Short Sale vs Foreclosure

SHORT SALE VS FORECLOSURE EXAMPLE REPORT

• 20,000,000 homeowners will have negative equity in their homes in the very near future. In other words, they will owe more on their homes than they are worth.
• Over 2.9 million homes have foreclosed in the last three years and the number is only expected to grow. (According to Credit Suisse there will be 8 million foreclosures from 2009 through 2012)
• Expect the effects of the real estate recession to ripple for years to come.
• Homeowner bought home at peak of market in late 2006 and paid $500,000 interest only mortgage and put 5% down. Interest, Principle, taxes and insurance payment is $4200 per month. 
• Assuming the property has depreciated 30% and is now worth $350,000. The owner is upside down by $150,000.
• The market is continuing to depreciate and is projected to level off in late 2009. In other words, months and months or more losses for the homeowner.
• Option 1. The homeowner can “stick it out” and keep the home and continue to make the $4200 a month payments. They will pay $50,400 per year to keep the home with massive negative equity. By late 2009, the home’s value has stopped depreciating. The market stays flat for at least a year after. The inventory levels have to sell off. In late 2010 or early 2011 the market then starts to slowly appreciate again. Best case the home starts to appreciate at 5% per year. Based on this rough example it will take at least 7 years for that home to be worth what the owner paid in 2006. During that time the homeowner will have paid $50,4000 per years. That’s $352,800 spent to stay in the home and “stick it out”.
• Option 2. The homeowner lists the home with an agent trained in doing short sales. The home sells and the bank agrees to accept the loss equity as the short sale. Bank loses $150,000. Homeowner moves to a rental home in the same neighborhood and pays rent of $2,000 per month, half of his previous house payment. Homeowner saves the difference between what he had been paying for the owned home and his new rent payment. $26,400 per year. Yes, the homeowner does have significant negative credit ramifications as a result of their short sale. This negative credit will prevent them from buying a home for the next 18-24 months. With this option he can set out the real estate recession and jump back in when the market has hit the bottom. If he times it right he can buy at the market’s bottom. This time he will have a more significant down payment and a better quality mortgage.
• Let’s be very clear about this next point…Yes, there is damage to your credit. According to national experts, after a short sale, a person’s credit will down by 300+ or – points and then prevent them from buying using a government-backed mortgage for up to 24 months.
• With a foreclosure the credit is damaged for up to 4 years preventing someone from obtaining a government-backed mortgage.