A lot of homeowners who are upside down in their homes are wondering how to handle a short sale. They are plagued by rumors, incorrect assumptions, and hearsay that often times leads them away from making the best decisions.
Long time reader "Sarah" read yesterday's blog regarding Parents of FSU Students who are looking at real estate to offset (reduce) the cost of college and wondered how this could help her decide how to handle her short sale situation. She asked:
What of home owners who *most likely* will want to sell in the next 3-5 years? That’s our situation as we are looking at finishing grad school in a year or two. Our options are always stay here, rent it out, or sell. But it is not so simple, is it?
First of all, Sarah is very astute to point out the options are relatively simple to determine, but determining the wisest course of action is not so easy. She then continues by reviewing her options ...
To sell means taking a loss. To take a loss means (1) the bank accepting a short sale, or (2) us financing the loss. How the heck do we do that? Is it even possible in the state of FL to convince the banks to truly forgive the difference in case of a short sale? Will banks even agree to a short sale without proving serious distress (like losing a job?).
Again, Sarah is heading in the right direction, but this is where we see some confusion and distortion enter the picture. So much incorrect rubbish is written every day on how to handle a short sale that it is amazing the Sarah is this close to reality.
The fact is, Florida is one of the top short sale State's in the country. As the leader in short sales in Tallahassee, I can tell you we have many solutions that we would address with Sarah, but each one is based upon factors that will be unique to each homeowner (for example, mortgage balance, current income, future income, future plans, etc.).
Sarah continues in her frustration on how to handle a short sale by closing with:
With regards to renting out the home, how hard is it to refinance a mortgage when the owner is underwater (because of falling real estate prices)? Our mortgage is hinged on this being our primary residence (it’s a loan for first-time home buyers) so in order to rent it out we would be required to refinance.
And so our confusion grows. Since we currently are not going anywhere our thoughts are just to sit tight and enjoy our affordable mortgage and not worry too much. One side of me thinks about taking out subsidized student loans to pay down the mortgage so we will have the freedom to sell at a lower price or refi in the future. Of course that’s taking care of debt with more debt, but at least we would have freedom of mobility. Am I crazy to think this way?
This final section of Sarah's comment is the reason that I wrote about how to handle a short sale today. I see these questions all the time and want to point out a "few rays of sunshine." First of all, why refinance an upside down mortgage? She is current in her payments, she should continue enjoying her "affordable mortgage and not worry too much."
Secondly, and important to note, Sarah is confused about renting a home. To qualify for the home loan that Sarah currently has, she and her husband had to be "owner occupants," meaning the loan was not for landlords. However, that was to qualify for the loan. There is no loan that I know of that makes an owner refinance or sell should they later choose to move out of the home. So Sarah, unless you have a "first time I've heard of it in 20 years" loan, you can rent out your home with your existing financing not having to change.
I think Sarah answered her own question about taking care of debt with more debt. As my (richer) friends always told me ... "Joe, you cannot borrow your way out of debt."
How To Handle A Short Sale
The bottom line answer to this question is talk to an expert so that you can make an informed decision. It might seem like a hassle spending an hour or two with somebody who helps short sale homeowners every day, but I can assure you that knowing your options will help you make the best decision. Based upon what Sarah has written in her comment, I can guess that my advice would be to "wait it out," as she has indicated she could be here five more years and she enjoys her home.
But my best answer is "I need to know the entire picture" before I answer. And that is the true case for anybody who is in Sarah's position and is seeking guidance on how to handle a short sale. If you fit that description and would like to meet with an expert in your market area, just let me know below and I will get somebody to contact you.
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Joe Manausa, MBA is a 26 year veteran of real estate brokerage in the State of Florida and has owned and managed his own company since 1992. He is a daily blogger with content that focuses on real estate analytics and providing his clients with a tactical advantage in today's challenging market.