when to short sale?

Question

I'm trying to understand when the proper time might be to throw in the towel and jump into a short sale.

We purchased for 450k in 2006 at market peak, lived in the house until 2011, and then rented it out for $1400.00 which is the going rate for the el paso/cruces area hoping the housing and rental market would rebound. That rebound never came. With 419k still owed and a 350k market value, a short sale seems to make the most sense. The current interest rate is 4.25%. Our current tenant is prepared to pay $1600.00 but that still leaves about -$500.00 per month.  When does one quit? Is there any reason to keep waiting?

Elizabeth Colegrove · Answer

You might want to look into reinvesting that money instead of paying it off into better investments that yield higher. While this one would be losing the money from your other homes would be increasing so in actuality you would be able to HIGHLY leverage you bad investment for good. You get the tax break and low interest rate. Just a thought.

RJ Laskin · Answer

Thanks for the replies. I found out that we can't short sale since we aren't in distress rather just in stress that we are loosing money every month. The situation is actually far more complicated. The advice I was given by our CPA is to pay off the loan, keep a tenant in the house for many years to come, and move on to better opportunities.

Brian G. · Answer

I guess it depends. How about getting your RE lincense and show as an active real estate professional on your taxes? Doesn't an active participation in RE allows you to reduce your taxable income produced from your rental loss including full depreciation dollar-by-dollar? Also the short-sale debt forgiveness will be treated as income, right? Hmmmm, I know the negative cash flow every month is not fun but I also hear additional tax implications/opportunities... Im not a CPA but make sure to verify with one before going the short-sale route...

@RJ Laskin

Vincent Grant · Answer

Hello RJ,

Late 2005, I purchased a SFR to be used as a rental. By 2009, the value of the property dropped by approximately 60%. I carried a first and a second loan with an average interest rate of 7%. Both loans were interest only. The home was rented but the rental income left me with a $430 a month shortage.

I applied for a loan modification twice, once in 20011 and once in 20012 and was denied both times. In 2013, I finally came to the conclusion that I needed to cut my losses.

After speaking to my realtor and CPA, I sold the rental in a short sale. I owed approximately $132,000 on the first loan and approximately $10,000 on the second. I was told that once I sold the home via short sale, I would not be able to obtain another loan for 2 years.

December 2013, the home sold in a short sale for $84,500 all of which went to settle the debt on the first loan. I came out of pocket with $2,500 to settle the debt on the second loan. After selling the property, I discovered it would actually be 2 to 7 years before I would be able to obtain another loan or refinance (not happy).

I sold the home because I did not see the property ever reaching it's 2005 value ($172,000) and the $430 a month shortage drove home the fact that I was throwing money away.  I regret holding the property for as long as I did but I look back on the experience as a lesson learned. I still own other rentals and happy to say they all have a positive cash flow and are worth more now then when I purchased them.

Unless you can turn your negative cash flow in to a positive one, short sale the home but first consult with your CPA and realtor. You may also want to check the FHA, VA and conventional loan guidelines regarding obtaining another loan after a short sale.

Good luck,