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) What's the Home Worth Today? Get a good valuation from your realtor. In reality, when you meet to talk, she should already have the comps ready to hand you. Don't waste your money on a official appraisal as it won't be used anyway. This is one situation where you want to be incredibly realistic, even pessimistic about the value, and not succumb to emotional attachment for the house. The more upside down you are in the loan, the greater chance for success in your house short sale.
3) Get Out the Calculator: Here's how I decided whether I needed a house short sale: Take your total loan amount, and subtract the present value of the house. Not what 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 pretend that the market has returned to normal appreciation today.) 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 just to break even with the amount you owe on your loan. No profit, no realized appreciation. Finally, compare how many years it will take to break even, with the cost of keeping it each year. Can you hack it? Is it worth it to keep it for that many years?
To illustrate: Let's say you bought a duplex with a $1,000,000 loan. In just one year it has depreciated drastically and will sell for only $800,000. Is it a good idea to seek a short sale?
Upside Down: $900,000 - $700,000 = $200,000 Estimated Annual Costs: Include all your yearly expenses = $60,000 Appreciation: A health growth real estate 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. - 16463
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) What's the Home Worth Today? Get a good valuation from your realtor. In reality, when you meet to talk, she should already have the comps ready to hand you. Don't waste your money on a official appraisal as it won't be used anyway. This is one situation where you want to be incredibly realistic, even pessimistic about the value, and not succumb to emotional attachment for the house. The more upside down you are in the loan, the greater chance for success in your house short sale.
3) Get Out the Calculator: Here's how I decided whether I needed a house short sale: Take your total loan amount, and subtract the present value of the house. Not what 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 pretend that the market has returned to normal appreciation today.) 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 just to break even with the amount you owe on your loan. No profit, no realized appreciation. Finally, compare how many years it will take to break even, with the cost of keeping it each year. Can you hack it? Is it worth it to keep it for that many years?
To illustrate: Let's say you bought a duplex with a $1,000,000 loan. In just one year it has depreciated drastically and will sell for only $800,000. Is it a good idea to seek a short sale?
Upside Down: $900,000 - $700,000 = $200,000 Estimated Annual Costs: Include all your yearly expenses = $60,000 Appreciation: A health growth real estate 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. - 16463
About the Author:
If you liked this story, come read some more on my blog at HouseShortSale.org. It's free and there's no sign up, just good information about how I dealt with my house short sale!
