Foreclosure news has become an all too common headline. This week’s news cycle about foreclosure activity increasing 75% in 2007 was just the latest in a continuous stream of bad news for some homeowners. While we write principally for the real estate investor here on TWA, we are joining a group of our personal finance cohorts writing en masse this week about homeownership, financing, and other challenges facing homeowners (see below). For our part, we want to offer some suggestions to homeowners facing difficulties paying their mortgage or selling their home in this down market.
Selling without a Real Estate Agent
Many homeowners purchased their homes over the past few years with little or no money down. When circumstances change, such as loss of a job or relocation, there may not be enough equity to cover selling expenses, such as realtor fees and closing costs.
Seller’s closing costs outside of realtor’s fees can be as little as 2% (or less) of the sale price. But using a real estate agent adds another 6%. The savings from selling your home on your own may be enough to make the sale and still cover the mortgage balance. Keep in mind that selling without a realtor is not easy. Hiring a real estate agent offers the advantage of providing your home with greater exposure to this buyers’ market, which means going it alone will likely increase the time on the market until you receive an offer. But there are many resources to help the DIY home seller, such as For Sale By Owner, Owners.com, FSBO.com that can help.
Do a Short Sale
A “short sale” involves selling your home for less than the mortgage balance where your lender agrees to forgive the shortfall. By definition, a short sale will require the agreement of the lender. In many cases, lenders are open to this alternative to avoid incurring the costs of foreclosure and reselling the home at the inevitable discount afterwards.
For this alternative, hiring a real estate agent with experience dealing with short sales is the best choice. Unfortunately, attempting to break through the maze of lender bureaucracy to get the necessary approvals is probably beyond most homeowners. In any event, the real estate agent will be paid from the sale proceeds. In a short sale, this means the bank’s money. When you contact a real estate agent, ask questions. Make sure she has experience in dealing with buyers in your situation, as well as with lenders and investors.
Also, for those who previously considered this option but rejected it due to the tax liability resulting from debt forgiveness, everything’s changed. Congress passed legislation in December to eliminate this tax liability for most homeowners facing this situation.
Lease your home
Become a landlord; rent your home. While becoming a landlord may not be at the top of your wish list, renting your home for a price that covers your expenses can provide a couple of years to allow market conditions to improve while your mortgage balance declines from your regular payments. Renting your home is also likely to be a quicker solution than selling your home, with or without a real estate agent. If you consider this option, start with determining current rents in your area and see if rents for your home will be sufficient to cover your mortgage payment (together with real estate taxes and insurance) and an appropriate allowance for maintenance costs. If not, consider whether you’ll be able to cover the shortfall. While having to make up for a shortfall isn’t the best solution, it can still be a better alternative than foreclosure or bankruptcy.
For those considering this option, we offer further resources on TWA under the property management tab that can help you get started and provide information about leasing, such as advertising your rental and approving prospective tenants.
Sell to an Investor with a Lease Back and Purchase Option
For those who owe more than their house is worth, want to avoid foreclosure, but still want to stay in their homes, this may be the right choice. At its essence, a sale and lease back involves a sale to an investor—likely a short sale with the lender’s approval—and an agreement by the investor to lease the property back to you following the sale along with the option to repurchase. At the right price, investors like this option because they have an automatic renter for the property. For the homeowner, it provides a way to stay in the home with a chance to repurchase.
There are several points to keep in mind here. First, this type of transaction is too complicated to go it alone. Again, hiring a good real estate agent is a good place to start. You may also want to hire an attorney to review any purchase option agreement.
Second, make sure that the rent and repurchase option are affordable. If you’re considering these options, you’ve already decided that your payment is too high and your home can’t sell for what you owe. That means the rent and the price to repurchase have to be lower. If this isn’t part of the deal, don’t consider it.
Third, if you already have credit problems, make sure that the option to repurchase will allow you sufficient time to improve your credit to obtain financing. Contact a reputable mortgage broker to review your credit and determine whether and when you might qualify for a new mortgage loan.
Fourth, beware of scams. Unfortunately, the unethical few will always rush in to exploit opportunities wherever they are to be found. I do not believe the unethical few are, by any means, representative of real estate investors as a whole. An investor can be a part, even a necessary part, of a solution that’s best for you. A good investor should be looking for those solutions as well as looking for a reasonable profit. A good real estate agent can help you sort them out.
Other Articles for Homeowners
Why renting is right for us right now @ Mrs. Micah
Why We Have an Adjustable Rate Mortgage @ My Dollar Plan
Debt-To-Income Ratio and Why It Matters @ Moolanomy
Catch a Falling Knife – Buying the Housing Slump @ Millionaire Money Habits
Can we afford the Payments @ PaidTwice
Pay off Credits Cards with a HELOC @ Debt Free Revolution
So You Want to Buy a Fixer Upper @ Remodeling This Life
Frugal Hacks For Your Home @ Being Frugal
American Subprime Crisis—Should We Care @ Plonkee Money
Mortgage escrow accounts Explained @ Cash Money Life
Don’t Use Your House to Pay for Your Life @ Rocket Finance
Why the Sub-Prime Crises has not Affected Canada Yet @ Four Pillars
That Damned Rent vs. Buy Question @ Blueprint for Financial Prosperity
Predatory Mortgage Lending and the Subprime Market @ Chance Favors
How to Avoid Foreclosure – The Definitive Guide @ Credit Withdrawal
The Real Cost of Homeownership @ Single Guy Money