Should You Sell Early to Avoid Foreclosure?
Many consumers seek refuge in “short sales” as mortgage companies face a growing number of delinquencies, defaults, and repossessed properties.
The volume of foreclosures in the U.S. has climbed to the highest level in recent history, and seems poised to continue growing at an alarming rate. Experts recommend the so-called “short sale” as one weapon in the homeowner arsenal that might help prevent a full-blown foreclosure. This kind of sale is used to cut your losses – and those of the lender – before it’s too late.
Today’s Housing Market: A perfect storm of negative economic forces
Some of the elements contributing to this “perfect storm” of foreclosures include:
- Since 2000, a record number of homeowners used high-risk loans such as interest-only mortgages to buy property that they could not actually afford. And adjustable rate mortgage payments have skyrocketed. Many consumers have watched their monthly payments double within the past 18 months as their adjustable mortgage interest rates have reset to keep up with higher prevailing rates.
- A glut of inventory because of overbuilding has left an abundance of new housing that can’t be sold because there is too great a supply and too little demand. As builders slash prices to promote sales, the prices of existing homes are also falling in order to remain competitive in an imploding market.
- Americans are relying more on debt – and saving less – as the average savings per household has reached into negative territory for the first time since the Great Depression. As the value of property drops and interest rates and monthly payments rise, homeowners are unable to sell their homes for enough money to repay their mortgages or home equity loans.
- Many used steadily rising home equity as a source of cash to pay for everything from cars to caviar, but that source of funds has dried up, leaving them unable to maintain a lifestyle to which they have grown accustomed. Meanwhile other pressures – such as high gas prices and burdensome credit card debt – are making it hard for consumers to make ends meet, so they are defaulting on their mortgage payments in order to pay other bills.
Short Sales: A way to head off foreclosures before they happen
Homeowners across the demographic spectrum are seeking shelter from the pressures of a troubled housing market and rising interest rates to try and dodge a financial catastrophe. So-called “short sales” are one of the most popular weapons in their fight against foreclosure.
A “short sale” refers to selling a home for less than the amount owned on the mortgage. Although this kind of sale generates less that what is required to repay the loan, sometimes lenders will accept a loss – or in other words forgive the balance owned after a short sale – in order to avoid the protracted process of foreclosure.
During foreclosure the lender has to maintain the vacant property, pay legal expenses, and face the risk that prices in the real estate market will fall further, which could devalue the worth of the property once it gets to the auction block. So in many cases, the mortgage lenders find it more practical and less costly to just accept a partial repayment of the mortgage in lieu of foreclosure.
Three Things to Consider Regarding the Short Sale Option
- Regardless of your strategy, you should contact your mortgage company as soon as you get behind on your payments. Communicating with your lender is the most important thing you can do to avoid foreclosure, but most homeowners make the mistake of doing just the opposite.
- Lenders are more likely to accept an offer of a short sale if you can demonstrate extenuating circumstances of financial hardship brought on by such events as catastrophic illness, the death of a spouse, or loss of gainful employment. If your property is deteriorating, subject to vandalism because it is vacant, or has no equity left in it, the lender will be more lenient regarding allowing a short sale and partial repayment of the loan.
- In some cases you may be liable for paying taxes on the amount of money that the lender forgave. Check with a tax expert to be sure what rules apply to your situation.
The Investment Upside: Save money by saving homeowners in the nick of time
Although you may help out a distressed neighbor by buying their home this way, you are not allowed to short sell a property to a family member, so you will not be able to rescue your brother from foreclosure by buying his house on the cheap. And short sales are cash-only transactions, so you cannot buy a short sale property with a typical mortgage loan.
But notwithstanding those exceptions, as a foreclosure investor it is possible to buy short sale properties for a deep discount and automatically gain substantial equity, just as you would if you bought merchandise at a “going out of business” sale. And by approaching homeowners in distress and offering to buy their homes in lieu of an impending foreclosure, you can do yourself a favor while helping to rescue them from a financial nightmare. So in many respects the short sale is a win-win situation.