What if I Owe More than My House is Worth and Want to Sell an Underwater House?
This article details what an underwater house is and what options exist for homeowners who think to themselves “I owe more than the house is worth and want to sell, but I don’t know how”.
An upside-down mortgage, otherwise known as an underwater house, is simply when a homeowner owes more than the house is currently worth. This is usually not a big deal because over the lifetime of the mortgage the value of the house can change a lot. This only becomes an issue if a homeowner needs to sell during a period of time when the house value is lower than the amount that is still owed on the mortgage.
Underwater Mortgage/Underwater House Example:
Mary Ann bought a house for $100,000 and for the next 5 years, the home’s value rose so that Mary Ann’s house is now worth $115,000.
The next year housing prices plummet and Mary Ann’s house is worth $80,000 and at this point, 6 years into her mortgage, she owes $85,000. If something came up and Mary Ann decided that she needed to sell her house right away, then she would have to figure out what options exist for her.
Mary Ann would have to pay $5,000 to sell her house – definitely not something that is desirable.
So what other options exist? Well, as a homeowner, you are able to pay the difference between what you owe and what the house is worth so that the property is no longer underwater. Also, if you are looking to sell, you can do a short sale.
A short sale is when a sale is approved by the bank at a price that is lower than what is currently owed on the mortgage. Often a bank will allow this to avoid a foreclosure. A foreclosure is bad for the banks and for the homeowner, so the banks do try to avoid them, if possible.
So then what other options exist? Well you can sell to someone like me, and to illustrate what that looks like I have a story:
So I was talking to a seller and she was actually asking me:
“How does it work if I owe money on my property?”
“What happens when I sell?”
So basically, I told her that I operate by first coming to an agreement on a number to buy the property in as-is condition, which means that she would not have to do any work or put any money into home improvements.
We would then pay that agreed upon amount at closing and the closing agency that we agree to use would then disperse the funds to the underlying mortgage, i.e. whatever’s owed on that mortgage, and then the remaining balance will go to her.
So if we buy the house for $100,000 and she owes $90,000 then we would pay $100,000 at closing and the title agency would wire $90,000 to the bank and $10,000 would go to the homeowner.
But really, she wanted to know.
“What if I owe more than house is worth and want to sell, but I don’t know how? What happens then?”
So this is what I told her. Basically, I said, most investors are not going to be able to work with you at that point and many people will refer you to a short sale specialist, which is definitely an option, but is not a guarantee and is a long process.
Due to that uncertainty and length of time, most people would probably prefer a different option. However, for the investors, it’s a business decision, and so if you owe more than the property is worth, especially if the property needs work, then there simply is no room for them to make a deal.
But luckily those are not her only options. I specialize in that kind of stuff, and so I worked the numbers and came up with different ways that we could structure a deal so that she would be able to realize full or mostly full value of the house but over different time periods. When individuals find themselves in tricky situations with properties, I always find it is more helpful to provide you with options rather than tell you what you can’t do or should have done. We provided an option for her because that is what we do – we provide no-obligation offers to allow you to see all your choices.
So if you have a property where you owe more than it’s worth and you’re looking to sell it, then feel free to reach out to me, and I’ll send you over an offer, no matter the specifics. The crazier the situation, the more creative we get to be with our strategy to help you get out of that spot.
Usually, that creative offer will look something like taking your payments in installments for your equity, but structured over a set period of time to ensure a steady revenue stream.
So, what that basically means is that every month the installation check would get sent to you, otherwise known as “Mailbox Money” and, that payment would be continued out as long as we agreed upon until your balance is paid off and it’s that simple.
It’s like being a landlord without any of the headaches. You just get the check.
You don’t have to worry about the property anymore because I bought the property from you. It’s a lot like if you’re selling a car, but once you sell your car, you also get a free stock that pays you a dividend payment every month. Passive income!
So the story I always tell potential homeowners when we’re discussing this option is that I knew a guy who had this Ford F150 that he was trying to sell.
The car meant a lot to him. He had it for a long time. He built his business with that car, had his family grow up in that car, and through all that wear and tear over the years, it was a good running car. Still worked like new.
It was a great truck. So he had it listed for $5,000 for months, and he couldn’t get it sold. And finally, his wife exclaimed “You got to just get rid of the car! I don’t care if you have to give it away.”
So he reached out to me, and the first question I asked him was, ‘Why don’t you sell it for installation payments?’. He said he never even thought of that as an option. The very next day, he had an agreement to sell the car for a total of $10,000 over 5 years. Doubled his profits, accelerated his timeline to getting rid of the sunk asset, and created a passive revenue stream for his family for the next half a decade!
So if that’s something that you’re interested in, especially if you have a property where you may owe more than it’s actually worth, then this is definitely a great solution for you, so definitely reach out to me.