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Brent Houston's Blog

By Brent Houston | Managing Broker in Los Angeles, CA
  • Short Sale – An Investment Perspective

    Posted Under: Home Buying in Los Angeles County, Home Selling in Los Angeles County, Financing in Los Angeles County  |  May 3, 2011 10:10 AM  |  483 views  |  No comments

    Investors often tell me that they own a home, tenants left or are not paying their rent, and the property is not cash flowing (mortgage is more than the rental income). What is an investor to do? Most tell me that they have put in too much money to let the house go via short sale or foreclosure.  Without knowing the actual financials of a situation, it is worth considering whether the time value of money makes a short sale a better option than holding on until the market recovers. To illustrate, here is an example:

    EXAMPLE
    Investor buys a house for $350,000 in 2006.  The tenant pays $1500 per month, the mortgage payments on $300,000 is $2,250 with tax and insurance.


    The house is now worth $225,000.  The investor loses his job.  Tenant leaves and new tenant can only pay $1250.  The investor can’t afford to pay $1,000 out of pocket each month, which is the difference between the rent and the mortgage.  


    The investor tries for a loan modification and is denied; he tries again and is denied several times before he gives up.


    What does the investor do?
    If the investor can show true hardship, he can either (1) use up all of his resources to keep the home; of (2) attempt to short sale the home.


    Often investors will say, “I don’t want to lose the $50,000 I put into the property?” – they should consider the following.

     

    No Short Sale:  Starting $125,000 in the hole, the owner pays $1,000 a month for 5-10 years for the value comes back to 2006 level and owner’s equity to return.  Investor will have to pay $24,000 or more to keep the place from going to foreclosure (assuming 2 years without rent increasing).

    OR

    Short Sale: Sell the property and start over. If the lender will agree to waive any deficiency liability, the investor can walk away from $125,000 in unsecured debt.  Investor can clean up his credit and buy again in 2-3 years.  Instead of investing $24,000 to keep the payments up, the investor can use that $24,000 to invest in a property and at year 3 has $24,000 in equity in a new property that is appreciating instead of still being more than $100,000 in the hole.

     

    Please contact a NextGEN representative if you have any additional questions at 877.647.3911.

 
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