Every now and then, we encounter a client who owes more money to the bank than there home is actually worth. With conventional knowledge, selling this home may seem impossible unless the home owner actually comes up with the balance to pay the bank out of pocket.
Contrary to that popular belief, we have actually helped over 30 home owners accomplish this successfully without having to come out of pocket with any money or having to worry about any further damage to the credit ratings.
What is shortsale?
For example, a homeowner owes $325,000 principal balance on a home mortgage. The comparable properties (comps) within a 1 mile radius that sold in the last 3 – 6 months are all indicating that this property is only worth $245,000.
- Mortgage Loan Principal Balance = $305,000
- Home value per comparable market analysis (CMA) = $245,000
- The highest offer received after marketing the property for 96 days = $240,000
- Estimated closing cost which is 2% of sales price = $4,800
- Total estimated proceed from sales = $240,000 – $4,800 = $235,200
- Minus loan payoff to bank = $235,200 – $325,000 = -$89,800
This essentially means that the homeowner have to come up with the $89,800 to successfully offload the property doing it the conventional way. Chances are there are taxes and other liens that also have to paid off in order to close title properly.
Most people don’t have that kind of money laying around. That’s why shortsale is the only solution to selling the property without coming out of pocket for the balance. Shortsale is basically getting the bank to agree to take the loss.
Why would a bank accept a shortsale?
The bank doesn’t mind taking this short term loss. It’s actually gain for them and here is why. A lot of homeowners end up getting frustrated and therefore abandoning the property.
If that happens, the bank will end up taking a bigger loss because of vandalism and possibly getting more than 50% less than the worth of the property at the county’s foreclosure auction.
Imagine the bank receiving a highest offer of less than $120,000 at the auction. It happens all the time. That means the bank would lose over ($325,000 – $120,000) $205,000.
The most the homeowner usually loses is past loss and some points of their credit. The bank is in a worse position than the home owner. With the right investor or real estate agent in your cornet, the home owner has the upper hand.
The banks are always open to the option of shortsale especially if the homeowner is already showing hardship with late mortgage payments. This would be called non-performing asset by a financial institution when homeowner stop paying. The banks wants less scenarios like this in their portfolio because it’s not attractive to thieir god fathers–the investors.
Remember that the bank is not in the business of managing properties but that of investing money in mortgage instrument for massive capital gain for their investors. Fixing toilets and kitchens or protecting properties from drug infested neighborhoods is just not the best idea for maximizing profits for them.
So how much does a shortsale affect the homeowner’s credit rating?
There was a lady client who was sick and had to be away most of summer time. She had a house up in the New Hampshire that she had to sell. She had been refinancing every year to pull money out of the equity.
After 6 months of not been able to sell the property, she realized that it had been overpriced. It is tempting to overprice a property when there is negative equity (Property value – Loan Balance). Essentially, she was hoping a miracle would happen.
She had someone staying in the property that does not pay rent. If there was rent coming in, it would at least offset the mortgage payment every month. But that wasn’t the case.
After 6 months of holding on to this non-performing piece of property, money down the drains on her $305,000 loan at 4% annual rate for a term of 30 years was:
Monthly Payment $1,456 x 6 months = $8,736
… with a higher chance of still defaulting or never having any savings left. If she used the shortsale opportunity, her credit rating may drop by 100 – 150 points. However, financially stressed people often lose their credit anyway… eventually.
Some are also concerned about the bank coming after other assets they may have for the balance loss that a bank took in a shortsale. This is simply not the case. Banks don’t make money from taking people assets over; the courts do.
When you settle, which essentially what a shortsale is, the courts don’t get involved.
For now, just understand that shortsale is one of the best options to avoiding foreclosure and avoiding non-performing assets all together for the homeowner as well as the bank. This conversation on shortsales will continue in the future.
Feel free to contact us if you have any questions with regards to your real estate need.
Ola & Lawrence
1 (866) 208 – 1444