step one. Whether the home was his primary residence or an investment home will also be a big factor. Without knowing the particular situation, I cannot answer the question about the deficiency, but there are ways to not pay tax on this event, and this would be reviewed in the attorney meeting.
What about all of the fees and closing costs? In a Short Sale, the seller generally has no money for closing costs like title work, etc. These fees will come out of the proceeds and will lessen the amount the bank gets. We do not charge an upfront fee for handling a short sale. Our attorney does the short sale negotiating work for a nominal fee at closing, but that fee comes from the bank as well. Please do not hire someone to handle your short sale that charges a fee to you.
If you would like to sit down with one of our Short Sale specialists, please call 800-439-1580 ext. 52 or email me at Mail@greggfous.com.