I was talking with a friend/client the other day and he was saying “I have to save my home; I just have to!”  So as we discussed his situation it became clear to both of us that that might not be his best option.

In his circumstance, he owed about $460,000 on his home, and he was about $36,000 behind in his payments.  He had already been turned down for a loan mod twice.  We looked at the current value of his home, which was about $340,000.  The question became, if we succeed in getting the loan modification and “save your home” how long do you think it will be before you can make a change in your living situation?  What if you have to move in 2 or 5 or 8 years?

These examples are for discussion purposes only.  NOONE can ever say what will or will not happen in the real estate market with any certainty. 

EXAMPLE 1: Achieve Loan Modification based on the circumstances above

Balance of the loan                         $460,000

Back Payments                                 $  36,000

New Loan Balance                           $496,000

If at some point in the future his circumstances change, and he must sell to transfer jobs, or move closer to his grand children, or for health reasons, etc.

Add approx cost of selling            $25,000-$40,000                depending on the sales price

So he will have to sell his home for about $536,000 just to break even; if the current value of his home is starting at $340,000, when will he be able to sell his home?

Do you think he should pursue a loan modification?  Please let me know your thoughts.

EXAMPLE 2:  Short Sale his home

Sell the home for                             $340,000

Closing cost paid by bank            $  25,000

Bank Receives Proceeds               $315,000

He leaves his home.  He does not receive any money from the sale.  However, he could “potentially” purchase again in 2 years (and this depends are a lot of factors) at fair market value.  In other words he currently owns a home that has 3 bedrooms and 2 bathrooms in 1,500 sq. ft. of living space on a 7,000 sq. ft. lot.  He may be able to buy a similar home for $340,000 and NOT owe $496,000 on it. 

He ends up saving almost $200,000 and gains his freedom.

Do you think he should short sell his home?  Please let me know your thoughts.