Addressing Negative Equity Issues

Mar 12, 2010

Problem #1 - Under-Reporting of Negative Equity.

Although the media is filled with statistics regarding the number of under-water homes, it still manages to under-report the full impact of the problem. This is due to several reasons; first of all, the numbers used to compile these averages are based upon the overall decline in value for a given area rather than a specific home. Many financial distressed homeowners have failed to maintain adequate maintenance or allowed taxes, insurance and other lien payments to lapse. The actual amount of negative equity for any given property is often far in excess of the official estimates.

Problem #2 - Counting Transaction Costs

In addition to the one out of every four homeowners that are currently upside down on their mortgage, there are literally millions more that are "borderline"; basically their current mortgage more or less equals the value of their least on paper.

Unfortunately, that status can quickly turn negative if they decide to actually sell. Sales commissions to real estate agents and brokers easily average seven percent while local taxes or closing costs frequently add another two to three percent. A ten percent premium above and beyond the current mortgage/market value is well within the average range quickly transforming a "break even" property into a negative equity position.

Problem #3 - Taxes, Taxes, Taxes

Investor owned properties often face even greater costs including depreciation recapture and Capital Gains taxes. Combined, the total tax hit combined with items like depreciation recapture can transform a borderline property into a negative equity situation. Add in transaction costs such as real estate agent commissions and closing costs and the average investor owned property often needs to price a property 20% to 35% above the asking price just to break even

Problem #4 - Second Loans Other Liens

As if the situation wasn't bad enough, a recent study conducted on behalf of BofA found a significant increase in the percentage of underwater loans when the primary mortgage as well as secondary loans and liens were compared against the full value of the property. In fact, only 45% of Prime borrowers were found to have any remaining equity in their homes.

Bottom Line

Walk the current homeowner through the actual numbers required in order to determine if a property is in a negative equity position or not; don't simply rely upon the paper estimates to determine the value of a property. In addition to the one out of four mortgages that are clearly in excess of the current value of the home, millions of other Americans face a "hidden" negative equity position when attempting to sell a home rather than hold for the long term.

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