The Money Mustache Community
Learning, Sharing, and Teaching => Real Estate and Landlording => Topic started by: RunHappy on July 06, 2015, 07:05:43 AM
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I am asking on behalf of my SO about what to do with his house in Baltimore (bought before we were dating). We left Maryland in 2013 and have no intention of moving back.
He has been renting it out most of the time (lease expires May 2016), but has never gotten the amount he needs to cover the mortgage much less management costs.
Purchase price (2007) $210,000
Z-Estimate $123,000
Owe $160,000
Mortgage $1600 (no PMI)
Currently renting for $1450
There are 5 foreclosures within 100 yards of the property and 10 within 3 blocks.
We are trying to figure out what to do with this house. He doesn't want to take a hit to his credit. He makes a good salary and doesn't think he would qualify for financial hardship for a short-sale.
All advice is greatly appreciated!
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Well depending on your situation now (do you guys currently have another house already paid for/mortgaged? - do you even want a house?) I think you have two options.
If you want another house, and you already have said house - you could just let it default if the bank wont let you short sale. Talk to the bank and tell them what you are thinking, and see if they are willing to negotiate. I am sure if you told them what you are thinking they might be more willing to agree to a sale where they get the proceeds and you walk away clean, rather than having another foreclosure on their hands. If they don't go for it, and you have a house, what do you need credit for? Let the house get foreclosed and free your mind.
If you for some reason need credit (like you haven't purchased a new home yet, still need credit for a mortgage) - then just wait a few years until the mortgage is less than the value of the property. You are fairly close already, and you are technically only losing a few hundred a month. Again do this if you for some reason need your credit rating. If not take option one.
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First, I wouldn't go by the Z-estimate as they currently list mine around 190K but homes are selling like candy from 210K-225K in my neighborhood.
I was in the same situation as your SO no so long ago. I purchased my place in 2007 for 230K and within 2 years it was down to 135K. I had the same thoughts but in the end decided to just hold onto the place which turned out fine.
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We currently have another (newly purchased) house that is already financed (VA loan) and we are working to pay it off in 10 years. We both have cars that we have no intention of replacing anytime soon and if we were I would pay for the next cars with cash, so I agree that we can take the credit rating hit. I honestly cannot see anything we would need to apply for a loan for. But I can say that because it is not my credit rating, he is very proud of his near-800 credit score.
Im not sure if he sees it as a moral issue, but it is possible. He has a more black and white moral code than I probably do. I would absolutely walk away from it and sleep well at night, because business is business.
Financially speaking we can afford to keep both houses and absorb the loss. Given that should we focus more on paying down his Baltimore home and then sell when the current tenants lease comes up next year?
What would happen if he just stops paying and walks away from it? Would the bank come after him and see his high income? Could they go after his 401k or other investments?
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MMM's latest article is relevant here:
http://tinyurl.com/na976wa
Also, if the market drop precipitously, that property might be costing you far more than think. Imagine if you could free up those cash flows and invest them into the market instead...
:) This article was what got us talking about it again.
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Financially speaking we can afford to keep both houses and absorb the loss. Given that should we focus more on paying down his Baltimore home and then sell when the current tenants lease comes up next year?
What would happen if he just stops paying and walks away from it? Would the bank come after him and see his high income? Could they go after his 401k or other investments?
IMO you shouldn't pay down a house that is under water. Let the tenants slowly pay it down and hope the market picks up in your area or just walk away.
No, they can not go after his 401K
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We did a short sale 4 years ago and that was a very good decision. Our house was underwater like 100K and although we had a tenant it was just too much stress.
Our credit took hit but it wasn't too bad (~60 points) and 4 years later we have 720 credit score.
If you decide doing short sale don't waste time negotiating with bank directly. They will give you hard time and cause you more stress. We hired an attorney/negotiator who was on top of our case and pushing the file in the system. Bank waived the deficiency. List it with realtor specializing in short sales. It took 4 months from offer to bank approval and closing.
The only thing we regret is not doing it sooner. But we were too emotionally attached and it took us some time to finally let go.
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If you don't need the credit (which you don't), I'd walk away now that you're secure with cars/new house.
As long as MD isn't a recourse state.
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If you don't need the credit (which you don't), I'd walk away now that you're secure with cars/new house.
As long as MD isn't a recourse state.
A few comments: none of this is advice for you, of course. You'll have to look into your particular options.
MD is a recourse state. This means in theory that even if the bank agrees to a short sale, they can come after you for the difference. If you walk and let them foreclose, it's the same deal.. they can sell it and pursue you for the difference. Note the "in theory" caveat above. In practice, many lenders were/are overwhelmed with such properties and have not pursued significant numbers of the mortgage debtors. As the housing slump eases, though, this may change, and the lenders have until the statutory limit on the debt to pursue you (7 years in most places.)
Your retirement accounts are generally protected from seizure, as is your principal residence. To collect from you without significant assets to seize, the bank would have to go to court, get a judgment against you, and proceed to try to have your wages garnished. Anecdotally, I have not heard many stories of this happening.
I considered doing this several years ago with my primary residence (which was underwater perhaps $70k at the time.) Instead I sat on it, paid the mortgage payments, and I'm currently finishing a bunch of renovation work on it before putting it up for sale. The market has recovered quite a bit and I believe I'll do OK when it sells.
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Thanks everyone for the advice. The fact that MD is a recourse state has us nervous about walking away. Right now the renters seem to be good and it is nice just having the place occupied.
We talked about the options and are going to take a "wait and see" approach. I don't think he has been that great about documenting previous expenses and looking at trends, but now is keeping track of everything. For example the A/C needed $500 of repairs, how much it is really costing to manage the property per month.
With the house being occupied we don't like the morality of walking away and leaving them in the wind. We are going to talk about it again when their lease is starting to come up for renewal. A lot will depend on if they renew or find another place or turn out to be terrible renters.
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The fact that MD is a recourse state has us nervous about walking away.
You can include deficiency waiver in short sale settlement. It is part of negotiations with the bank.