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How to sell a house when you owe more than its worth

How to sell a house when you owe more than its worth.

Many houses in America are underwater at the moment.  This happens every time there is a decline in the market.  The steeper the decline the more houses go under water or upside down or whatever term you want to use.

The problem with selling these houses the traditional way is that no bank on earth will make a loan for more than the market price of the house.  Real estate agents across America are trained to short sale under water houses.  This is a process where the seller applies to the bank to sell their house for less than the loan amount.  A short sale can get the house sold if the bank is willing to negotiate, and I assure you that banks aren’t always willing to negotiate.  If the homeowner somehow survives the long annoying process that we call the short-sale, then the homeowner can find another wammy waiting for them.  In many cases the bank will send a 1099 for to the owner that shows that amount of the short sale discount as income for the homeowner.   Imagine getting a 1099 for $100,000 worth of income when you really didn’t get any money at all.

There is a way around all of this mess if you are willing to get a bit creative.  Real estate investors have been using owner financing for decades to deal with problems just like this.  The way that this works is that the home seller contracts with the buyer to sell the house on installments.  This is basically the same thing that you did when you first bought your home, except that you made your payments to a bank.  In this case you are the bank.

Because you are the bank, you get to make the rules.   You can also sell the house for more than the market price because you can sell your house to people who can’t get bank financing.  The most important part is to keep the payment affordable for your buyer.   As long as the buyer can afford the payments, the overall price is sort of irrelevant.

There are some important nuances to deal with here, and each state has its own sets of laws to comply with.  I personally know the Pennsylvania laws pretty well, but even I would consider doing a deal like this without the services of a competent real estate attorney.  Don’t you dare use an attorney who doesn’t specialize in real estate law.  You also want to bone up on the Garn St. Germain Act of 1982, and the Dodd-Frank Laws.  Actually, you need to make sure that your attorney understands these laws; that is what they get paid for.

The price of the house is truely irrelevant.  I am currently working with a couple in Fox Chapel who have a $900,000 house that they have invested $1,280,000 into.  They werent real thrilled about the prospect of selling the house for the 900k that it is worth.  I assure you that even high end under water houses sell with owner financing.  If all goes well, I may have a story to share about helping a guy with a $2,600,000 house in the very near future.

If you need to sell an upside down house in the Pittsburgh Area, then email me at PittsburghREIA@aol.com , I will help you if I can.

 

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