Short Sales May Not Be Best Bet for “Underwater” Homeowners

by Richard S. Feinsilver on August 7, 2011

The Street reported on August 5, 2011 that banks are stepping up their efforts to facilitate short sales of properties in which the outstanding balance on the mortgage exceeds the present market value of the property (also known as being “Upside Down” or “Underwater”). Basically, the banks have finally realized that they have to get these toxic mortgages off of their books in order to satisfy their shareholders. This may be all well and good for the banks, but what about the homeowners??

A short sale has traditionally been, and remains, an appropriate strategy for an extremely small segment of the homeowners who are underwater – those who either have other assets to protect or, in the rare instance, those who have little or no other debt.

The majority of homeowners that I encounter in my practice are not only underwater on their first mortgage, they may also have a second mortgage as well as other obligations such as credit cards, and medical bills. The banks, for the most part, as they have done time and time again in the mortgage modification process (the 31% rule as an example), are not taking into account the overall financial health of the homeowner.

Homeowners who are underwater are being bombarded by both their Lenders and local Realtors with solicitations to sell their homes in a short sale. In fact, as mentioned in The Street, some banks are allegedly offering financial incentives to homeowners (also known as “Cash for Keys”).

If It Looks Too Good – It Usually Is…A financial incentive may not be the best answer. .

A quick payday offered by a lender may only prove to be a drop in the bucket. If you sell in a short sale, you will required to immediately incur the costs of relocating, and most likely, be required to begin to pay rent. This will eat up most, if not all of the incentive provided by the lender. In addition, it does not take into account any of your other debts. I have seen numerous instances wherein a homeowner has completed a short sale only to have to file for Chapter 7 bankruptcy a few months later when they realize that the short sale did not solve all of their financial issues.

If you are presently experiencing this ordeal, do not make a quick decision. You need to have as may facts available to you to make the best informed decision for your circumstances. I suggest that any homeowner in this situation should sit down with a experienced professional who can look at the overall situation independently and review all options, including the possibility of filing of either a Chapter 7 Bankruptcy or Chapter 13 Bankruptcy. An experienced bankruptcy lawyer deals with these situations on a day to day basis and knows how to assess the pros and cons of a short sale as it may relate to your individual circumstances. Don’t sell yourself short – make an informed decision…

{ 1 comment }

Mike August 7, 2011 at 7:35 am

Your correct in that short sales where the bank has approached you is probably not the best thing for a homeowner. However, I have recently found that their are a whole new segment of homeowners who want to do a short sale. Those who can afford their property, but have outgrown it and can not sell for fair market value. These people are now trying to sell for FMV, but ask the bank to allow them to pay off the shortage over time.

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