Why Short Sales Make Sense

This is good information to cut and paste, and send to everyone.

Distressed Property Owners Beware!

Foreclosure Statistics are both unsettling and unnerving. Consider the following:

–          23% of all Homeowners nationally,  owe more than their houses are worth, according to Corelogic, Inc.

–          In Florida  45.5% of all homeowners with mortgages are underwater, as of the end of November, 2010.

–          Completed foreclosures on Jumbo Prime Mortgages have increased 700% since 2008, according Lender Processing Services (LPS)

–          According to NAR, (National Association of Realtors), in many local markets, over 50% of sales activity in Real Estate involves distressed properties.

–          Foreclosure and short sale activity is expected to increase, due to the additional drop in real estate value, the lagging economy, increase in consumer prices and interest rates, end unemployment.

Is a Short Sale the Answer?

While many homeowners have taken the short sale route, there is also a sizable number of sellers who are taking the “wait and see” approach. In many cases, homeowners are falling behind in their payments, not realizing that the consequences of not negotiating with their lender now could have serious financial ramifications in the future. Fees, including interest, penalties, attorney fees, can dramatically increase the amount owed to the lender. Presently, most banks are willing to negotiate with delinquent homeowners, in many cases, reducing the amount owed  while releasing the homeowner of all future liability, when the property is sold.

For example, a homeowner has a $500,000 mortgage on a property worth only $400,000. If the homeowner also has $50,000 in liquid assets, the bank may be willing to accept that – or even less – to satisfy the $100,000 deficiency.

It’s unclear whether banks will be this flexible in the future. History indicates it is unlikely.

During the Savings and Loan debacle of the 1980’s, the Resolution Trust Corporation (RTC), a government entity, took over the assets of the failed Savings and Loans. Several years later, they sold the assets to third party investors and companies, many of whom instituted very aggressive collection campaigns against unsuspecting previous property owners that had defaulted on the loans believing there would be no future liability. Actions taken included obtaining deficiency judgments and garnishing wages to satisfy the judgments.

The message for present homeowners should be very clear; unless they are planning to file bankruptcy, be completely aware of the contractual debt and how it is increasing due to interest, penalties, and attorney’s fees.  It may be advisable to minimize these costs by short selling now as future costs could be far greater than the financial liability alone. As previous property owners found out in the 1980’s, these costs could also include the loss of health due to the stress from having to deal with past bad debt collection actions.