Why shouldn't I walk?

AV Paperboy_IHB

AV Paperboy_IHB

New member
<p>This may get a little long winded, but essentially the title says it all.</p>

<p>Like a lot of other people, I got caught up in real estate mania, and no, I have no Option ARM that is about to explode, and I was definitely not subprime. That being said, there is no way I should EVER have been approved for a loan. I was making $55k in late 2005 and qualified for a $290k interest only 5 year ARM at 100% financing with literally $500 in the bank. I did not lie and overstate my income, and hid nothing from the bank. But I had a pulse and I was approved with minimal verification. Now I know some will place the blame on me for taking out such a loan in the first place, and believe me, looking back and realizing how stupid I was still makes me cringe, but you cannot overlook the fact that I NEVER should have been approved. However, what's done is done. I have improved my income since closing in Jan 2006 by about $20k per year, however before that happened I managed to rack up ~$20k in credit cards to supplement the income I was not making. Who cares I thought as I gleefully spent, in 2 years I could refi, pay off my debt AND stick it to the gov't by deducting the interest on my HELOC right? Except things didn't go as planned. </p>

<p>So, my situation today. I'm essentially "renting" from the bank, to the tune of $1,725/month, plus $200 HOA putting my monthly outlay for my 1 bedroom condo at $1,925, give or take. And that is before RE taxes, and before the tax benefits are factored in, however they essentially wash, so after tax let's agree that I'm paying $1,925/ month for housing. I say I'm renting because my payments are only covering the interest, so at the end of 2 years I still have the same exact loan balance as I did when I closed. How stupid are interest only loans? Again, mental kick in the butt for me. But again, too late to cry over what I did in 2006, now I must sort it out. I can't refi, I tried to get into a 30 year fixed to "weather the storm' so to speak, but the comps in my neighborhood are far below where I'd need to be to even have 95% equity to refi. So that option is gone for the foreseeable future. I'm a bit of a finance/real estate nerd, so I've been working on trying to find the bottom for my neighborhood. Right now rents on a one bed condo like mine are running about $1,300 a month. (By the way, this is down from $1,400 this past summer.) Granted I'm not using the most scientific of methods, just looking at what's on Craigslist and taking an average of the asking prices. Anyway, I estimate rents are eventually going to fall to around $1,000 per month or so, and even if they don't the low end market value of my place is roughly $180k. The high end estimate is $215k. Optimistically speaking. Personally I think the bottom is going to come a lot fast than people think in the low end of the market and that will be the first to rebound, however rebound to me meaning only that some sales activity will return and prices will stay flat for a few more years. Basically it'll be 10 years before I'm back to even! </p>

<p>The reason I come before the great IHB community is to seek advice. The rational part of my brain says to dump my place as fast as possible, put it on the market now, hope to sell it to a knife catcher for $260k, stick Citi with a $30k loss and get out while I can. I have 3 years before my ARM resets, and right now with LIBOR so low the reset impact would be minimal. But again, I think there is a lot of interest rate risk in the market right now and I think LIBOR will be at least 1 - 2% higher in 2011, and while I expect to increase my earning capacity in the next 3 years do I really want to be paying even the same amount per month on a place that will be worth even less in 3 years? So, what should I do? Put in on the market in January, price it to sell in today's market if that's possible, and risk getting the bank to accept a short sale while knowing that I could end up in foreclosure? Or do I continue paying a ridiculous amount, $1,925 or ~45% of my take home pay for housing, continue to have credit card debt that I can't pay down and live with the real possibility that I get screwed in 2011? Thoughts? </p>
 
<p>You're screwed.</p>

<p>Put it up today. Call an agent today that has successfully done short sales. Tell your agent to price it to sell, this month. See how many offers you get, when you get an offer, look to see if you can make it whole for the close, if you can, do it and be done. Push your agent to hound the bank to get a response to the short sale. The bank will say no. I give that a near 90%+ chance.</p>

<p>Eventually, you'll need to make a choice between paying when able and defaulting and taking the credit hit and trying to stick the bank. BTW, once you default on the mortgage, your credit cards will like rocket to 30%.</p>

<p>But let's be clear, you have a contractual obligation to repay the money at the appointed interest rate. The bank taking your condo isn't an either or option for you, it's a contractual term for when you reneg on your obligation. The non-recourse portion is merely their as protection to prevent one mistake from turning into a wipeout.</p>

<p> </p>

<p> </p>
 
i am no expert in RE, but putting myself in your shoes, my first instinct would be to list it for sale in Jan for a price slightly above the market, and in no event below. There is always a chance somebody comes over and loves your [insert blank, like beautiful floors or whatever] and pays the price you asked. You can always lower the price, offer additional perks, etc., but if you price too low from the beginning, people will suspect you are desperate and would try to "wait you out." I cannot believe you would not sell it in 3 years, eventually, somebody is bound to like it and buy it. Also, there are always more buyers for an entry level house like yours. I know it is 1 bedroom, but is it possible to get a roommate in the meantime to help out with the payments? Good luck!
 
<p>I think the skyrocketing credit cards is a good reason to stay where you are for the new few years.</p>

<p>I was involved in a rejected short sale here in Fla a couple of months ago, and from the bank's paperwork, it was clear that the credit of the short seller was going to be ruined almost as much as a foreclosure.</p>

<p>So try to pay down/pay off the credit cards.</p>

<p>If you have no big guilts you could do the following while your credit is still good.</p>

<p>Buy another place at a very low price. You'll never qualify for 2 mtges, so get the seller to take back financing, or take a second. (There's that pesky due on sale clause, but I doubt anyone is going to be enforcing them.) Move into your new place and mail back the keys. I have a client who did just that, bought a second house while his credit was still good (he qualified). And then abandoned the house he was having built on the West Coast of Florida. Then he filed bankruptcy, we have different recourse laws here and an incredibly complicated thing called homestead. And that was that.</p>

<p>So, now this client's credit is shot, but what does he care? He has a house he can afford, a decent job, and will just have to pay cash for everything for the next 7 years.</p>

<p>I personally would never do this. I promised to pay, and I would feel that I should pay. Now, if the reason I wasn't paying was because I lost my job, or got sick with some dread disease, and couldn't work anymore, that's different. But just because I made a bad bargain. . . Nope, I couldn't do it and sleep at night.</p>

<p>The question isn't how much your house is worth. It's what your character is worth.</p>
 
lawyerliz-I've heard about this solution that you described. it might actually work, if you don't mind taking a hit on your credit. there are a couple of things I wanted to add: if you take this path and your house has been refinanced before, you would be liable for the amount of deficiency judgment (if bank forecloses and sells your house for less than your mortgage was). also, don't forget that you can get stuck with an IRS bill, since whenever a bank gets less than your mortgage at the foreclosure sale, they report it to IRS as income paid to you. it could be pretty substantial depending on your tax bracket. moral implications aside, that is an interesting solution...
 
This may be a bad idea, but could you rent your place out, move somewhere cheap for a while (parents, girlfriend), and just concentrate on getting your credit cards paid off. I believe you would also gain a tax benefit from depreciating your condo, can anyone advise on the numbers. Pencil it out to somehow get into a situation where you get some cash flow to get out of cc debt.
 
who would rent 1 bedroom condo for 2K a month (that is the least you need to rent it out for not to pay out of pocket)? for that kind of money, you can rent a SFR in a pretty good location.
 
ha-ha, yeah, your wife will pay your bills, but your life would be more like a living hell (the problems that you have now will fade in comparison to nightly "so-and-so makes so much money his wife doesn't have to work," "so-and-so and his wife just returned from a vacation," "what do you mean I'm not getting a birthday present" and other similar pronouncements :)
 
<p>What about just staying where you are working hard to pay down your debt. Sure the bank gave you the loan but that doesn't change the fact that you took it. Honestly, I am not trying to come off rude or anything but I really believe that the ethical thing to do is stay put and work hard to bring down the loan value so that when the reset comes, you might have some equity and the new payments won't be so bad. Also, if you can put in enough money to match the comps, you should be able to refi into a fixed loan.</p>

<p>I know, you don't exactly have a lot of cash lying around but you make a decent salary. You can get a second part time job, get a roommate, reduce your expenses, and put as much money as you can into your house. </p>

By the way, if you are a finance/real estate nerd, how did you get into this position in the first place? In late 2005, you figured housing would go up significantly enough for you to refi and get enough cash to pay off your CC debt?
 
AV Paperboy - this is a business decision. The bank made a business decision when they made you the loan. If you decide to walk, you are making a business decision. Your quality of life would improve greatly by getting walking away (even through your credit would suffer for the next 7 years). Dont let other peoples ethic's/morals make the decision for you. They say they would not walk away, really? They say that because they are not in your shoes and thus, easy for them to say they wouldnt walk away, they are not the ones paying 45% of their take home income to their mortgage, you are. You have to do what is right for yourself, not what others or society perceive to be what is right.





Make the right decision. Walk.





Good luck.
 
<p>Echoing a couple of other posters, I like renting out the place and taking the loss as a tax deduction. Move somewhere else that costs less. Let's say that your condo falls $500 a month short of paying your mortgage interest + HOA + taxes. You get to deduct $6000 + depreciation. The depreciation would be based on the structure value, maybe another $5000 per year. Depending on your tax rate, that might be worth $2-4,000 per year aftertax.</p>

<p>But that's not the only saving. If you rent somewhere else for much less, the rental of your condo puts you in a better situation. Let's say you lived with your parents for free. Then, you get ~$1400 a month of income that you arent't getting now from the rental. You could be $15-20k better off a year aftertax. With that money, pay off the credit cards. It wouldn't take long. Then the mortgage won't seem bad.</p>

<p>Alternatively, if you were to sell it and cover the shortfall yourself, do it now. Since I suspect you wouldn't be able to cover the shortfall, you can just let it ride for about 3 more years. It is hard to predict exactly how things will unfold. I don't think prices will recover, but you may find the social or credit stigma of a short sale is completely different. Goodness knows what crazy loan modifications might be offered by then. There will be so many short sales by 2010. I dare say that there will be more short sales between now and 2010 than in all prior CA real estate downturns combined.</p>

<p> </p>
 
LOL I like the idea about the wife. That really is your best shot. Don't ruin your credit. You will pay more for everything. Then the chance of finding a wife for dual income later will be ruined.
 
<p>Qwerty - you make a good point. No one is in his shoes and he needs to do what is right for him. That being said, why is it right for him to walk away and ruin his credit? Why isn't overcoming this challenge with hard work not better for him? </p>

<p>Furthermore, even after 45%, he is left with over $2200 a month which should be plenty for a single guy who isn't trying to live above his means. Heck, he might be able to bring home more if he is currently in a 401K and stops contributing for a while. I don't know how much you need but I personally spend less than $1500 a month after rent and I am not even trying to be frugal. </p>
 
<p>"my first instinct would be to list it for sale in Jan for a price slightly above the market, and in no event below. "</p>

<p>Study after study has shown that wishing prices almost always lead to deeper losses. One was just posted in the Register (aggregated from the WSJ) a few weeks ago.</p>

<p>Take it from someone who got religion and sold last month: <strong>you need to have the best place at the best price in order to move it.</strong> Price it right and it will actually sell. And expect low-ball offers. </p>

<p>Because of the commission, you're going to go short. So do it right (if you do it at all).</p>

<p> </p>
 
"Study after study has shown that wishing prices almost always lead to deeper losses. One was just posted in the Register (aggregated from the WSJ) a few weeks ago."

The key words are "almost always." True story: a friend of mine just sold a crappy condo in MV (2 bedr, 1300 sq. ft., freeway noise, 1 car garage for 500K (priced about 50K above the market), it was on the market for 6 months, but finally, along came a buyer who loved their blue-colored walls (go figure). So, my point is: if you have 3 years till the disaster strikes, why not try to get a better price for your place w/t taking a loss.

Anyhow, I think walking is also a good idea...
 
I've been mulling this over, and I think if you made your choices, you should have to live with the consequences of those choices. You will certainly know better next time. I would call all your lenders and see what you can do to restructure the debt, and then embark on an austerity plan to pay it off as soon as possible. The debt proof living website has a good <a href="http://www.cheapskatemonthly.com/member_tools_rdrpdemo.asp">debt repayment calculator </a>to help you figure out how to structure your payments to get you out debt the fastest. You can also get her books from the <a href="http://www.ocpl.org">Orange County Public Library.</a>
 
<a href="http://www.getrichslowly.org/blog/2007/12/03/free-at-last-saying-good-bye-to-20-years-of-debt/">Here's a guy</a> who eliminated $35K of debt, and chronicles it (along with tips) on his blog.
 
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