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October 18, 2010

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Something about this letter strikes me as very blame-y. The author specifically points out that she bought the townhouse at her parents urging (not her fault!), and also cites "current tenants" as the reason the home will never fully regain it's value, and I'd bet dollars to donuts that those "current tenants" are "different" from her...if you know what I mean.

My advice for her would be to see if the bank is willing to do a short-sale, and try to get out from under it that way. She mentions that her mother is on the deed, but doesn't address whether she's on the mortgage, which are two different things that will affect the bank's willingness to short-sell in different ways.

I'm curious as to whether townhouse is currently cash-positive in terms of what she's bringing in for rent versus what she puts out for mortgage payments and HOA fees. If so, I suppose there's no real harm in continuing to sit on it for a little while, but if if it's not, then she might consider self-fund a short-sale - meaning she brings her own money to the table to get out from under it.

There is so much left unsaid that it is hard to answer.

Does the rent cover the mortgage/taxes/HOA fees?
How much did she pay for it?
What does mom want to do? Her thoughts are paramount since she is on the deed.

If the house is generating enough income, I would leave it alone. If the loss is small and the income isn't enough, I would consider selling. However, I would do nothing until I talked to Mom!

I'm in the same exact position with a condo - currently I'm renting it out (at a loss of -$200 per month, bought in 2005 at the peak of the market before I was married, and I'm now living rent free with my in-laws in hopes of paying down the mortgage more quickly.

By my estimates i'm $110,000 underwater. I feel like I'm to the point where I should just stop paying....I'm just throwing my money away at this point while others get bailed out. At the rate I'm going, It'll take me 5 years to pay down to the point I can sell, or I could stop paying, rebuild my credit, and have a wad of cash 5 years from now to make a downpayment with.

We're in a similar situation. We bought a house in California in 2007 as the market was on its way down. Ours was a new construction and the builder had knocked down their asking price by 25%. Surely an unprecedented drop right? Wrong. I didn't expect that the market would drop by another 25-30%. We got a traditional full-doc mortgage that we are able to afford. We are also in the military at the end of 2009 we were re-stationed in Florida where we currently rent where we live. Our house is CA is about 300K(!) underwater at this point. We have renters but they only cover about 60% of our mortgage payment. We are seriously tempted by the whole "walkaway" thing especially since California is a non-recourse state (that can't come after your other assets in case of foreclosure). I'm pretty sure FL is a recourse state so I would seriously consider that aspect. The bank can and probably will at some point go after your assets or your moms to cover the difference. Right now we're continuing pay our mortgage because 1) our moral values compel us (yours may be different and I make no judgement about that, just telling what ours is) 2) we can continue to pay (no financial hardship, we're still able to save close to 50% of our income in retirement and savings account every month) and 3) maybe we're just suckers. :P

We did the same thing. We bought a townhouse for $2 million. Now it is only worth $10,000. I'd sell it, but I don't want to take a $1.99 million hit.

I'm in the same boat - I have a small loss (~$200/month) after taxes, HOA, & mortgage. It doesn't work out to a huge difference once you consider the deduction from taking a loss on it each month... Anyway - i have a year left on the current tenant lease. I might try a short sale, or I might hold on to it if i can find another tenant. Same situation - bought the condo in 2005 - moved when I lost my job, but wasn't able to sell the condo.

My comment is probably going to piss you off, but it's medicine you (and thousands of others, unfortunately) need to take.

Look, you have to honor the contract you made with your mortgage company. Your options are to sell the townhouse at a loss or keep it and either live in it or rent it like you are doing now.

If you don't honor that contract by not paying your mortgage, you are stealing and deserve to go to prison. Of course that won't happen - we don't have debtors prisons any more. Still, if you say you are going to do something and then don't do it, that's just plain wrong.

You made a mistake. A really dumb one. Learn from it and don't let it happen again. Who knows - maybe you will profit from what you have learned by more carefully considering the value of things in the future before you buy.

Ditto My Frugal Miser. Also, grow up and don't blame your parents. I bought and condo at the end of the '80's just as the housing values were going down. I lost three quarters of the value of the condo, and the values stayed that way for five years. Today, I would get about what I paid for the place--no increase in value. That's life--I strongly suggest that you deal with it.

This situation is not too different from many other investments. Let's say you bought some shares in a stock or mutual fund when it was selling close to its all time high and you rode it all the way down to a point where you have little or no chance of ever getting even. You need to get out of that investment right away, particularly in this case since the investment is costing you money every day you continue to own it, take your loss which you can use to either offset other gains you might have, or at least take a $3000/year loss and defer the rest of the loss to be used in future tax years.

Even if you were living in the condo and getting some value in return for your monthly costs it would still be better to shed it and become a renter. Maintaining your status quo is not a viable financial option. The first rule of investing is to cut your losses fast, accept the fact that it didn't work out and move on. The fact that the condo is in another state from where you are living may be an advantage in that the homeowner's association may not be able to file a judgment of default against you that would resurface years from now in a title search if you were selling another piece of real estate.

I know that she wants to walk away, but does she realize that banks are now coming after, suing and winning money from people that walk away from homes? Something to consider since you'll have the debt to pay with a lien on your income and no house to show for it. Like some others have mentioned, it might be easier if you take the loss.

Have you considered being more active in the homeowners's association to improve the neighborhood? You can't leave it to "others" to do the work if YOU are not happy.

To My Frugal Miser,

Indeed it is a contract and in a non-recourse state an owner may walk away. It's in the contract.

The problem with selling it at a loss is that the remaining mortgage balance is still owed to the lender. Keep in mind that most cancelled debts are considered taxable income.

If it's done as a "short sale," it's the lender's loss, not yours, and the lender will send you a Form 1099 showing their loss as taxable income to you. This is because the lender was forced to "eat" the loss, and was not made whole.

The only way you can claim it as a loss on Federal and State tax forms is if you can somehow afford to pay the lender what is owed. That way, you -- instead of the lender -- would be the only one that could legitimately claim a loss.

If you have decided you really want to unload it, it will be a matter of "picking your poison."

But if it were me, I would use an amortization table to see the big picture -- how much each month goes to interest, PMI (which I'll assume you have), and principal for 30 years.

Then I would put all my efforts into applying extra towards the principal, with the goal of getting rid of the mortgage many years sooner, so I wouldn't be stuck with a 30-year mortgage.

This would save you many thousands in interest and PMI, which in turn would greatly reduce your losses. That may also give the market time to stabilize. (By the way, if you accumulate at least 20% equity in the home, you should be able to get the monthly PMI expense cancelled.)

Back in the early 1990s, I did that with a mortgage that had no PMI but the interest rate back then was 10-3/4%. I didn't want to be stuck with it for 30 years, so I applied as much as I could towards the principal, and was able to pay it in full within 5 years.

Do you WANT to be a long distance landlord speculating on property value increases? If you do not then I'd figure out a way to get out of the property by selling it.

WE don't know how much rent she's getting verus the mortgage. We don't know what the mortgage balance is verus market value. Its hard to give much useful advice without the basic details.

The value of the house will return eventually. A property is not going to have 0% gain over 30 years. It may take years but eventually the property will go up again gradually over time.


MVD - My CPA says that if you sell a short-sale on a non-owner occupied property, the loss(sell price below the basis) is deductible. This would at least help offset the taxable income from the 1099 the lender sends. This does not apply on an owner-occupied. Not sure how it would apply on one that was owner-occ, but is now non-owner occ, as with the poster?

Strange irony: So many people sign up for mortgages that too often last decades longer than their marriage vows. Yet in retrospect, taking on a 30-year mortgage was likely a much more impulsive move.

I hope that everyone who reads this piece will realize that while some have reaped great profits, there can also be consequences in buying real estate on impulse and without serious thoughts about long-term ramifications.

And here's another sticky situation: After my uncle died, my aunt was moved into a nursing home. Their house didn't sell after 2 years on the market, and it went into foreclosure. We later learned that after living there for about 40 years, they had borrowed so much against it that they owed more than the house was worth.

I believe Tim is right. For a rental if you sell a property for a loss and its a business property then you can claim that loss. That would be offset by any debt discharged by the bank. IRS section 1231 covers it. If the rental is held for at least a year and produces income then it would qualify. On the other hand if it were a primary residence then the Mortgage Forgiveness Debt Relief Act of 2007 would negate any taxes.

I love how Frugal Miser brings up contracts - if the mortgage is non-recourse, then verbiage states that if the payments aren't made, the bank gets the house back - hence, the contract has been upheld....what am I missing...

Anon

You aren't missing anything. Knee jerk reaction opinions are "you made a promise tp pay, so pay or you are immorral and wrong"

Sound cute, but it isn't true. The contracts don't say pay or you are immorral. They say pay OR we take back the collateral. So either way you are fulfilling the contract, just depends on which part.

What is wrong or immorral or unethical is if you made the payments and the back could still foreclose and take your house. Of if you didn't pay and the back could not foreclose or take possession. That is wrong and immorral. Becasause that is nnot part of the contract.

But a default is written into the contract. Default remedies actually take up a majority of the note and deed of trust verbiage. It spells out exactly what happens. Both parties agree to it at signing.

This is the same situation that I'm in with my condo. My wife and I have accepted that we will loose money on our investment. We've accepted that responsibility and will sell the condo for what we can and cover the rest out of our pocket to fulfill our contractual obligation.

Here's the catch for us though. We've been trying to sell our condo for almost 2 years now. We've had 4 different offers which we've accepted. Solid buyers in all cases. But all 4 times the bank has denied the loan to the buyer because there are too many people behind in their association dues and our the association reserve is too low for the bank's liking.

Simply put, we can't sell our condo because of the fault of others in our building. So we have no option but to keep losing money until that situation rectifies itself, and who knows how long that will be.

Just want to note some things:

- The banks were mostly responsible for the crash (and build up) in housing prices.

- The banks got bailed out with YOUR money

- The people that couldn't afford their house in the first place are walking away.

- Some homebuilders and HOAs actually completely left some communities and/or filed for bankruptcy.

- You are at a significant and unfair disadvantage compared to EVERYBODY else if you continue to pay for something you bought at the top of the market. Why should you be forced to take the loss when everybody else is walking away and being bailed out?

Anon and Troy, Florida is not a non-recourse state.

me.yahoo.com, Have you tried to see if your current lender would give a qualified buyer a mortgage? It would reduce their position since the new loan would be much less than your current balance based on what you said. Might be worth a shot.

T, the people that actually paid...wait for it...cash at the top of the market are at an unfair disadvantage if everyone who put no money down starts walking away. You should be forced to "take the loss" (you're not taking a loss if you keep the property) if you signed a note (in a recourse state) because you promised to pay. You should be forced by having your assets and/or wages garnished. For all (and there are many) the people who legitimately cannot pay their loan anymore, for whatever reason, it's a terrible situation. They can file for BK protection if it comes to that. Most people that legitimately cannot pay now, could not truly afford the home when they bought it.

Chris, you are right. People who paid cash are at an unfair disadvantage too.

In a perfect world, if you agreed take on a mortgage and the home goes down in value, then you should take the loss.

But when the banks are working against your best interest, pushing millions of people to buy a house they can't afford, then they take your tax money to cover losses, and everyone in your community is walking out further lowering your house's value, it doesn't make sense.


(btw, I've never had a mortgage)

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