Short Selling

 As many who know me know I like to write about things close to my heart.  Right now one of the closest thing to my heart is the fact that I am going to lose my house.  Now I say this for the simple fact that I have made the decision to start the short sale procedure for my home.  While this is not where I expected to ever be, the facts are I have had to make the best decision for my family.  Let's take a moment and look at my story and then we can discuss what you can learn from my mistakes, and what I have found. 

Let me make very clear: I am NOT an attorney, CPA, or financial advisor.  The things I write here are what I have found from research and discussions with my attorney, and every state is different.  BEFORE you make ANY decisions, meet with an attorney in your area who you are comfortable with!

My husband and I bought our home in 2006.  We did not buy an extravagant home and we bought within our means.  The home was the cheapest one in a decent area that we could find and needed a lot of work.  We were OK with this it was an investment for our family's future.  We bought our home for $158k on an ARM (Adjustable Rate Mortgage) loan due to my filing status.  I am a contract worker so I can't verify income it fluxuates, but we were making more than enough to cover the payments.  Then the ARM adjusted.  We refinanced for $165k on a fixed rate subprime mortgage with an escrow acct for taxes and insurance.  Still OK, work had slacked off and we were hurting but it was an investment.  We had put $25k personal cash into the house we didn't take any of this out when we refinanced, just wanted to be out of the ARM and the extra was the closing costs and escrow payments.

Then the bottom fell out.  America has found herself in a very difficult time, many are losing their jobs and finding themselves upside down in not only their cars now but also their homes.  The Real Estate market saw a tremendous boom in previous years allowing many to make quite a bit of money, but now as things go the bubble has burst, the honeymoon is over.  Personally I live in FL and homes here have lost over 40% of their value in the past year.  Homes are now selling at the same price they were in 2002.  So what happens to those of us who bought after 2002?  We are upside down in a home.  With as many people out there that are like us out there the national short sale and foreclosure percentages are sky rocketing, and the loans being given are virtually non existant.

What does being upside down mean?  Simply put, we owe more on our home than it is worth.  So what happens now?  We have some difficult decisions to make that is for sure.  As you can tell from the math above, we owe $165k on our house and have $25k personal money so we are at $190k into our home.  The house at the corner of our road just sold for $45k.  It is larger than ours and redone as well.  So what can we do?

Option one is we keep making our $1,500 per month payment on our subprime loan.  Ok, I exaggerated $1,426 is our monthly mortgage payment.  (We have a 6.35% APR fixed for 30 years.)  So out of the $17,112 we pay per year, about $1,000 of that actually goes to our principle for the first 10 years or so.  So we are just paying principle for the first 10 years essentially.  This means in 10 years we would have to sell our home for $180k to break even.  Oops!  I forgot the 7% for the real estate agent.  So add $12,600, I have to sell my home for $192,600 to get out what I have it in right now…  but I have to pay $17k a year to do that.  Option one sucks.

So we come to option 2.  Foreclosure.  In foreclosure you walk away from a home and the bank is stuck with it.  Your credit score will take a hit.  You will not be able to buy a home for 7 years, and the bank is responsible for your home.  The definition of a foreclosure is when a court says that you have forfeited your right to the item you used to secure the loan, such as your house.  Banks really don't like doing this anymore than you do.  They lose lending power because if they make a bad loan then it looks like they didn't make a good decision.  By not making a good decision they get a slap on the wrist (there are lots of slaps going on out there now).  You are required to get out of the house at the time the foreclosure completes.  This is also known as eviction and where the horrible images we are seeing come from.

Then there is option 3.  This is the one that we had to go with.  This is to join the ranks of the short sellers.  A short sale definition is when the bank accepts less than the value of the mortgage and takes a loss.  The first thing I tried was calling the bank to explain how we had lost work, etc and we found out real fast that the banks don't talk to people like us.  After all we are only the ones who are paying the mortgage, they want to talk to short sale experts who know the short sale secrets.  OK not really, they want to talk to an attorney who knows the short sale procedure and can proved them the nice neat clean short sale package that they can sell to those who make the final decisions.  There is no short sale magic and it is NOT a fast process.  This has pros and cons, let's address some of it now.

The first thing you will have to do if you want to do this is to get with your attorney and prove hardship.  In order to prove short sale hardship, you have to create a short sale hardship letter.  You would think this would simply be a write up of how your circumstances have changed.  WRONG!  You have to provide taxes, pay stubs, bank statements, basically you have to prove hardship and a short sale expert or attorney is the best way to accomplish this.  You want to make sure you follow every step the specialists tell you.

The major con is that your credit will take a substantial hit.  The same as a foreclosure.  Your score will drop about 200-300 points, but it will only prevent you from buying a home for 2 years instead of 7 years.  The majority of the hit you will see will come from the fact that you have to be 60-90 days late before the banks will talk to you or better said your attorney about accepting an offer on your home.  This brings us to the offer on the house.  You can not buy your own home at a lower cost, nor can you conspire with anyone to buy it for you.  You must be leaving the premisises and you must sell your home through a liscensed real estate agent.   I would highly recommend finding a short sale company or short sale service company who puts you together with attorneys and real estate agents who work together.  Personally our attorney and agent have worked together on over 140 short sales.

Now the major up side of a short sale.  In doing a short sale you avoid foreclosure, have 2 years instead of 7 years damage to your credit report, and most of all get to get out from under the mortgage.  Oh did I mention that you can stay in the home for as long as the process takes?  In the short sale procedure, you give up all of your rights as to determining how much the house is sold for.  That is determined by the attorney and the bank, it is going to be less than you owe and at that point it is determined by how much of a loss the bank will take, and what they think they can get for the home.  You stay basically as a care taker for the home. 

In 2007 Bush signed into being the Mortgage Debt Relief Act of 2007.  The simple explination of this is if the bank accepts the lower offer you are "forgiven" the difference.  This is important because previously owners were taxed on the difference as income.  I will discuss this more in another hub, but using simple math, if it is your primary residence (they didn't want investors to profit from walking away from loans), so if is a primary residence or homesteaded property as they call it here in FL and you owe $165k on the home, like us.  If our real estate agent and attorney work out a short sale for $100k (we are doing simple math) I am "forgiven" the other $65k.  Previously I would have received a 1099 from the mortgage company for $65k at the end of the year.  Making it look like I had actually made money. 

So this is how I got where I am.  I am short selling my home in an effort to staunch the flow of blood from my accounts.  My neighbors continue to tank my property values so now it is up to the attorney to do their part and get the bank to accept an offer on the house, whenever I get one.  Wish me luck!