Selling A House At A Loss...?

[AKL_Megs]

HOW do people sell their homes when they OWE about $30,000 to $50,000 MORE than the house is WORTH?

Let me explain...

Our favorite neighbors/friends want to move. They bought their home about six years ago, and since then, their home value has dropped by about $70,000. I know for a fact that they OWE about $30,000 to $50,000 MORE than the home would EVER be valued at, based on past conversations.

I'm really hoping they don't move and the more I think about it, financially, it doesn't make sense. They either MAGICALLY sell their house for tens of thousands of dollars more than recent sales in our neighborhood (cookie cutter neighborhood, same houses), or what... take the loss andapply the difference to their new mortgage? I can't imagine wanting to move SO BAD that I would pay $30,000 - $50,000 to do it! (And NO, there is no real reason, other than wanting "a bigger house" that they are moving.)

Do people really do this?

 

[Lisa loves Pooh]

Short sale: a negotiated sales price with the lender for less than what is owed.

and for your second question--yes people really do this.

It doesn't ding your credit as bad as a foreclosure, but it can impact your ability to buy a new home, depending on the circumstances. But not a much as if you walked away.

 

[themilesfamily]

I sold real estate for a while before my daughter was born and I've been to one closing where the seller actually had to send a check to the closing.

I'm sure in today's market that happens a lot more often.

Awful. You think of a home as a good investment that will appreciate. Not always!!!

 

[VAfamily1998]

Yes, that is called a short sale. My next door neighbors (or I guess now, former next door neighbors) did it a couple months ago. They had to sell right away because of divorce

 

[dmank]

I think they do really do this. But, sometimes it does make sense.

For example, say you live in a market that has depreciated by 25%.

You had bought a house for $100K 7 years ago, now worth 75K. Loss is 25K.

The house you want was 300K 7 years ago, now it is only 225K. Those people have lost more money (75K). They too are taking a loss, same percentage but greater number.

So effectively by trading up, you get a bigger house for much less money than you ever thought possible.

I don't know if this totally makes sense. We are sort of in the same boat except our house price is flat, while higher priced homes have fallen some. So we'd take a hit due to having to pay commission but if we can get a good enough deal on the new house we'd do it.

 

[AKL_Megs]

Short sale: a negotiated sales price with the lender for less than what is owed.

and for your second question--yes people really do this.

It doesn't ding your credit as bad as a foreclosure, but it can impact your ability to buy a new home, depending on the circumstances. But not a much as if you walked away.

They would NEVER go this route, I know that. I'm guessing if that is the only option, they will be staying until the market picks up!

 

[AKL_Megs]

It seems so TERRIBLE that people sign up for short sales! I thought that was something people in bad situations do! Not people who are just sick of their house!

 

[BELLE1109]

We sold out previous condo for less than we paid for it (not a short sale though). However, we bought our new home for far less that it was worth or appraised at 3 years ago so it worked out for us.

 

[Jestocost]

It seems so TERRIBLE that people sign up for short sales! I thought that was something people in bad situations do! Not people who are just sick of their house!

The mortgage becomes due in full when the house is sold. If the proceeds of the sale are less than that the payoff amount, then the lender needs to agree to accept less than the amount owed OR the seller needs to pay the remaining amount in cash. In general, lenders will approve short sales only in cases where there need to sell the home is the result of a financial hardship.

 

[snowywhite89]

HOW do people sell their homes when they OWE about $30,000 to $50,000 MORE than the house is WORTH?

Let me explain...

Our favorite neighbors/friends want to move. They bought their home about six years ago, and since then, their home value has dropped by about $70,000. I know for a fact that they OWE about $30,000 to $50,000 MORE than the home would EVER be valued at, based on past conversations.

I'm really hoping they don't move and the more I think about it, financially, it doesn't make sense. They either MAGICALLY sell their house for tens of thousands of dollars more than recent sales in our neighborhood (cookie cutter neighborhood, same houses), or what... take the loss andapply the difference to their new mortgage? I can't imagine wanting to move SO BAD that I would pay $30,000 - $50,000 to do it! (And NO, there is no real reason, other than wanting "a bigger house" that they are moving.)

Do people really do this?

Maybe the bigger house is now selling for $140K less than 6 years ago so now is the time to buy it. They might have been saving for the down payment on the bigger house and will use some of that to pay the loss on the present house.

Maybe they are not telling you all the details and they need to sell or the house will go into foreclosure.

 

[simba20]

We bought our first house back in June.....it was a short sale.

The family was military and the family was PCS to Ft. Hood. They had to get out and leave. It is my impression that the hubsband went to Texas looooong before the wife and kids did.

She worked at one of the hospitals in our area as well as being a part-time nurse at a school. The day of closing, she was actually packing up her apartment to leave for Texas. Our seller also agreed to pay 3% of our closing costs which amounted to just over 3k.

I am so greatful to find this house as a short sale. It was in one of my top neighborhoods. We started lookign in 2009, and there was no way we could have afforded this neighborhood (new or resale) in 2009. However, with house sales being the way they are, the seller dropped their price by 10K which put this house in our "able to look at it" price range.

Then we offered 10K less than what they were asking and they accepted our offer. The sellers time crunch was on our side.

However, for us as buyers, out clsoing date kept getting pushed back and back. We had a Disney vacation coming up, and I told our agent that we were going and to deal with anything on our end....if she needed us, I gave her the phone and fax numbers for The Beach Club and Animal Kingdom Kidanai (we were doing a split stay).

Finally, our closing date came, and on June 10th we closed.

I love my house. Honestly. We were able to buy a bit more than what we needed (due to it being a short sale) and have room to grow.

And, on the sellers side, short sales do allow you to get out of your home when you honestly have to GET OUT and don't have the money to make up that difference between what you owe and what you have to sell for.

 

[brerrabbit]

I understand how the short sale works but from what I understand you also have to take the hit in taxes on the amount of the short sale. In other words if you owe $150,000 and the house sells for $100,000 or a $50,000 loss then you have to take the amount of the short as income for tax puposes. Assuming a 25% marginal rate that would be an additional $12,500 you owe the feds. You may avoid the big loss but you still owe the taxes.

 

[zalansky]

I understand how the short sale works but from what I understand you also have to take the hit in taxes on the amount of the short sale. In other words if you owe $150,000 and the house sells for $100,000 or a $50,000 loss then you have to take the amount of the short as income for tax puposes. Assuming a 25% marginal rate that would be an additional $12,500 you owe the feds. You may avoid the big loss but you still owe the taxes.

This is how I understand it as well as far as paying big bucks on taxes. Apparently as someone else mentioned, there has to be a proven hardship to the bank showing you can no longer afford the payments before they will approve it as a short sale.

 

[bdcp]

Selling homes at a loss isn't new or is it that unusual. We sold our second home and had to come to the table with $6,000 in 1995 and had to come up with money for closing on the next house a month before that. We sold that next house 8 years later and walked out with double what we paid for it. No one really knows what their neighbors finances are no matter what they say to you. The houses in our neighborhood are all worth within about 50k of each other depending whether or not the basements are finished. We know of a few homes that have sold for less than they were bought for in the last few years, but they all managed to do it. We have not had a single short-sale and only one foreclosure (4 years ago) out of 73 homes. Some people will let you think they're barely making it when they have inheritances or money sitting in the bank. You never know.

 

[simba20]

I understand how the short sale works but from what I understand you also have to take the hit in taxes on the amount of the short sale. In other words if you owe $150,000 and the house sells for $100,000 or a $50,000 loss then you have to take the amount of the short as income for tax puposes. Assuming a 25% marginal rate that would be an additional $12,500 you owe the feds. You may avoid the big loss but you still owe the taxes.

Credit card settlement agreements work the same way. I ode settled with a CC company for a $800 difference. I received the tax form (1099 ?????) after I paid.

 

[zalansky]

Credit card settlement agreements work the same way. I ode settled with a CC company for a $800 difference. I received the tax form (1099 ?????) after I paid.

Thats interesting news! I have a friend who just settled with a CC company for $3000 on a $10000 debt. So she will get a 1099 for the difference? because she sure didn't mention that part of it when she told me about it!

 

[tvguy]

Certainly a whole lot more money is involved with a house, but it has been very common among people who finance cars, and trade them in before they are paid off. In the car example, most folks can just roll remaining debt from the old car, into the new loan for the new car.
Never understood either how people will run out and spend $25-$30,000 on a new car, when $2-$5,000 in repairs will put their old car back in reliable running condition.

 

[Art 1]

I understand how the short sale works but from what I understand you also have to take the hit in taxes on the amount of the short sale. In other words if you owe $150,000 and the house sells for $100,000 or a $50,000 loss then you have to take the amount of the short as income for tax puposes. Assuming a 25% marginal rate that would be an additional $12,500 you owe the feds. You may avoid the big loss but you still owe the taxes.

That's true, there is going to be a lot of surprised people when they find out.

 

[Art 1]

Thats interesting news! I have a friend who just settled with a CC company for $3000 on a $10000 debt. So she will get a 1099 for the difference? because she sure didn't mention that part of it when she told me about it!

She probably doesn't know any better. Most folks that get into that kind of situation are not that bright.

 

[Jennabeth]

We will be doing this and yes, it's because we want a bigger house. We bought our house in 2001 and right now in W. Michigan houses are at 1999 prices. We will be bringing a check to close but will be buying our forever house at 1999 prices with super low interest rates. Many people keep asking why we are trying to sell our house in the "worst selling market in history" but they keep forgetting it's also "the best time to buy."

The crazy thing, we will need more cash to get out of our house than we will to buy our bigger house. I try not to focus on that because if homes kept increasing we'd probably never be able to buy what we are getting now.