House Short Sale: Is It Time?

If you are like the rest of us, your home has recently dropped in value by a whole lot. There comes a time when you have to ask yourself if it makes sense anymore to continue the monthly agony of pouring money, time and effort into a never ending black hole. It may be time for you to look at some of your exit options, short of foreclosure. Here’s how I determined my position, and how I decided if I need a house short sale.

1) Get a Great Realtor: I would interview a number of them, and find a good fit for your situation. Preferably, they have a degree in finance and a brokers license in real estate. Don’t be afraid to ask the tough questions, because its your life, your house short sale, and your money! You don’t want to find someone that will make a bad situation worse! Be careful of the referral service mills too. They always ask for money up front, and that should be a big red flag! All of the legitimate realtors I found will never ask you for a dime. They pay all costs including advertising, and the bank pays them a finders fee.

2) Price It: The first step is of course, to determine just how much trouble your in. The worse the situation, the better your chances of a successful short sale. Most realtors will help give you a current fair market value for your house, and what the short sale price should be. Don’t waste you money on an appraisal, they won’t do you any good here! Be realistic, and be aggressive in lowering the price. Don’t let emotional attachment to the house set the price. You’ll be even more emotional if you can’t sell it! The goal is to be relieved of the debt with a successful short sale.

3) Judgement Time: This is where you determine if you need a house short sale. Take your total loan amount, and subtract the present value of the house. Not what you think it’s worth, but how much you can get for it TODAY. This is how much your “Upside Down” in the loan. Then, figure your annual expenses including a year’s worth of payments, taxes, insurance, maintenance, and repairs. This is your “Yearly Cost” to keep the house. Now, take the amount your upside down and multiply it by 8%. We will assume the best case scenario. In a FAST appreciating market, this is how much your house value would go up each year, if the housing bubble was over today. (yeah right!) We’ll call this number: “Appreciation per Year.” Finally, divide the Upside Down amount, by Appreciation per Year. This is how many years it will take for you just to break even with the amount you owe on your loan. No profit, no realized appreciation. Compare the Number of Years to Break even with Yearly Cost to Keep the House. Can you hold out for that long? Does it still make sense to hold on? Or would letting it go make more sense?

For example: You bought a luxury condo with a $9,00,000 loan. In one year it has depreciated drastically and will sell for only $700,000. Should you put the house on the market for a short sale?

Upside Down: $800,000 – $600,000 = $200,000 Annual Costs: Includes all yearly expenses = $60,000 Appreciation: Assuming a booming market = $200,000 x .08 = $16,000

The Bottom Line: It will cost $60,000 per year in payments, for 12.5 years, just to break even with the original value. That’s assuming a strong market with all 12.5 of those years of appreciation, at 8%. In that time period over $750,000 will have been spent in principle, interest, taxes, and insurance, along with other expenses with no equity gain.

You don’t have to guess what I decided to do. My numbers we’re very similar to these. I know I’ll take a hit on my credit, but for me, 2 -3 years to rebuild my credit is a lot better than 12.5 years of suffering. I’m going to call it quits and live to fight another day.