I Owe More Than My Home is Worth. Can I Short Sale?

Navigating an upside-down home value. The ins and outs of short sales.

Out of the 14,000 homes on the market across the Wasatch Front over 25% are short sales. Why are there so many short sales on the market? Some misconceptions about the purpose of short sales have led many to frustration, loss of money, and even getting scammed. It is important to be educated, patient, and complient when considering a short sale.

Short Sale Graffiti

As the market continues to dip, the number of people with hardships increases. This is one cause for so many short sales on the market. However, another theory suggests the popularity of short sales is more psychological. Malcolm Gladwell included the "Graffiti Theory" in his book Tipping Point. In New York the crime rate was reduced by cleaning up graffiti. The leaders in New York believed that graffiti in the city promotes more graffitti. So they cleaned up the graffiti quickly to prevent it from spreading.

The popularity of short sales is like graffiti in the housing market. Years ago, you would hesitate to do a short sale even if you were in the same financial situation you are today. Just like with graffiti, you wouldn't want to be the only one harming your neighborhood. But if you're surrounded by it, what's the harm in adding a little more? Because there are so many short sales in the neighborhood it is easier, psychologically, to short sell your home. This is a downward spiral that continues to harm our economy.

Short Perspective versus Long Perspective

Weekly I receive calls from individuals effected by short sale graffiti. This is how the conversation begins: "Dave, I want to short sell my home. I owe more than it is worth and it makes me sick thinking about how the value keeps going down. I need to get rid of my house." This is a short-term perspective and reflects a misunderstanding about short sales. This person is not a good candidate for a short sale.

The first and only question long-term thinkers ask is: "How can I take advantage of the current market?" If their home has negative equity, long-term thinkers rent it out. They take advantage of today's market by buying a home at today's prices and interest rates and counting the extra rent on their home as income. These long term thinkers know that their house value will return to a level where they can sell it down the road. They don't care if it is 5 or 10 years. There is nothing they can do about the timing. These long term thinkers help get rid of short sale graffiti and they will be rewarded financially for it in the long term.


Too Short to Short?
Many sellers attempting a short sale should not be. Short sales are only for people facing an inevitable foreclosure. Here are some thoughts that indicate you should not be doing a short sale:

• I feel like I'm not getting ahead.
• My payment is too high and I can't refinance at todays rates.
• I'm upside down 100k in my home and that's way too much.

While these feelings are unpleasant, they do not qualify you for a short sale.


Here are the things the bank will evaluate when considering a short sale. It is important to remember that any attempt to artificially create these qualifications is invalid and can lead to worse problems down the line.

• House payment above 31% of gross monthly income
• Significantly reduced income
• Bank account with no more than $5,0000
• Recent divorce, medical bills, or other significant increase in financial demands

Short Sale Outomes
Here are some possible outcomes from attempting a short sale.

• Seller is forgiven of debt and completes sale.
• Seller is released from liability, but is required to contribute to the sale of the home. Sometimes this involves bringing money to the closing table.
• Seller completes the short sale but isn't released from liability.
• Seller completes the short sale and is required to bring money to closing table and isn't released from the obligation.
• Seller completes short sale but is required to sign a note.
• Seller gets the sale approved but cannot find a buyer at the bank's price and is foreclosed on.
• Short Sale fails and seller forecloses.

Some people are frustrated with the process because there are no guarantees. There are many different factors that effect the outcome of your short sale. For example the bank (or investor)determines if they will accept the short sale terms. How long you have been in default is another factor effecting the outcome of your short sale. During the process a lot of the outcome will be determined by the negotiator and your agent. Can your agent get a good buyer for the home at the negotiated price? It will also depend on you. Are you able to get all the documents the bank needs promptly?


Short sale scams
Once you are in default on your loan scammers will start targetting you. I outlined Loan Mod scams in a previous post, but short sale scammers use very similar tactics. They claim to be there to help you and save you from foreclosure. Some will even guarantee you results, but remember there are no guarantees with short sales. Some will charge an upfront fee while others will offer to give you money after the sale of your home.


Scammers try to build credibility by claiming they have attorneys, title companies, and lenders working with them. They may even state that what they are suggesting is completely legal. A typical strategy involves asking you to sign over your house to them, an LLC, or a trust. They may even ask you to sign a contract giving them exclusive rights to buy the property from you. They eventually negotiate a short sale with the bank at a low offer. After closing on the home they will find a buyer willing to pay $20k to $100k more than what they bought it from you for. Remember that some short sales still require you to payoff the existing loan. If they did not get a letter stating you were being forgiven of the difference, the bank may come after you 6 years down the road for that $50k that the scammer just made off of you. Some will even have the nerve to offer you some of the money they make on the transaction. Guess who most likely will go to jail for this fraud? You. You sold the home, you shorted the bank, and you got money from the guy that was supposedly helping you. This "flopping" scam is explained in further detail in THIS article in Bloomberg Businessweek.


What's the right way?
If it is inevitable that your house will go to foreclosure, have a real estate agent that has short sale experienced help you. These experts have a designation indicating extra education about short sales. Such designations include HAFA certified and CDPE (certified distressed property expert) or both. They also should have sold at least 12 short sales. Anyone can claim to be a short sale expert, but ask for proof of successful transactions. The agent will provide you with a list of items you will need for the short sale. They will not charge you any fees. They will receive a commission only AFTER the deal is done and it will be paid by the bank. They also will not tell you to stop making your monthly payments.


The Short of it.
Those who strategically default and short sale their home will not be better off years down the road. I believe those who take advantage of the market will have a clean record and will be $30k richer in 3 years than someone who does a short sale today. Those who inevitably are heading to foreclosure can potentially find some relief and have a chance to get back on their feet. That is what the program is for.