Author Topic: Case Study: Condo Underwater, How do I get out?  (Read 5705 times)

dccondounderh20

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Case Study: Condo Underwater, How do I get out?
« on: August 30, 2014, 06:47:23 AM »
Friend recommended this site re: my situation.  Like the site, like the ideas, wondering if anyone can help:

FACTS:

35 y/o, no kids, want to move into a bigger house with girlfriend w/in next 2 years
No cc debt, good credit
No car payment (will drive till wheels fall off)
Making max contributions to 401k
Employer paying off student loans (no monthly payment required)
Mortgage Payments Made Monthly On time
Steady, Reliable Employment

2006: Purchased condo as primary residence, owe $207K, value approx $190K, monthly payments c. $650/month (interest only).  Interest only expires March 2016 when payment will likely double.

2012: Purchased vacation home, owe $135K, value approx $180K, monthly payments c. $950/month.  Fixed 30 yr loan. c. $4k rental income/yr

Total mortgage debt: $342K

Savings: $45K in money market account earning less than 1% interest.

Savings potential: After all mandatory expenses (mortgage, property tax, condo fees, cable/phone, energy, 401k, medical, income tax), and going on austerity budget, I can save $1,500 per month. 

Goal: Move into a bigger house within the next two years with girlfriend who is about to start a new job this month, whose lease on her rental apartment expires in March 2015.  Minimum price for SF homes/Townhouses in DC area $400K.

My Question: What is the most effective way to move into a bigger house in the next 2 years without carrying 3 mortgages? 

After perusing the forum a bit, I'd like to anticipate a few questions and do my best to answer them:

1. Why doesn't your girlfriend just move in with you at your current place?  My place is a really great location in the DC area.  It is close to shopping, it is close to transportation, it's "in the beltway" (for non-dcers, this means it's a good location), it has all of those "upgrades" in it which were in it when i purchased, it has a gym and pool which i use to exercise, and my own parking space (that was a luxury years ago).  The downsides (besides being under water) are the neighborhood isn't super fantastic, but more of an issue is the size.  It's really small.  596 square feet.  For myself, it is adequate-- just the right size, prevents me from accumulating too much crap.  I've always thought it'd be really difficult to fit 2 people in here and girlfriend agrees.  If the place had like 300 extra square feet, it'd be fine (don't need much).  I also have music equipment in here (I'm a musician on the side-- that's no money maker).  I also have a bike in here (I know that's praised in this forum).  So I'd love to have us squeeze in here, but I don't think that's physically possible.  She also doesn't much space, having lived in just slightly bigger 1br apts.  Even all this considered, the monthly payments on it will increase in 2016 and I can't be sure the value will increase to get me above water. 

2. Why did you buy in the first place?  I moved to DC in 2005.  I was paying $1,000/month in rent making like $35K (that's before taxes).  That was tough.  Then, I found out my rent was increasing to $1,400/month, so I explored other options.  My employer had a program where it paid for closing costs, so I found my current condo where my monthly payments were less than $1,400/month.  Then, after "the crash" in 2008 the interest rate adjusted ... downward, so my monthly mortgage payment has been under $700/month for years now which has allowed me to save.  Unfortunately, the interest-only period expires in March 2016 (10 years ago, 10 years seemed like a century). 

3. Why the hell did you buy a vacation home?  In 2012, I realized that my property was underwater, and since I knew I eventually wanted to upgrade to a bigger place, I started looking at SF homes and townhouses in the dc area, since interest rates were low, with the idea that I'd rent out my current place until I can hopefully sell it.  Not only was I extremely disappointed with what was available, I was outraged at how much they were asking.  When I saw a "fixer=upper" for $370K in a crappy area, that was the last straw.  I evaluated, what did I really "want," since I judged my current house a better situation than any other at the time.  I had always wanted a vacation home and saw a great one which was an estate sale, so I decide to go ahead since I always wanted one, figured I'd enjoy it myself, and it had rental potential if I needed it.  I had a medical emergency in 2013, so I decided to start renting the vacation house out and it really helped me out quite a bit that year.  In two years, the after tax/rental fee income is approximately $4k/year.  Is this vacation home an unnecessary luxury?  Yep, it is.  Do I regret buying it?  Nope.  Every time I visit, my decision is re-affirmed.  I prefer not to give it up, but I will if I can get a bigger house in the DC area.  With my total mortgage debt, I figure it's as if I bought one of those SF homes and I have two places that I enjoy, both of which have potential rental income.  Plus, I figured by the time I really needed to move, my DC condo value would increase enough to make it happen.  Unfortunately, htat hasn't happened.

4. Why don't you sell your vacation home?  Right now, that's the route I'll probably take.  I'm making improvements (many myself) to get the place in better shape than when I bought it, anticipating selling end of winter/early spring (for folks who want to have a vacation home by spring/summer).  I'm not so sure this is the best course of action since I'd be getting rid of the "good" property that's worth more than I owe to subsidize the "bad" property that's worth less than what I owe.  Plus, the vacation home is the one I'd like to keep AND it provides some added income at the same time. 

5. Why don't you just rent out your condo that's under water?  I would certainly do this, and I think that I can get more in rent than my the monthly payments I'm making.  The only problem is that in order to move out of here, I need a primary residence (vacation home is too far away).  Even if I wanted to carry 3 mortgages (I don't), bank will only approve me for like $300K which won't really get anything in the area that doesn't involve a minimum 40 mile commute, I'm sure I'd need a new car, etc.  I actually can't believe they'd even approve me for that much. 

6. Why don't you just rent a bigger place somewhere and rent out your place?  I'd consider that but rents are about the same/more than mortgage payments in the area.   

7. Why don't you just save as much as you can until March 2016 and decide then?  I plan to do that, but if I save max by 2016, that would give me an extra c. $28,000.  That gives me $73,000 which is great, but I'm still unsure of the best move at that point if my house is still underwater.  Do I sell it for a loss than?  If that's the right decision for then, why don't I try it now?  Girlfriend's new salary will likely help out, but I'd still like to avoid the 3 mortgage situation.  Regardless of whatever decision, from now till the end of the year, I'm going to try saving absolutely as much money as possible. 

8. What is your lifestyle like?  I don't enjoy fancy cars, and I don't really go to the movies.  If my place was robbed and totally cleaned out tomorrow, I'd only really miss my laptop and music stuff (not into fancy furniture).  I wear suits to work every day and I JUST replaced them all after 10 years because they were starting to get holes (an extreme example demonstrating I don't like blowing money on clothes).  I do like to buy crap and eat out at restaurants though.  I can certainly cut down on that stuff if needed and the $1,500/month extra savings is assuming I don't purchase unnecessary stuff on amazon and eat at home. 

9. Why don't you invest your money better?  That's a good question and from reading this board, I'm now considering investing at least some of the $45K into the Vanguard VSTAX. 

10. If your DC area condo is in such a great location and in great condition, why isn't it increasing in value?  I used to think there was something wrong with my place.  Perhaps the neighborhood/schools aren't that great?  But then i was thinking there are significantly worse neighborhoods in DC where people get robbed (a lot) where the houses are waaaay more valuable than mine.  Then the other day I saw this Wall Street Journal article that said there is a trend of lower-priced homes not increasing in value like higher-priced homes are and they mentioned that this is an issue for first-time home buyers who were hoping to use equity in their homes to upgrade, but now can't (that's me!).  Theoretically, the value HAS increased over the past few years and it *should* continue to rise, but that's what all the wizards said when I bought in the first place (not blaming anyone, still my decision). 

My ideal scenario: Get rid of primary residence somehow, keep vacation home and keep renting it out, buy new place, live happily ever after.  Secondary (likely path I'm on): sell vacation home next year, buy new place, move into new place, rent out current underwater condo, sell in 2016 whether underwater or not.   

I'm up for any advice/options anyone may have/suggest.

ragnathor

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Re: Case Study: Condo Underwater, How do I get out?
« Reply #1 on: August 30, 2014, 08:02:35 AM »
I would sell both your primary residence and your vacation home. In my experience, condos are almost always a bad investment. You pay for the lifestyle. What are your HOA fees and property tax? You are paying interest only right now, so it's as if you are renting plus all of the risks of home ownership (which you've experienced as it is now under water). Even if you take a loss I would get rid of it.

As for the vacation home, I would most certainly sell it but sounds like you want to hang onto it. $4k rental income per year that you're getting I bet is much less than the maintenance, property tax, etc. you pay each year to keep it. Instead of a "vacation home" you can rent out nice hotels or properties on Airbnb and still have $$ left over with what you saved keeping a mortgage, etc.

You want to move into a bigger place. Is your girlfriend paying a portion of these costs? If not, then it sounds like your housing costs could easily increased another $1,500+. I don't know enough about the area to suggest renting or buying, but I would absolutely look into getting rid of the 2 above properties before buying another.

thedayisbrave

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Re: Case Study: Condo Underwater, How do I get out?
« Reply #2 on: August 30, 2014, 08:16:49 AM »
I would sell both your primary residence and your vacation home. In my experience, condos are almost always a bad investment. You pay for the lifestyle. What are your HOA fees and property tax? You are paying interest only right now, so it's as if you are renting plus all of the risks of home ownership (which you've experienced as it is now under water). Even if you take a loss I would get rid of it.

As for the vacation home, I would most certainly sell it but sounds like you want to hang onto it. $4k rental income per year that you're getting I bet is much less than the maintenance, property tax, etc. you pay each year to keep it. Instead of a "vacation home" you can rent out nice hotels or properties on Airbnb and still have $$ left over with what you saved keeping a mortgage, etc.

You want to move into a bigger place. Is your girlfriend paying a portion of these costs? If not, then it sounds like your housing costs could easily increased another $1,500+. I don't know enough about the area to suggest renting or buying, but I would absolutely look into getting rid of the 2 above properties before buying another.
+1

Gerard

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Re: Case Study: Condo Underwater, How do I get out?
« Reply #3 on: August 30, 2014, 08:23:09 AM »
I would sell the vacation home, but do much deeper research on whether the two of you could make the current condo work for you. A few days on minimalist or small home websites, some serious talking about separating needs from wants, shedding some possessions you use infrequently, maybe even buying/getting some more efficient furniture or promising yourself the occasional weekend away in a bigger space (maybe via airbnb). Lots of smart happy people have great lives in less space than you have.

Take my advice with a grain of salt, though... I've always found it less work to change my attitude than to change the things that I think are problems.

thirtysomething

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Re: Case Study: Condo Underwater, How do I get out?
« Reply #4 on: August 30, 2014, 09:42:49 AM »
Understand the small living space. We live in NYC (and lived in London) and moved out of our 600 sq ft 1 bed apt when baby #3 was on the way. If you like the vacation home (which I would seriously consider selling), then I say keep your current place and learn to make it work while saving as much as possible. Our friends and family often comment on how cramped they feel in their 3, 4, 5 bed homes, but our last few 2 bed apts have been great for our family of 5. Our kids are young still (under 10 years), so we'd like to upgrade (buy?) in a few years. But early on is the time invest and avoid lifestyle inflation.

mm1970

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Re: Case Study: Condo Underwater, How do I get out?
« Reply #5 on: August 30, 2014, 10:04:07 AM »
Hmm...I would squeeze into the condo.  But I don't have experience selling underwater.  Part of the underwater is your timing.

We bought in 2004 and our house (Coastal So Cal) is still worth less than we paid for it, probably about $100k less.  So rather than "trade up" we "squeeze".  We have a SF home with 4 people in 1146 sq ft, so 287 sq ft per person.

Can you refi to keep your mortgage on the condo at a reasonable level?  Somewhere between now and doubling?

DollarBill

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Re: Case Study: Condo Underwater, How do I get out?
« Reply #6 on: August 30, 2014, 10:29:15 AM »
I agree with the others. I would sell the vacation home first. It seem like you got lucky when you bought it since it rose $45K but I wonder if you crunched the actual cost numbers if it's much of a gain. Count up the: Taxes, interest, upgrades, furniture, kitchen ware and the gas to get there. Plus, how many times do you even use it? I for one wouldn't want to be chained to one vacation place. I was talking to my Dad once about buying an RV for $15K and he said damn that could buy a lot of nights in a hotel. Plus, I would need a truck, get bad gas MPG's and have a lot of up keep. So now I drive a gas sipper and take more road trips...thanks Pops!

As for the house upgrade: This is coming from a guy who was previously married. I would never move in with someone who is just a girlfriend, not even if I was engaged. Take a peek at http://forum.mrmoneymustache.com/welcome-to-the-forum/divorce-wmfd-(weapon-of-mass-financial-destruction)/ just don't stay there to long...it's soul crushing :). There is so many things to go wrong. Especially if you are planning to have both your names on the deed or if you are planning the purchase with your combined income. If you still feel the need to move in with each other I would choose one of the places that you currently have.

I think many people now-a-days look at moving in together as a test run or it will free up some money since your sharing expenses. Neither are a good idea. It opens yourself to so many problems.

Lastly, I grew up 20 mins South of DC and I know it can be expensive but "Dang" $209K for a 600sf Condo. I just retired (@39) and I was thinking about moving back closer to the family. I guess that won't be happening any time soon with those prices. I'll just stay here in Kansas in my $158K...2700sf house (5 beds, 3 baths, 3 car garage, built in 2009). Yes, I know it's "Kansas" but the livin's EZ and simple (Just the way I like it).

It's hard to live in that area and not get caught up with all the spend thrifters. I say make smart choices...save/invest and then get the heck out of that place when you have enough to pull the plug.


electriceagle

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Re: Case Study: Condo Underwater, How do I get out?
« Reply #7 on: August 31, 2014, 09:09:55 PM »
How to get out of an underwater condo:

First, locate a pocket of air. This may be inside a bathroom, walk-in closet or other isolated area. Head for the pocket of air immediately as it will provide you with the time necessary to formulate your escape plan. 

Oncr you have reached your air pocket, get rid of clothes and items that might slow you down. Immediately begin breathing deeply to saturate your lungs with oxygen. Shoes should go, as should pants or shirts that might become waterlogged. Don't be afraid of embarassment once you reach the surface. If you have keys or any other objects that might be useful in breaking windows, keep them.

Now that you are in an air pocket and have relieved yourself of unnecessary clothes, think of the layout of the condo. Did you notice any broken windows? If not, identify a location with two windows, to break in your escape.

Think clearly about how to reach your window location; keep in mind that you will need to wade and swim through cold water to reach your escape route.

Now, get ready to head to your escape window. It is likely that the pressure inside your condo is less than that outside; if this is the case, you will not be able to exit.

Find a handhold next to your escape windows. Hold on and step out of the way as you open one of the windows. It may seem counterintuitive, but you need to let water in so that the pressure can equalize.

Hold on tight!  The water may rush quickly. Open the window immediately adjacent and see if the pressure change can be used to catapult you outside.

Even if you can't piggyback on the pressure change, use the second window to get out of the.condo. Shove your way out whatever way you can.

Once you are clear of the building, kick upwards (make a few air bubbles to confirm which direction this is) as fast as possible. It may seem counterintuitive, but at this point, you need to get air out of your body quickly. This is important to keep compressed air from harming your lungs as it rushes to exit your body.

As you kick, blow bubbles with your mouth. When you see the surface, open your mouth and push the air out as fast as you can. Your body's velocity and buoyancy should keep you going upwards.

Once you reach the surface, take a deep breath and hold it in your lungs. Congratulations, you have gotten out of your underwater condo. Keeping a full breath will help you to float until rescue. Swim slowly towards land if visible.

chasesfish

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Re: Case Study: Condo Underwater, How do I get out?
« Reply #8 on: September 01, 2014, 06:21:46 AM »
I think you need to go stand in front of a mirror, stare at yourself, then proceed to punch yourself in the face.  You bought a vacation home while carrying an interest only mortgage.

1) Why the heck are you sitting on $45,000 in cash and only paying interest only on the condo?  Really?  What the hell.  Take that cash and immediately start paying down your condo.  You've chosen to be underwater by taking an interest only loan.

2) What is the total expense per year in the vacation condo?  Is the 4k net income after all your expenses and your mortgage, or is that gross rental income?  Vacation homes are typically horrible, horrible investments and experience booms and busts in pricing.  They only make sense for people already financially independent, or very savy real estate investors who pick them up deep into the bust.  Those investors buy them so deeply discounted they do cash flow as rentals or make a good annualized ROI once sold. 

3) If you need a bigger place, you need to rent.  The bank won't approve you for more than $300k for a reason, you can't afford it.  The vacation condo is probably a huge expense, mortgage plus expenses.

4) The DC condo is probably a decent rental, but you need to get that debt number down.


Judging from my calculations, the $1,500/mo you could save, plus the $45,000 you already have in cash would allow you to get your mortgage down by $72,000 in the next 18 months.  Your property wouldn't be underwater at that point when you want to make changes.

The vacation condo is your decision, but its carrying cost is probably similar to owning a Ferrari.  This is the wrong place to come to and try to justify owning a Ferrari, then say you're struggling to afford the type of house you want.  Life is about choices, and you'll need to work hard and retire some debt over the next three years if you want to keep both the vacation condo and get your new house.


olivia

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Re: Case Study: Condo Underwater, How do I get out?
« Reply #9 on: September 01, 2014, 01:55:59 PM »
I think you need to go stand in front of a mirror, stare at yourself, then proceed to punch yourself in the face.  You bought a vacation home while carrying an interest only mortgage.

1) Why the heck are you sitting on $45,000 in cash and only paying interest only on the condo?  Really?  What the hell.  Take that cash and immediately start paying down your condo.  You've chosen to be underwater by taking an interest only loan.

2) What is the total expense per year in the vacation condo?  Is the 4k net income after all your expenses and your mortgage, or is that gross rental income?  Vacation homes are typically horrible, horrible investments and experience booms and busts in pricing.  They only make sense for people already financially independent, or very savy real estate investors who pick them up deep into the bust.  Those investors buy them so deeply discounted they do cash flow as rentals or make a good annualized ROI once sold. 

3) If you need a bigger place, you need to rent.  The bank won't approve you for more than $300k for a reason, you can't afford it.  The vacation condo is probably a huge expense, mortgage plus expenses.

4) The DC condo is probably a decent rental, but you need to get that debt number down.


Judging from my calculations, the $1,500/mo you could save, plus the $45,000 you already have in cash would allow you to get your mortgage down by $72,000 in the next 18 months.  Your property wouldn't be underwater at that point when you want to make changes.

The vacation condo is your decision, but its carrying cost is probably similar to owning a Ferrari.  This is the wrong place to come to and try to justify owning a Ferrari, then say you're struggling to afford the type of house you want.  Life is about choices, and you'll need to work hard and retire some debt over the next three years if you want to keep both the vacation condo and get your new house.

Well this sums it up so perfectly I won't bother adding anything except ditto.

frugaliknowit

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Re: Case Study: Condo Underwater, How do I get out?
« Reply #10 on: September 01, 2014, 02:33:11 PM »
I live in a condo that size in Chicago (guess what...around the waterline....grrrrrrr....because buyers for those condos are not buying, they're renting...!).

Dump the vacation home and do what I am doing:  Throwing crap out, building open shelving where ever I can, and eventually scaling the furniture.  Fortunately, I was able to refinance and will be done with it in a maximum of 11 years.  You are screwed with that time bomb mortgage so get cracking!

I would think long and hard about moving in with your GF.