Short Sale vs. Foreclosure: What Are Your Options?

Let me give you a very common real estate scenario, one I have encountered more frequently in the past several years.

Mr. Seller paid $350,000 for his home in 2006. He now wants to sell his home because he [got relocated/got married/wife had their 4th child]. As a real estate agent, I now have the awkward responsibility of telling him his home is currently worth $315,000 in today's real estate market. He then tells me he owes $340,000 on his mortgage and that he doesn't have the cash to bring to closing and asks me what his options are.

If the above scenario sounds familiar, you're not alone. So, here are your options:

1. Bring enough money to closing to cover your remaining mortgage, plus closing costs. For example, you owe $340,000 on your mortgage but you can only sell your home for $310,000. You are responsible for the $30,000 difference, plus closing costs.

2. If #1 isn't an option, then you need to consider staying in your home until you are in a position to sell your home without bringing money to closing. Or, if you have to move you can choose to rent out your home until you're in a better financial position.

3. If neither of the above options sound good to you - you don't have much cash but you HAVE to sell your home and don't want to rent it out - then you need to consider a short sale. Meaning, you need to negotiate with your mortgage company and ask them to cover any shortage in paying off your mortgage after your home sells. Basically, this is like option #1, except you're asking the bank to cover the $30,000 shortage, plus your closing costs. This will negatively affect your credit, and most short sales are huge headaches and can take many months to close, but you will be able to move on to the next chapter in your life without taking a huge financial loss.

4. Just walk away. Many homeowners have chosen to simply walk away from their home and let go into foreclosure. This will negatively affect your credit more so than a short sale, but you won't have to deal with the headache of a short sale, or the ensuing months of paying a mortgage on a home you can no longer afford - or no longer want. This option is very attractive to the rich. e.g. 'Why keep paying on a home that is depleting my bank account and has lost over 50% of it's value since I bought it? Let the bank deal with that headache!' Having enough cash to get them through the next 7 years while their credit score recovers is also helpful.

Our real estate market will continue to force many people to choose between the scenarios I have outlined above. And every one's situation is going to be different. You need to decide what works best given your current financial situation. Talking openly and honestly with your real estate agent is the best advice I can give you. I make decisions based on the information my clients give me. If you tell me you're not in a hurry to sell and you're financially comfortable, then my advice will be much different than if you told me you needed to sell in the next 45 days or you will no longer be able to pay your mortgage, car payment, etc. Unfortunately, people tend to tell me the former, when the truth looks more like the latter.

Will A Second Wave Of Foreclosures Hamper Our "Recovering" Real Estate Market?

This is a great article from the Washing Post talking about the possibility there will be a huge onslaught of foreclosures coming down the real estate pipeline in the not so distant future. This second wave of foreclosures will most definitely ruin any chance of a real estate recovery. What is the likelihood of this happening in 2010? According to this article the numbers are pretty telling.

"Lenders are deluged by late-stage delinquencies. The pent-up foreclosure inventory is there," said Massoud Ahmadi, director of research for the Maryland Department of Housing and Community Development.

Also from the article,

In addition to those already in default are 11 million more U.S. borrowers who owe more on their mortgage than their home is worth -- known as being underwater -- and are in danger of becoming delinquent, said Sam Khater, chief economist for First American CoreLogic.

I briefly touched on this topic late last year and it sounds like I wasn't that far off. I feel like the government is trying to help stave off this impending second wave of foreclosures. But until the banks get their act together and help homeowners adjust their current mortgages and assist with shortsales I feel like we'll be dealing with the threat of foreclosures for a very long time. From the article,

"Banks have remained in foreclosure paralysis, allowing that backlog to get larger and larger. You can't do that indefinitely," said Sandeep Bordia, head of U.S. residential credit strategy at Barclays Capital.

I agree, but banks won't change unless someone forces them to change the way they're handling this crisis. Until then I guess we'll all just have to cross our fingers and hope for the best.

Did foreclosures really kill our economy? The numbers don't add up

According to this 2007 report by the U.S. Department of Housing and Urban Development and the U.S. Census Bureau, there are (were) 128,203,000 housing units in the United States. Of those, 64,231,000, or 50%, are owned free and clear.

If 1.2 million homes are in foreclosure at any point in time that would equate to less than 1% of all homes in the country or 1.9% of the 63,972,000 homes that have at least 1 loan on the property.

Then let's assume that each quarter 1.2 million homes go into foreclosure. That equates to less than 4% of all homes in the country (4.8 million homes) or 7.5% of homes with at least 1 loan on the property.

Are we really to believe that because 7.5 out of every 100 homes in the country went into foreclosure our economy was thrown into a recession, mutliple financial corporations were forced to shut down and the stock market tanked? Unless I'm severely off on my math the numbers just aren't adding up.

The $50 trillion credit default swap market theory on the other hand is beginning to make more sense with each passing day.

More Proof That Free Handouts Don't Work

The above home was built for a family on ABC's "Extreme Makeover". Now they have let it go into foreclosure because they used their "equity" on a botched business deal. I've heard that roughly 80% of people who win the lottery eventually have to claim bankruptcy. I've also heard that the winners of HGTV's Dream Home giveaway eventually have to sell the home or end up getting foreclosed on. The moral of the story is that people don't appreciate, or have the wherewithall, to use free handouts (bailouts) appropriately and better their lives. People in general are stupid and I've always maintained this stance. And this story is no exception. Our society keep bailing people out, like in the current mortgage crisis, and people will continue to squander the money away and end up in worse situations than where they began.

Bottom line is this, if you don't have blood, sweat or flesh in the game, then you won't appreciate what you're given. Learning lessons the hard way is the only way to prevent future stupid decisions.

This Marriage Ain't Long for this World

I've talked about Irvine Housing Blog before, a blog devoted to encourage people to rent instead of buy due to Irvine, CA's terrible real estate market. Or as the blog author puts it, "Chronicling ‘the seventh circle of real estate hell’ since September 2006". Today he posted a poll where you could vote on how long you could stand being "upside down" on your mortgage. (You owe more on your mortgage than your home is worth). Most people have said they wouldn't stand for it for even a minute. Just walk away and throw your keys to the lender, baby! Nice attitude. Or you could just stay in your damn home until things turn around. But I digress, this comment from a reader is what really caught my attention,

"I got aways to go yet. We bought our “McMansion” in 2001 and the price skyrocketed to almost double. I tried to talk my wife into selling and moving to a local rented apartment or townhouse (daughter in public HS) about a year/year and a half ago (when things were still hot to sell) but she wouldn’t hear of it. We could have walked away with $300K in profit (after fees) and, while the prices have not dropped here in MD like they have in CA, I fully expect that, when my daughter has finally graduated in mid-2009 and I finally talk my wife into selling (prolly 2010), we will only be able to sell for a modest increase over our cost of purchase, if that.

My wife is a Pollyanna. She still thinks things won’t get that bad here. So far the local comps are about 10% off their highs of 12 months ago and sales have slowed. My only consolation is I will have an “I told you so” to hang over her head."

Um. Wow. Can you imagine what this guy's wife would say if she knew he felt this way? Ouch.

Dallas and Tarrant County Make Forbes List...For Foreclosures, That Is

Dallas County came in at #21 out of 50 with 4.4% of the homes entering foreclosure proceedings having negative equity. (Read the full story here) Meaning the sales price will not cover the loan amount owed to the bank. Tarrant County represented at #36 with the same number (4.4%) of foreclosed homes having negative equity.

Although I'm not quite sure how we or why we made the list since #50, Pasco County, Florida boasts a whopping 15.7%.

I'm confused.

House Shopping by Wave Runner

So I'm still in Naples, FL on vacation and a friend and I took out the wave runner to cruise up and down the bays looking at all the expensive real estate this fine city has to offer. And regardless of what you might be hearing about the woes of real estate in Florida, I am here to tell you there are some eye popping price tags and there are buyers out there actually paying them. I took a couple of pictures from my Blackberry of some homes I came across so the quality isn't that good but you get the idea. So I'll be posting a different home each time and I want you to guess how much the home is on the market for. Enjoy!

This one isn't on the market and my hunch is that the builder ran out of money. This home is obviously falling into complete disrepair. Can you imagine what the neighbors think?

Haunting Reality?

Now everyone knows I don't like to spread doom and gloom real estate lies but I couldn't resist posting this. I can't take credit for this so thanks to BlownMortgage.com. Love it!

Dallas Thinks; Therefore It Is

I admittedly don’t keep track of mortgage rates regularly. (I let my client’s lenders handle that part of the transaction) But while having lunch with a lender friend yesterday he said he is closing deals at interest rates under 6%! Yet people still want to perpetuate what a terrible real estate market we are in? It is getting more and more frustrating to repeat the same information to my clients here in Dallas trying to educate them about the real estate market. I guess I’ll continue to sound like a broken record by repeating the 2 main reasons why it’s a good time to buy.

1. Rates are amazingly low.
2. Inventory is great meaning buyers have a lot of homes to choose from. If you don’t want to get into a multiple offer situation then you don’t have to. There’s plenty of fish in the sea.

So I ask my buyers, “What exactly are you waiting for?” and here’s what some of them are saying followed by my official response.

“Rates might go down!” – Uh, like to what? 4.5%? I doubt it. Some people might be able to get a 5.5% interest rate but if it goes any lower than that I will very surprised. But think about the opposite. If you wait too long you might be looking at a 7% interest rate. If you want to play the wait and see game then you might get burned.

“Inventory is high and I keep hearing how bad the real estate market is so sellers should be negotiating down off their asking price!” – Do you know the sellers financial situation? In all price ranges sellers move for different reasons. If you happen to get lucky and make an offer on a home where the owners are getting a divorce and want to ditch the home for next to nothing then congrats. But just because there is an abundance of inventory don’t expect EVERY seller to give away their home to you because YOU think the real estate market is bad. And what’s the alternative? Wait until there is a small amount inventory on the market? That means multiple offers and paying top dollar. So let me know how that works out for you.

“I keep hearing about all of the foreclosures and pending foreclosures. Find me one of those!” – This is my pet peeve and I could spend an hour answering this but the quick answer is that there are literally THOUSANDS of investors combing the Dallas real estate market for foreclosure deals. So when a true foreclosure deal comes on the market there are multiple offers on the property for over list price and the investors are paying in cash which means they can close quickly. But your typical buyer doesn’t want to pay list price (they want to negotiate) and are financing their loan thus needing at least 20 days to close the loan. Which offer do you think the banks are going to accept? My advice is get over the foreclosures and look for a home you want to live in, not the deal of the century.

People don’t realize real estate is local and not dependant on other states. North Texas has been and is doing just fine. But the national media attention has crept into our minds and we can’t shake it. While pondering the phenomenon we are experiencing with everyone and their dog believing the real estate market is bad, I thought of a real estate analogy. There is a house in your neighborhood. Just your average home and the owners keep to themselves. Not many neighbors have seen the inside of the home but it looks to be in average condition. So one day the neighborhood gossip sees the For Sale sign in the yard and the owners packing outside. She skips over to offer her goodbyes and they politely invite her into their home. Meanwhile she sees a couple stress cracks over a few door and window jambs. “The home obviously has serious foundation problems and I think I smelled mold too!” she says to anyone who will listen. Then they tell someone who tells someone else – you get the point. Even when people are looking at the home neighbors feel the need to tell them about the problems the home has and therefore the home lingers on the market and sells for pennies. But guess what? They actually just brought down their own property values by spreading these untruths.

Dallas has bought into the woes of California, Las Vegas and Florida and is actually hurting itself by perpetuating the bad real estate market story. Our city does NOT have foundation or mold problems yet the terrible rumors persist and only time will tell how our own foolish beliefs will affect our real estate market. In the end we only have ourselves to blame.

There's "HOPE" for the "F" Word

NeighborWorks America and The Ad Council have launched a National Foreclosure Prevention Awareness Campaign.

NeighborWorks® America, one of the nation’s largest housing and community development organizations, announced a new public awareness campaign today with the Ad Council aimed at preventing home foreclosure that urges homeowners in financial trouble to call 888-995-HOPE. The Homeowner’s HOPE hotline, provided by the Homeownership Preservation Foundation, is the cornerstone of a foreclosure prevention effort involving many of the country’s largest mortgage market companies. The public awareness campaign strives to reduce the number of homes entering the foreclosure process, which is expected to exceed one million households in 2007.

Is this because they just nice people and care about the national overall real estate market? No. Here's the real reason why as stated in the release.

Given that each foreclosure costs $30,000 or more, the total cost to the housing finance system of one million foreclosures could approach $30 billion.

Basically they're trying to save their own behinds. Which they should seeing as how their poor predatory lending practices are the reason this HOPE number is even necessary in the first place. Shame on them.

And on a self serving note, good agents will help their clients avoid "creative" financing which ends up hurting thier clients in the long run. In my experience, those people who purchase homes without using a Realtor are the ones who get srewed the worst. IJS.

So you wanna be a "flipper"?

Check out this poor guy's trials and tribulations of real estate flipping. If flipping homes has ever crossed your mind then this is definitely a must read.