Los Angeles Sweet Digs

May 15, 2008

What Would You Do In This Situation?

A friend of mine is in a serious housing dilemma.

In June 2005 (pretty much on the precise day the market peaked), following the advice of a financial professional who told her she needed a tax write-off, she purchased a three-bedroom, two-bath condo in a gated community in east Carlsbad for $630,000 (using an agent recommended by the financial adviser). 

She used two mortgages, including an interest-only loan, to obtain 100 percent financing on the property. Her monthly payment, including taxes, insurance, and homeowners’ association dues:  $3,700.

A year later, her job went away.  Six months later, she took another job back East. Unable to sell the condo, she rented it for $2,200 per month, and pays the $1,500 difference out of her pocket, which she can afford to do — for now.

The renter has expressed interest in buying the property, but for $550,000.  Similar units in the complex have sold in the low $500s.confusion1 What Would You Do In This Situation?

Here are the options she is considering:

  • Selling the property and paying the $80,000 difference in cash.  She is extremely reluctant to do this because she is only about three years away from retirement and is trying to sock away as much cash as possible.
  • Trying to arrange a short sale, which will be difficult considering that she is not behind on payments and technically can afford to pay the mortgage. Plus, she will wreck her credit.
  • Let the renters move out and give the house back to the bank, which will ruin her credit.
  • Hang on to the house, even though:  1) the interest-only part of the loan expires in two years; 2) she hopes to retire to Florida in three years and will have a much tougher time making up the difference in the mortgage payment; and 3) she has no idea how long it will take for the market to rebound.

There are many people advising her, and it’s hard to know what the right thing to do is.  If anyone out there has any insights, or any other ideas, we’d love to hear them.

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Posted by Cindy Allen on May 15, 2008 8:51 AM | del.icio.us | Digg

  • Amy Sanborn
    I agree with Dillon.
    Your credit score ALWAYS matters.
    Offset the loss.
    You'll live, you'll be ok, and you'll be free of the burden while doing the correct, responsible thing.
  • Hi, Phyllis: I was recalling this post about Fannie and Freddie not giving loans to people who claimed they planned to convert their present homes to rental property. But the fact that she already has the property rented might take care of that.

    http://blog.redfin.com/losange...
  • Why wouldn't they give her a loan if she qualfies?

    The problem home is in another state and is currently rented. I don't think a lender can deny a loan based on an inkling.. when there is no evidence that she will walk on the problem home.
  • Strictly, maybe you're right. I just fear that most lenders are going to be mighty suspicious of someone buying a condo in Fla. when they are upside down on a property in S.D. But you're right, it doesn't hurt to try.
  • Strictly Business
    Maybe should could make an attempt to buy a place in Florida and see what happens. If she's retiring soon, practically that's her safest bet. She doesn't have that much time to secure her future.

    Credit truly doesn't take that long to repair anyway, but if she has a house of her own and all the credit she needs to retire with, I wouldn't waste her money on the other house.

    As was said by someone else, when Mozillo gives back the money he made on these loans, we can talk about "doing the right thing."
  • Dillon and L.A. Guy, thank you. I personally think this is the smartest option, although I wouldn't love the idea of writing an $80K check.
  • l.a.guy
    By the way, I think people are little delusional if they think having bad credit in the future is not going to be a burden. If you have no way out but BK then it is what it is, but I wouldn't casually go trashing your credit. My wife and I have 750 FICO's, no debt and better than average income and we still had to jump through hoops to get a home loan. Banks are scrutinizing applications like... well like they should have been all along, but certainly far more than anything I've seen in the past 10 years buying four different properties.
  • l.a.guy
    I'm with Dillon. Sale it now, use the loss if possible against some gain. Right now she's spending $1,500 per month instead of saving $1,500 per month, if you think about it that's a $3,000 per month swing, or as Dillon points out, the difference between having an extra $54,000 in the bank over three years (plus interest) versus putting $54,000 more into a property which is unlikely to rebound given her time horizon.

    Sale! Sale! Sale!
  • What a lot of people are doing in this situation is buying the new proeprty - while their credit is good. Then after the new escrow closes they "give" the undesired proeprty back to the bank.

    I am not here to pass judement.. and $80,000 is a lot of money. Gee maybe when Mozillo gives Countrywide shareholders back "his" millions your friend, can step up to the plate & pay her lender back.
  • Thanks for commenting, everyone. She has thought about buying the condo and then giving it back to the bank, but do you think the bank in Fls. would give her a mortgage? I blogged about banks being a lot more careful with people like her, who already own rental property that they're upside-down on.

    And John, at the time everyone was under the illusion that real estate would do nothing but go up. Silly, in retrospect, but that was the environment at the time.
  • John
    Uhmmmm... here's a thought. Suck it up and take responsibility for a foolish decision. She made a bad bet, and should take the loss, not put the burden on anyone else. Who in their right mind would buy an additional property, 100% financed, three years from retiring? I'm sorry, but taking chances like that, she must've been delirious.
  • Dillon
    She has an above-market offer for her condo. Take it before the tenant changes his mind. Does she have any long-held stocks or other assets that have risen in value? If so, sell those and use it to pay the $80K. She'll be able to offset the capital gains on those assets with the $80K loss on the condo.

    She'll no longer have to pay the $1500 a month, which adds up to $54k in 3 years 'til retirement. That's 2/3 of the $80K. If she can save about an extra $725 per month on top of that, she'll make up the entire $80K in 3 years. If not, she can work for an extra 1.5 years (retire in 4.5 years), and the $1500 a month in savings will make up the entire $80k.

    In the meantime, fully fund her 401k and IRA if possible. Since she's so close to retirement, she'll be able to use that money sooner rather than later, and will help reduce her current taxes.

    Most importantly, her credit will be intact. She can take her time shopping for a retirement home in Florida. Chances are prices there have not hit bottom.
  • Janet
    She should buy a place where she wants to retire now. Get her debt in order and give it back to the bank. A deed in lieu of foreclosure is much less damaging to your credit than foreclosure or a short sale. It shows integrity and that you are being pro active, not a deadbeat. Her credit will eventually recover, she can still get utilities and probably finance a car if needed.
  • Strictly Business
    If it's at all possible for her to do, I think I'd buy a place of her own where she currently lives in Florida while her credit is still good and then give the house back to the bank.

    When I first heard about people doing this, I thought it was horrible. All things considered, now I'm thinking it's pretty smart.
  • What Would You Do In This Situation?
    If I were her, I would let the bank have it. Why worry about her credit? She is only about a few years into her retirement where she would not investing in anything so why worry about her credit. With bad credit, she is still be able to get the phone service, utilities, and renting an apartment. Cut her loss and run.
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