THE MORALITY OF SHORT SALES

Is walking away from a million dollar + home, when you’re $250,000 upside-down immoral or simply a business deal that didn’t work?

This question was put to the group of professionals attending the Real Estate Trends class at last week’s Stewart Title Success Summit, and the ensuing discussion was spirited to say the least. I love to hear what you think!

Here’s the scenario:

A family buys a beautiful new home in 2006 for $1.5M. Remember, at that point in time it was still possible to get financing based on stated income and without putting any money down. But for our purposes here let’s say the homeowner does have some skin in the game - say they put 5% down or $75,000. They move in and live happily paying the monthly mortgage as promised. Now fast forward to today.

We are well into the recession, the mortgage market has gone through some violent and not-so-violent revolution, home prices have gone down, as have interest rates. The $1.5M home is now worth much less, maybe as much as $250,000 less and if the family were in a “have to sell” situation they would be putting their home on in a glutted market with 7 years of competing inventory. They are paying a mortgage based on the $1.5M price and looking at homes down the street or around the corner that are selling at today’s depreciated prices and in a lending market with amazingly low interest rates.

So, Mr. $1.5M homeowner looks at his asset sheet and says, “Wow, I’ve got a liability here. I’m paying on a $1.5M mortgage but the house is only worth $1.25M. I could get a better interest rate, protect my credit, and fix my asset sheet. All I have to do is give this house back to the bank, let them do the short sale, and I’ll go buy that beautiful place around the corner. Oh, and by the way Mr. Banker, would you give me a loan on my new place?

This scenario is actually happening and the number of times it happens is promising to grow in numbers for the next 2-5 years depending on how one looks at the statistics.

I’m guessing that many of us can see our way to why a short sale can be a welcome relief and justifiable to the homeowner who was put into an adjustable rate mortgage on a home in the under $200K range and are now dealing with an 8% or higher interest rate. Or we feel OK with it if the homeowner lost their job, or had a medical crisis that clobbered their savings, or lost their equity in an ugly divorce or, . . .

So, does a higher price point, more generous income stream, and the ability to buy a new home at a better price and interest rate make a difference?

The other side to consider is this. The purchase of a home and the agreement to repay a mortgage is, at its heart, a business deal. At its essence, the agreement looks like this - the home-buyer says: “Bank, if you lend me the money to buy this home, I agree to pay you (fill in the blank) amount for this period of time, at this rate. And if I don’t pay you, you have the right to take control of the property in the way you see fit.”

So again I ask, the question, “Is walking away from a million dollar + home, when you’re $250,000 upside-down immoral or simply a business deal that didn’t work?”

I stand with my Managing Broker, Charles Roberts, who initially posed the question in the session last week – I’m not particularly interested in passing judgment. I’m much more fascinated by the fact that this conversation is even taking place and what it means for our society in the future.

Easy Money

My father died 2 weeks ago & his memorial service was this past weekend. When the pomp & circumstance was complete, my siblings and I spent a few hours pouring over photographs & other memorabilia, telling old stories and for the most part laughing about the adventures and mishaps of our youth.

During our dance down memory lane I uncovered a frame that held 5 stock-transaction receipts near the top of the frame, a short poem in the center and the calculations of what could have been at the bottom. The stock receipts showed the sale of 2000 shares of Pizza Hut stock over a period of 1 year - 1975, my sophomore year of high school. Sale of 300 shares, sale of 500 shares, and so on. The last 700 shares were sold on 6/26/75 and settled on 7/3/75.

The poem goes like this:

There once was a young man named Dick
Who sold his Pepsico stock too quick
Making money had been easy
His attitude was breezy
He thought he was really slick

From this sale a lesson was learned
Easy money should never be spurned
Dick bellowed and blew
But from then on he knew
Keep good stock and you'll never be burned

And at the bottom were the split dates:
07/21/75 - 3 for 2 = 3,000 shares
11/07/77 - 1.55 for 1 = 4,650 shares
05/07/86 - 3 for 1 = 13,950 shares
08/10/90 - 3 for 1 = 41,850 shares

Dad figured those original 2000 shares would be worth about $5M today had he held onto them. What did he get in return? New siding on the house, a groovy little sports car and a 10-day family vacation to Los Angels.

My father left me many things, among them; a commitment to honesty, a thousand great memories, 4 fantastic siblings, a small gold pinkie ring with the classic 70's smiley face (the symbol of his life's guiding principle, "Think Happy Thoughts"), a very small amount of money, and this 8.5"x11" frame with a powerful reminder of what's possible when we use our cash to buy assets and then leave the assets to work their magic.