Sacramento Real Estate Views

The Short Sale Process

The First Step is Personal

Selling your home short is a big decision and not an easy decision to make.  Not only is it emotionally charged but you’re walking away from a home that you may love and there are short term ramifications.

More often than not, however, the short term pain outweighs the long term pain – significantly.

In the Sacramento region, homes have lost so much value that it’s appearing to not make good financial sense to keep an asset that has lost 50% to 70% of it’s value with no prospect of gaining that ground back in the long term (15 to 20 years).

So how do you determine whether or not selling your home short is right for you?

For my family, it was purely financial.  We ran the numbers, assessed our short term situation and then looked forward, based on common economic information available to everyone and applicable to the Sacramento region where we live

We live in Rocklin and love our community.  We bought our home in Rocklin, our first, with the thought that we would live in it for 5 years, sell and move up…we bought in 2003 and 5 years later in 2008..well let’s just say that selling and moving up wasn’t possible due to the fact that we were underwater on our mortgage.

No equity, no moving up and no prospect that this situation would change for years to come if we stayed in that house.

Wow..what a wake up call.

The First Step in the Short Sale Process

In my opinion, the first step in the short sale process is assessing your individual family situation and determining if staying in your home is a financially smart decision.  The problem with this is that most people are emotionally connected to their homes making the decision even harder.

How we made this easier was that we reminded ourselves that no matter what building housed our family, as long as we were together, we were home.  The building we live in doesn’t define my family.  It’s just a building.  The only meaning it had to me was the meaning I attached to it.

I would not allow my attachment to my house to ruin me financially, long term, .  We were about $135K underwater.

Some Questions to Ask Yourself

Step #2 for us was to find out how underwater we were and assess the market direction.

What’s the difference between what I owe and what the home is worth?

The more underwater you are, the easier the decision becomes.  If, at this point, you’re even to slightly above water or just slightly underwater, in my opinion, you’re in a good spot!  While you may have lost your down payment, you are certainly not financially unhealthy by staying in your home as I believe we are done with double digit value losses.

We may have more value to lose but I believe it will be in single digits going forward.

The next question was about what the housing market looks like going forward.

Is it possible for my home to appreciate to the point where we’ll recover the equity that we’ve lost in the next 5, 10, 15 or 20 years?

I ran a scenario of possibilities.  I created tables (click here for an example and scroll down a bit) that projected out possible appreciation over the next 10 years.  Because no one can know what the future holds, you can run projections on “what if’s”, best and worst case scenarios.  An “if this, then that” type of projection.

In our case, if the market appreciated 8% over 10 years straight starting today, we’d be marginally up in equity at the end of 10 years.  If the market appreciated 5% every year from now for the next 15 years, we’d been close to the same position.

Then I ran the year over year numbers for appreciation in Rocklin homes over the last 2 years.  There hasn’t been any appreciation in Rocklin in the last two years in fact Rocklin has lost value every year since 2007.  The average sales price for the average house in Rocklin this year so far has lost $500 in the average sales price over 2009.  I consider that even or 0% appreciation.

But the year isn’t over yet.  This will be a pivotal year for values in Rocklin now that we have no tax credits driving first time home buyer sales.

The state is in a tough position.  Our unemployment percentage is higher than the national average.  Businesses all around my house/community have been closing and moving elsewhere.  The economic data I have access to and have been reading for the last year all point to our economic situation not improving locally for another few years at least.

We conceded that we would likely not see any appreciation for the next two years, best case.

The waiting period after a short sale or foreclosure to get an FHA loan is 3 to 4 years.  This would put us purchasing another home at about the same price as homes are selling for now in 2 to 3 years.

Our view was that once appreciation began, it wouldn’t be meteoric. It would most likely be gradual for a couple of years before the next up cycle.  That would put us out about 7 years, the normal time of an economic boom or bust cycle, from the beginning of the downturn in 2007 to 2013/2014.

By then, we’d be able to qualify for a loan with the short sale behind us and still be able to purchase more home for less than we purchased in 2003.  From here, the decision became easier as selling short would instantly improve our situation regardless of the ramifications.

In the next article, I’ll write about further steps in the short sale process.  To be sure, this step was for us the first and most important step to making our decision.

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Tags: Rocklin, Roseville, sacramento, short sales

This entry was posted on Friday, August 20th, 2010 at 9:00 am and is filed under Short Sale Information. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.

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