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Ask Dave

Short Sale Happenings

Vince is thinking about a short sale because his real estate investments are beating him up. Is it the best thing?

QUESTION: Vince has 5 rental properties, all out of state. His primary residence is in California, which is killing him financially. He owes $400,000 on it and could sell it for $320,000. What are the repercussions of a short sale? Dave says there are 2 types, and details each one.

ANSWER: There are 2 kinds of short sale; with recourse and without recourse. With recourse means you sign a note for the difference, and there’s very little negative ding to your credit with that. In your case, you’d sign a note for $80,000. Without recourse, which is the normal short sale, means they take a loss of $80,000 because they think if they foreclose on you, they think they won’t get their money anyway. Of course, they don’t like that and they are $80,000 ticked, but they are not foreclosure ticked. It’s not as good credit-wise as just paying them, but it’s better than foreclosure.

If you want to get out of this house now, you could borrow $80,000 against one of the rental properties and just pay the difference. Then there’s no short sale involved at all. But honestly, I’d wait it out. Let the market recover, because if you’ve got the income to ride with this thing and you don’t have good traction right now, you’re selling at the wrong time. I’d avoid that if you can.