The simplest way to explain a negative equity is when your property depreciates in value. This means that you are left with a property that you will have to pay for to get sold instead of making money off the sale.
A short sale refers to the sale of such negative equity properties. For example, you buy a house for 350K with a mortgage for 300K and after two years the prices drop to 330K. This means that your property’s equity went into the negative and you just had 20K wiped out of your bank account. You do need to sell off such a property because if you don’t, you will continue to lose money as the property will continue to depreciate and the negative equity will continue to increase.
It’s very important to understand the reasons for property depreciation in order to design a strategy to deal with it. Some of the most common reasons a property may begin to generate negative equity include recession, natural disasters or problems with the housing market in general. If you want to know if your property is in negative equity, you should get your property evaluated. A thorough evaluation will help you find out exactly where you stand and whether you own more to your bank than the property is worth. If this turns out to be the case, you need to act immediately before your financial situation gets worse.
It is important to note that while negative equity sounds very negative, it is not necessarily bad news if you can still afford to pay your mortgage and have no intention to move out. If you are unable to make the mortgage payments or need to move, you might have to shop around for other options. Some companies offer an option to lease and buy your property at a mutually agreed upon price at a later point in future while taking over your mortgage payments. This is better than a traditional sale with an estate agent or cash sale.
From the investor’s point of view, a negative equity property can sound like a great deal but watch out for common mistakes. These can range from not taking the time to have the property appropriately inspected for underlying bigger problems than meets the eye to looking for unauthorized renovations that you can get cited for by the city later.