Howdy from the North Carolina mountains y’all.
Picking up and moving everything
Betsy and I recently picked up and moved everything from Lansing, MI to Hendersonville, NC (just south of Asheville). We moved for a lot of reasons including but not limited to:
- great location for the local food movement
- living amongst the Appalachian Mountains
- warmer weather.
We haven’t been very vocal about this on DFA because for the previous 6 months we had been in the middle of a short sale of our home in Michigan. While in the process I did not want to talk about it publicly but now that it has completed successfully I can share the details.
A short sale of our home
You may have an opinion on short sales, I had one opinion before the process and a different opinion after going through it.
First let’s define a short sale for what it is: basically you sell your home/property for an amount less than what is owed on the mortgage(s). It’s really as simple as that. Short sales do not lower the property value of your neighbors because, unlike a foreclosure, it sells at market value.
In a short sale the bank holding the mortgage is the seller and thusly pays all realtor fees (buyer and seller). In a normal sale we would be the seller and would be responsible for paying the realtor fees.
I won’t get into the numerical details of the sale but suffice to say we sold the home for $50,000 less than what we originally paid for it nearly 5 years earlier. While living in the home we also did quite a few improvements including:
- 60 yards of topsoil and a lawn installed throughout the lot
- landscaping throughout the lot
- a 350 sq. ft. paver patio off the sliding glass door
- painting several rooms
- all warranty work done throughout home before expiration (nail pops, etc.).
Though we sold the home for $50k less than the purchase price, when considering the improvements $65k is a more accurate assessment of equity lost over the 5 years we lived there.
Before we go any further I wanted to clarify that to be considered for a short sale you have to be able to prove “financial hardship” to your lender(s). Betsy and I both went through job changes and were making much less than when we purchased the house so showing hardship was as simple as handing over our financials to our lenders. After looking them over both banks approved the transaction.
In short, you can’t just do a short sale because you want to, you have to be unable to afford your mortgage going forward. Be honest with the banks and avoid trying to pull any wool over their eyes; honesty is always the best policy.
Who should pay for the loss?
This is where it gets sticky for some people, but not for me.
Minus what we owed on the mortgages, we lost around $25,000 in equity. As mentioned above, in a conventional sale we would pay realtor fees (an approximate $14,000) in addition to our equity loss, putting the total loss around $39,000. Because the bank paid the realtor fees we were able to close with simply our equity loss and thankfully didn’t have to bring any money to closing.
Should the bank have to eat the rest of the loss, or should we have eaten it? That is the question. I used to believe we should, because we signed on for the debt. However, the errant lending practices of the banks had a lot to do with the market bubble and crash. Had they kept lending practices conservative the bubble never would have formed or popped. That makes them half responsible for all losses. We lost in equity, and they lost on the investment.
It’s important to note… because of the interest we paid over the nearly 5 years while living in the home, our first mortgage company still came out ahead on their investment. It is the 2nd mortgage (and lien) holder who ate the loss. They understood the elevated risk going in and charged a higher interest rate accordingly.
At the end of the day we shared in the loss with the 2nd mortgage company, and I believe that is the proper outcome. We both played a part in the transaction so we are both partially responsible for the losses.
You may feel different, which is fine; that’s one of the great things about living in a free country.
What about our credit score?
As I see it, your credit score is the only negative part of a short sale, but it doesn’t have nearly the negative impact you might think.
Before the short sale my credit score was around 790, which is considered excellent. After the short sale it went down to around 705, which is still considered good.
Here’s the kicker: the credit score went down because of missed mortgage payments, not because of the short sale.
Note: most banks will not consider you eligible for a short sale unless your mortgage is at least 30 days past due.
We’re not overly concerned about our credit scores – which are both still quite good – because we don’t plan to borrow money again and they’re plenty high to keep all insurance premiums low.
What about taxes on the forgiven debt?
It is the Mortgage Forgiveness Debt Relief Act of 2007 that provides tax relief for forgiven debt on mortgages of principle residence from 2007 through 2012.
As long as the home you’re selling is your principle residence, it does not count as income for tax purposes.
Where are we now?
After selling we decided against taking on the burden of another mortgage and are renting in our new location of Hendersonville, NC. Yes it’s a great time to buy, but taking on another long-term debt isn’t something we’re ready to jump back into right away. The plan is to rent for the near future and adapt as time and circumstances allow.
The only debt we have left is our student loans which you can see and track in the right sidebar. We’re planning to accelerate payments and pay them off within the next 3-5 years.
We have 3 months expenses saved for personal emergencies and are bringing in enough to cover our personal budget, business budget, fund our debt snowball, and build a modest savings.
We’re much happier working in our passions full-time and do not regret the decisions we have made, rather we’re quite satisfied with them.
A few more thoughts
Before the short sale we were hesitant to get involved in the procedure. It was unknown to us and we had heard a lot of negativity in relation to the process. After going through it we are confident to encourage others to look into it. It’s not as bad as the banks would have you to believe, and unless abused we don’t think the normal short sale process is “wrong,” quite the contrary actually – if it fits your circumstances, like it did ours, don’t be afraid, it can be a huge blessing.
If you do pursue a short sale, we recommend finding a local realtor who specializes in short sales. We did this and it made all the difference. Our realtor handled everything for us and took over all communications with our banks – I wouldn’t have it any other way.
If you do not use a realtor be sure to use a local counseling agency who specializes in helping underwater homeowners through mortgage modification, short sales, and foreclosures.
Share your thoughts and experiences
If you have an experience or opinion to share that will help the DFA community in a positive way, please add a comment below.