Is a short sale of my house a viable option?

February 11, 2010 6:08 PM

I need to get out of my house, and it's not all due to financial reasons. Is short sale a viable option?

Over the last year and a half, my wife and I have been through utter hell. Many, many situations have come up that are stretching us to our emotional and financial limits. I'll spare you the details on anything but the relevant bits. I'm suffering from chronic stress to the point that I'm worried about being headed for a heart attack, and my wife has developed severe anxiety problems to the point where she doesn't feel comfortable driving or even leaving the house without me. We've both independently come to the conclusion that we need, not want, to move out of the area as soon as possible. We're planning on renting and staying within the state when we are able to get out. I'm trying to look into our options and minimize the damage, which is the focus of my question.

The house is in bad shape. We discovered and got rid of several areas of mold which were severely affecting my wife's health. The house was not well-maintained, which probably contributed to the mold problem and others. A lot of babies got thrown out with the moldy bathwater - we have no flooring other than the bare cement foundation throughout most of the house, the master bathroom is stripped to the studs and missing every fixture except a toilet, the cabinets and about 2 sheets' worth of drywall were removed from the kitchen. We cannot afford to hire anyone to fix the place, so we've been doing it all ourselves and learning as we go. We've put a lot of work and over $10k into the house so far, including remodeling the front bath and master bedroom, laying flooring, replumbing, etc. I doubt that my HOI will help me at all; the mold is already gone, it's never been assessed by a professional, and the mold wasn't localized to one problem with the house like a single leak (As a state, Florida learned all about separate claims and separate deductibles the year we had multiple hurricane hits).

We have a lot of debt. Most of mine was incurred at a time that we thought we could handle it, and now our situation is considerably worse than it was at the time. My wife has a great deal of debt in collection, mostly from a previous marriage in which she was literally starving. We haven't even started to touch her debt yet and have kept financially separate. The plan from the beginning was to take care of my obligations first and then tackle hers when we're ready.

Our house is underwater and will be for some time, even when you consider full market value rather than the house's actual condition. I'm current on all my payments right now, and all of our bills and my debt are current as well. Financially we have the ability to stay current on our payments for several more months, but can't continue to make any headway on our other problems at all - we're paying the minimums on our debt now, and the home repair costs are really eating into anything that's left over.

I contacted a real estate attorney through a friend and explained my situation to him. All he essentially said was that I should go for a short sale. This isn't his specialty, but he recommended a particular Realtor who works with short sales. I sent a long overview of our financial and personal situation, which was forwarded to the Realtor. When she called me yesterday, she confessed that she hadn't read the entire writeup, but the first question out of her mouth was, "how far are you behind in your mortgage payments?". She seemed surprised when I told her that we were current. I explained myself as best I could to try and clear up any misperceptions - I'm sure that most of the people who come to her are already at the ends of their financial ropes, and it's an easy enough assumption to make. After talking, I took away the following from her:

• We shouldn't bother doing any more work to the house; we'll never see the proceeds.
• We should stop paying on our mortgage now (!) to show hardship, and start negotiating a short sale after we're delinquent (very scary proposition)
• We wouldn't be responsible for the tax burden if the balance of the mortgage is forgiven (my checking confirms this part)
• We also wouldn't be responsible for the balance of the mortgage (this part doesn't jibe with what I've seen elsewhere)
• If we stop paying on the mortgage, we could even move before the sale - using the unmade mortgage monies to pay rent - and complete the process through her remotely.

What I gathered from her sounds wonderful, if that's the whole truth of the situation. Somehow I don't think it'll be this easy, though. I'm certainly not willing to make a move like this without a second opinion, which I'm seeking now from here and from other real estate professionals.

A look over our bank statements and charges would probably show that we're not completely broke - yet. We still manage to inexpensively go out one night a week, and we buy more for ourselves than just survival items. We have drastically cut back expenses in some areas, and we've had negative net cash flow for some time now. Still I don't think we could illustrate a pattern of complete financial ruin. In fact, I don't think we could conclusively demonstrate any single hardship that's "big enough" to justify this action. If we were to list our debts jointly, I think we probably could qualify for bankruptcy. Having the debts removed would help, but I fear that with all the protections around the primary residence in bankruptcy we could end up even more tied to this place.

This is a step that neither I nor my wife take lightly. I'm not normally the type to fall down on my obligations when I'm able to meet them, but a lot has gone into this decision. I'm not completely averse to any risk, but want some assurances that we'll be able to survive somehow if we walk away from this house. I'm not good with negotiations, and would much prefer to have a Realtor or attorney take care of any dealings with my lender.

Other relevant information: We're in Central Florida, and we plan to stay in Florida but move to a different part of the state when we get the chance. We plan to rent a house and do not have any major purchases planned that would require a decent credit score. I work from home, so will not have to change jobs.

Credit checks are standard for employment in my line of work, so if I were to lose my job a short sale could affect my future employability (also, isn't there a box on most applications asking if there are any judgements or liens against you?), but as I said earlier I'm willing to take a risk. I'm also willing to sign a promissory note as part of the short sale, so long as the payments allow me enough left over to keep us fed, clothed, and sheltered. I imagine that I'll need to find out my limits of acceptability and give my representative authorization to work within those lines… Am I correct that this is how the game is played?

Any and all advice welcome. Please be gentle. I can't possibly convey to you how much we've been through, and it's hard to make reasoned decisions from where I'm sitting. About the debt - some of it was frivolous, but it was under control before we walked into WWIII and some of the reasons for going into debt were quite legitimate in my mind.

Finances:
Income: ~$96k / year
Credit Card Debt: ~$45k, min payment ~$1070 / month
Auto Loan: ~$17k, payment $455 / month
Wife's Debt: Still compiling information, but probably around $20k currently in collection or default

House:
Lived in house as my primary residence since 1999, refinanced twice.
Only one mortgage on the property at a fixed rate.

Market Value (Zillow): ~$135k
Mortgaged: ~$182k, payment $1200/month
Tax Burden: ~$1800/year
HOI: ~$1900/year


Throwaway email: [e-mail]

posted by anonymous to home & garden (10 answers total)

Caution: depending on where you live, a short sale can take a VERY long time to go through. I put an offer down and waited four months before I had to back out of the sale to rent an apartment close to my work. This happens a lot, and every time a buyer like me does that (sorry, I couldn't handle a 4-hour commute to work while doing graduate school), you have to start the process all over again.

The thing that takes so long is this: the bank you got the mortgage through has to agree to the sale for it to go through. And say that the bank does. It still can take months to process the transaction, and longer still if you have more than one bank involved with the mortgage--each one has to agree. Not many banks are happy to take that sort of loss, and it's very hard to get them to accept a short sale until you're in even more dire financial straits than you appear to be. Your credit takes a very serious hit in the process, and it's hard to recover from.

Have you considered renting out some livable part of your house? I don't know if it'll help balance your debt/ income ratio, but it's pretty common and can bring in $500-600 a month even if it's a single room. (the one without the bare studs and cement floor, I dunno). If you've got a working bathroom in the house and a kitchen, you might be able to find a tenant. Best case scenario, use the money to finish the repairs, and if you still want to move, rent the place out after you go to take care of most/ all of the mortgage. It's a pain, but it keeps you paying on the mortgage, and you may be able to use the equity you build to help pay down your other debts as you go along.

Again, this depends on the part of the country that you're living in--I know nothing of Florida. If the housing market is booming near you, you might be able to sell relatively quickly, and maybe get more of the value out of the house than you think. In some areas investors are snapping up properties to be converted into rentals because prices are so low. They pay cash, which makes the banks happy and willing to move things along.

I'm basing this on my attempt to buy a short sale and the experience of a friend who was in a similar situation, and I don't claim any expertise in this matter. If you're serious, talk to your bank.
posted by _cave at 6:50 PM on February 11, 2010

I think your second opinion should be from an attorney, not a real estate agent. What do you plan on doing if the realtor gives them bad advice, sue them for giving bad advice? They're not your lawyer, and they won't be held to the same standard that a lawyer will. Getting advice from a lawyer serves three purposes: 1) The advice is theoretically more sound than what you'd get from a realtor, 2) the lawyer's loyalty lies only with you, which can't always be said about realtors, and 3) the lawyer is VERY likely to have malpractice insurance, so if he screws up, you have options.

Caveat: I'm not your lawyer and I don't practice real estate law. I hope you can make a good decision here, it's obvious you're trying to put a lot of thought into your course of action.
posted by Happydaz at 7:39 PM on February 11, 2010

Why are you considering a short sale rather than simply walking away from the mortgage? As this New York Times piece very eloquently points out, that's exactly what your bank would do if they owned a property that was underwater.

I appreciate your sense of duty to make good on your prior commitments, but your mortgage company has as much responsibility for this situation as you, and it is unfair that you should carry all the burden.
posted by alms at 7:53 PM on February 11, 2010

Presumably the op is not walking away because he indicated that he works in and industry for which credit checks are a condition of employment.
posted by dfriedman at 7:56 PM on February 11, 2010

I am a banker who has been in mortgage lending and collections for ten years. While I am not your lender and can't speak for them, I do mortgage loans every day and have collected and foreclosed on them as well.

First-in talking to a realtor who specializes in short sales, you are not getting unbiased advice. Your first call should be to your lender. Explain the situation and that you want to know if they would consider a short sale. Ideally, you want to talk to someone in loss mitigation rather than your garden variety customer service/collection person. If your mortgage is with a huge bank halfway across the country, you may have less luck with this but I'd start there. They may be willing to play ball, especially seeing as you are in FL, which has had more than its fair share of short sales recently. Moreover, her assumption that you are not going to be responsible for the leftover balance is mistaken. Sometimes you are and sometimes you are not. I know some states do not allow judgments after a short sale but most do.

Keep in mind that the whole short sale discussion is predicated on the idea that you could sell it. Is this even realistic to think about in your area?

Second-be very careful in deciding not to make your mortgage payments. This will trash your credit and even landlords check credit these days before renting a place out. So when you say you have no big purchases coming up, that's not really true. You need a place to live and a landlord who sees that you defaulted on a mortgage isn't going to see you as a great credit risk. Nor is your insurance company who also runs your credit to set your rate, and of course your future employers. Moreover, if you decide to stop making payments when you still have the money, that's not going to buy you much credbility with the lender who you are hoping to negotiate a short sale with. Yes, defaulting will get their attention, but at what cost?

My advice...
1. Don't worry about your wife's debt right now. It's already in collections and is already ruining her credit. Focus on fixing what you can.
2. Can you do anything about the car payment just to ease up the cash flow? With that kind of balance, the payments seem high. Contact a local bank or credit union you trust and stretch those payments out as far as you can to free up some cash flow for yourself. This is normally bad advice but in your case, given your situation, best thing is to free up monthly cash. Your credit is still good so fix this while you can. Same for your credit cards. Call them up, ask about lower rates. Be careful settling for less than is owed as it does damage your credit, but not nearly as much as foreclosure does. Try to negotiate that monthly expenditure down to give yourself some breathing room.
3. Get on the phone with your lender. They don't want you to default. Ask for help. It may be available in the form of a loan mod or something similar.
4. Contact your HOI provider. You never know. If the problem was internal water (ie pipes) you may get a decent adjuster and get a break on something.
5. Talk to some local realtors. What are the odds you could sell the place at a price that the bank would go for, even in short sale?
5. Calm down. You will make it through this, both of you. Financial ruin is not the end of the world and lots of people are in this boat with you. If none of this works, talk to a credit counselor (a reputable one) and seriously consider bankruptcy.

Speaking as a lender, bankruptcy is more common than you think. If it happens, it'll suck for a few years but you will bounce back. However, I have to tell you, foreclosure seems less common and is a nasty business. Avoid this if you can.

I realize you want to be able to walk away from the mortgage and the house. Recognize that this might not be possible or even desirable, long term. If you can get rid of everything else through bankruptcy, maybe you can make the house livable, at least for a couple years until the market bounces back and you can sell it for what its worth.
posted by supercapitalist at 8:06 PM on February 11, 2010 [2 favorites]

IANYL or accountant or your anything else...but here's what I would do if I were in your shoes:
--stop making mortgage payments
--put enough money aside to get into an apartment when the time comes
--throw all extra money at your debts
--when the house forecloses move into as cheap a place as you can find
--pay off your debts ASAP (with $96k income and $85k debt you can easily have all of your debts paid off in less than two years if you live frugally for a couple of years)

Side notes:
--a foreclosure isn't as bad as a bankruptcy on your credit report
--LOTS of people have less than stellar credit these days, don't know how much this will impact your business
--a short sale seems highly unlikely by the description of your home's current condition (ie: the bank may short sale $20k-$50k but not $100k)
--STOP using credit and debt to finance your lifestyle! If you don't have the cash to pay for something, you can't afford it!
--take Dave Ramsey's Financial Peace University class with your wife, it may make you lots less stressed and give you more hope for getting out of debt
--you may still be forced into bankruptcy because of the house but hopefully by the time that debt rolls around you may be able to make a settlement offer with the bank and actually have the money to pay it because by then all of your other debts will be paid off and you will still be earning $100k per year

Good luck and RELAX...this isn't the end of the world even though it feels like it
posted by MsKim at 10:15 PM on February 11, 2010 [1 favorite]

I'm going to be slightly contrary and say that late payments are worse than bankruptcy for your FICO score. A bankruptcy with no late payments is pretty easy to recover from in short order as long as you keep some credit lines open through the process so you have a continuation of good payment history.

The point being, do what you have to do before it gets to the point that you can't pay your bills. Most everyone considers knowing when to cut your losses and move forward a mark of good character.

If Florida is a recourse state, you are correct that they can come after you for the remainder of the mortgage. If not, they can't. Period. You give up the collateral and you no longer owe them any money. If the Realtor told you that you wouldn't be on the hook for the money, they are probably correct unless there's something unusual about your history with the house or you lied on your loan application.

Even if Florida is a recourse state, you can always file for bankruptcy and give up the house. You're not required to affirm any debts you don't want to.

Either way, don't be scared of bankruptcy. It's not a big deal unless you are the sort that needs credit. It won't even keep you from getting a house somewhere else in a couple of years. They'll just want to know why you had to take that route. Saying you were $200,000 underwater on your mortgage and your wife had $20,000 in delinquent debt and describing the steps you've taken to prevent a recurrence of the situation will be all that is required.
posted by wierdo at 10:42 PM on February 11, 2010

Nthing MsKim's advice, especially Dave Ramsey for your non-house debt. I've recently met several young couples in over their heads who cut their mega debt down to zero in a couple years.
posted by Elsie at 5:50 AM on February 12, 2010

Some folks are recommending foreclosure, but you may want to listen to this NPR podcast interview with a real estate lawyer regarding "strategic defaults". Her advice is specific to Arizona, but she does make an interesting point that you can't compel your mortgage holder to foreclose on you, and it may not be in their interest to do so. Regardless, someone like her might be worth talking to; it sounds like a common situation these days.
posted by serathen at 6:57 AM on February 12, 2010

I am not your lawyer, etc., and I do not have firsthand experience with consumer bankruptcy. I have no idea how "bad" a bankruptcy is for your credit score, but I'd expect it's pretty bad.

The reason why I'm responding at all is that you seem to have some misconceptions about bankruptcy. There is no need to "qualify" for bk -- you don't have to prove that you have negative net worth, for example. However, there is now something called the "means test" which generally works by looking at your income and expenses and forcing you into Chapter 13 if you make too much money (according to the test). The "protections around the primary residence" that you speak of are drastically different in a Chapter 7 (liquidation) and a Chapter 13. Again, speaking very roughly, home mortgage creditors are in a far better position (and you in a worse position) in a 13. Even in this case, a lawyer with experience in consumer bk could advise you on your options.

This is all by way of confirming what others have said above: if you possibly can you should contact an attorney, and if you're considering bankruptcy you should (also) contact a bankruptcy attorney.
posted by lex mercatoria at 11:07 AM on February 12, 2010