Way underwater - rent it?

Rehabbing, Fix and Flip, Rental Properties
1

I was on these forums years ago (AFTER I bought a house in 2005 in Arizona!!) :banghead . Long story short, I never started investing and went a different route instead. I am back hoping to get educated, and hope you all can pass a little wisdom onto me…I have a huge decision to make and don’t want to make the wrong one.

My husband bought our house in 2005 for $225k. :banghead It is in his name only. We owe 200k. House is worth 110-120k. With those numbers, we’re 80k or so underwater. We also put 20k into it for repairs/remodel. So looking at the whole picture, with what we have into the house (down payment/repairs) we are “into” the house 245k. That puts us at 130k or so underwater (not including realtor costs if we were able to sell.)

We are considering our options (rent house out, lease option, short sale, forclose) The one I want to ask you all about is: We are considering buying a second house in my name only and renting this one out. I would attempt to buy this second house in about 6 months after we do some work to our debt/income ratio (I have a 700+ credit score) New house would be in my name only. Would aim for a 150k house, and be going for about a $1000 payment on it. We would move into new house and rent current one out. We want to move to be closer to our daughters school among many other reasons. Mortgage on current house is 1423. Rents are about 900. OUCH! We are considering paying the “new house” mortgage of 1000 and the negative monthly flow on the old house of 523. That puts us at 1523. Not a great place to be, but doable. Maybe when current house has regained some value (10 years?) we could lease option it (way too underwater now)

I know we would possibly have to deal with vacancy, unpaid rent, bad tenants, evictions etc in addition to the neg cash flow. Not what I want and it would be a horrible investment, but it isn’t an investment. It is just trying to save our credit without being stuck in this house for 20 years.

And if it got bad down the road (nobody willing to rent it, cant keep up with payments) we would have to go short sale/forclose route. But it would only ruin hubbys credit. We could still use mine. Worst case scenario… no wait, worst case is bankruptcy and 10 years bad credit.

We really don’t want to go short sale/forclosure be because we would loose the down payment/upgrades we have into the house to a tune of 45k., but we have gotten ourselves into quite a mess. Would it be better to take the loss of what is into the house and short sale, or take the risk of renting it out and waiting for enough appreciation to get out of it?

2

You’re looking at the BEST case scenario when you say you’ll have a negative monthly cash flow of $523 on the old house. Just one month of vacancy will bump that figure to nearly $650/month if you spread out that $1423 mortgage payment over 12 months to determine your monthly cash flow. Then anything that goes wrong bumps that amount up more. Over the 10 yr period that you listed for the market to come back, you will pay at least $62,760 out of your pocket with the negative cash flow. I think you would find yourself much more negative at that time if you let everything play out for 10 yrs.
It may be hard to bring yourself to short sale the house, but you have to consider all the money you KNOW you’ll be dumping into it each month to keep it afloat. In your example, you’re hoping for price appreciation.
His credit will take a hit and there’s also a possibility of tax consequences too.

3

Sorry to be the bearer of bad news but you have already lost that $130k. Well to be more precise you’ve lost $45k, plus all the other housing and mortgage expenses you’ve incurred until now (minus the rental expenses you would have other wise had, which is definitely lower so you will have lost money). The other ~85k is a liability that may end up with your lender depending on the decisions you make and the laws in your area and how they pertain to your situation.

Waiting 10 years will not magically recover your loss; assuming that is all it takes as the downturn is not over and historically prices are extremely slow to recover from bubbles. During all that time you will have interest expenses, principle expenses, housing related expenses, and rental expenses. Even if you had paid all cash you would still be taking on a loss as there would be lost opportunity costs on the money tied up in the house.

In addition renting the place out does not put you underwater by only $523 per month. Its more like $973 per month as you will have rental operating expenses (look up the 50% rule). At that rate you’ll be spending $12,000, plus lost opportunity costs, per year holding onto the place. That is at least $120,000, maybe even $200,000 with lost opportunity costs, coming out of your pocket during the 10 years time you think you will have to wait for the price to recover.

Also are you sure about that $900 rental rate? Tons of people have gone into Arizona looking to take advantage of the crash in prices and most plan to rent the properties they acquire in the interim. That is a lot of competition, many with deep pockets able to tolerate bigger rent reductions or rental concessions. Rental reductions and concessions are things you will need to take into account to figure out your potential rental income. Most of those investors will also be looking to dump those properties at some time, whether by plan or through failure. That means future pricing pressure on local properties.

The only way your plan works is if the economy goes into hyperinflation and you are save by skyrocketing rents and values. While many believe this will happen, its still only one possible outcome. Japan has spent the last 20 years in deflation and property values have yet to recover. The other model similar to what is happening now, our Great Depression, had a similar pattern to Japan.

From your post it sounds like you are thinking of purchasing a much cheaper and better property, move there, and leave this property on life support until such a time you strategically default, get lucky, or feel that you can now break even just because the prices at the time matches your purchase price. With that being the case, no experience as a landlord, and with no apparent love of the property in question I think the chances of this property going into foreclosure or a short sale is almost guaranteed. If that is to be the case then you are better off letting that happen now rather than later, so as to spare yourself the holding expenses and get the recovering over with more quickly. Unless you really are set on owning, at least in the next 7 years, you also may want to consider renting as it likely remains the cheapest option and will help rebuild your family balance sheet; furthermore the drop is likely not over with yet.

By the way laws may differ. However if you were married at the time the first house was purchased you may also be responsible for the mortgage. You not being on the note does not matter. Legally, at least in most states that I know of, debt incurred in marriage is share by both partners no matter if only one partner signed. In practice you could hide assuming the bank does not know who you are or that your husband is married to you, but its something to consider. Also if you only have one mortgage on the property, that mortgage is the purchase mortgage, and depending on your state law you may not be responsible for any deficiency in a foreclosure. Something to consider. Assuming you decide your best option is to walk away consult a local attorney to help you in the process.

4

excitingname,
You are getting great advice from the previous posters. Always have that “worst possible case” solution in mind.

Just another thought… if you could SWAP your house, and house debt, for another house near daughter’s school…

Maybe an ad in the school newsletter, or on a bulletin board. Or a Pennysaver Newspaper ad. Craig’s List!

I have had great luck over the years advertising for WHAT I NEED. There is often someone out there, with exactly that item, just sitting on their hands.

You can also look at “For Sale By Owner” ads near the school. A Real Estate Attorney (and advice from this site) can help you equalize the debt/equities and do the paperwork.

In a market like Arizona’s, you have to be creative in order to get what you want. Don’t give up. You may find someone who is VERY negotiable near the school. And you may also have to pull the plug on that house if that becomes the only option.

Furnishedowner

5

YOU ALL ARE AWESOME!!! Thank everyone for your responses!

FURNISHEDOWNUNDER - That would be an awesome creative solution. I could widen my area I would accept and maybe, just maybe find someone. I would still be stuck with all the negative equity, but would be in a house that is priced SOMEWHERE along the bottom and in 5 years might show some appreciation. And credit would stay intact. We would still be stuck in a house, but if we could get the house we WANT to be in for the next 20 years, well hot damn, that could work. How would that work out being that I am underwater, IF they are not? Interesting, that’ll take some thought. Ok, all, tally is 3 votes for default on this house if needed.
Thank you for your help!

SAMMYDY-
We are a non-recourse state. Don’t know if that applies to second mtg also (no line of credit or anything, just 80/20 loan to get the down payment financed) Think Obama has a forgiveness on the tax for the difference between the amount owed and the amount the bank gets.

Yeah, even if we don’t go as bad as the 50% expense rule for rentals, there are still those expenses that will come up, especially over 10 years. And at the 10 years, if that is enough, we will have shelled out a LOT of cash (more than we are into it with the down/fixups) Why string it along. Only one reason is the credit. And we don’t know how long it really, truly, stays on the credit report, and how many points it will knock his 740 score!

Pretty sure on that 900 rate but would absolutely research it fully if I were to really think of going that route. It used to be 1100 steady, but has dropped.

I let fear of not being able to buy a house, ever, even in AZ prod me to move to AZ and buy a house. Bad mistake, and I won’t make another by wishing for hyperinflation. Japans story is pretty scary. 20 years?! Nobody knows of course what will happen here. or how long to recover. Probably it will be another 5 years, and my 10 years may be low. It could be 15 or 20. Thats the problem. Nobody knows and nobody can accurately predict. 10-20 years of being a forced landlord sucks.

The new property would be comparable in size, but newer and in a better neighborhood, and with any luck, a pool. Somewhere I could stay for the long haul. I don’t love my neighborhood, but i do have great neighbors, and we overhauled the inside ourselves. I personally refloored the house, put tile countertops in the kitchen. We’ve done a lot more.

I would consider renting. The main thing is what is best financially, credit wise, and how we can not live in this neighborhood for 20 years.

I don’t know how it looks to lenders (if hubby has a house and if I have to “claim” it or not) but I do know the house is not on my credit report, because I am not on the loan. Lots of questions I’d have to get answered to make sure I don’t ruin his credit and get stuck with bills from this house.
Thank you for your help!

JUSTIN0419
Yeah, 62000 in 10 years. I am out of pocket 45k now (with the down and the dollars into the house) 10 years of landlording to maybe come even. IF the house were worth 245000 in 10 years, the credit would be saved but wow. And of course, the 10 years could be way off. It could be 20.
Thank you for your help!

EVERYONE
IF we can’t do a trade/short sale/deed in lieu and have to forclose, does anyone know how long forclosure REALLY stays on credit report? I have heard anywhere from 2-7 years. Also, what kind of hit will the credit score take? I have heard anywhere from 100-250 points. Guess that will vary based on current credit and however they calculate it.

6

I had a situation several years back now that ended up where I was about 4 months late on a mortgage and only about 2 weeks from foreclosure. My credit took about a 100 point hit from that. I ended up paying off a lot of credit card debt (some were maxxed out) and my credit rebounded 100 points to make the net result a wash. So you may be able to offset the damage by fixing some of the rest of your financial picture.
Remember, FICO is the old standard that’s been in place for years. Now there’s the other score. I think it’s Vanguard from Experian. Not completely sure, but there is a new scale.

7

Hi,

 I think the estimated period here in Arizona to regain equity lost during the last three years is 2030 to 2035 or so! For a $120k home to recover a 50% loss it would take 10 years at 10% appreciation rate, there estimating Arizona will run about 4% a year after we finally hit bottom, and we are still waiting to see what ALT -A loans defaulting do to our market.

I think I would short sale, the hit to your credit is only a couple of years and your back in good shape without cost, Arizona is a non - recourse state for lenders so there is no coming back after you and in some cases state and federal taxes for 1099 gains is being waived.

Good luck,

            GR
8

What I would suggest is, rent the current house. Then instead of buying another house to live in, rent one instead.

If you rent your current house for $900 and your mortgage is $1423, you will be in the negative of $523. Let’s say the rental property you’re moving into will cost you $1000 (hopefully less) so that’s a total of $1,523 in the red.

You then use your good credit and some cash on hand to buy an investment property that can yield you enough cash flow to cover the $1,523. Let’s say you find a 4 family building where you can rent each unit for $500. That’s $2,000 in rental income from that building enough to cover the costs on the other two property.

Good luck.

9

joolkano,

I think thats some very wishful thinking.

If there’s such a building that $2,000 in rent can net $1,523 in monthly profit, let me know where it is.
If your monthly profit was half that, it would be a great deal, right?

10

Hi HPM,

I agree, even if they can get half that, it will still reduce the amount of money they will be in the red. What I am trying to get across is, she should leverage her good credit to help them accomplish their overall goal.

Also, I just sold a 2 family house in Cleveland on owner financing for $500 down, $300 a month on land contract, 15 year term, 10% interest. Each unit is 2 bedrooms that would rent for $450-$500 per month. My buyer will live in one unit and rent out the other unit. So the deals are out there.

My company buys REO properties nationwide. Contact me sometime I may have homes in your area that you may be interested in.

Regards.

11

You don’t use a good investment to prop up a bad one. That is a horrible business decision. If they can get such a profitable rental it should stand on its own, not support a financial black hole.

12

Thanks for the thought joolkano, but as I have never been a landlord, and have zero cash flow, maxed credit cards, current business income is in half, and am negative on available time for another business, FOR ME, buying any kind of investment property is not an option right now.

So in the past couple months we have seen a massive decline in our business. Income is about half what it was last year. Oh yay, I guess now we can “prove” hardship. That sucks! Things are really rough right now.

ON here again looking to see how to go about doing a short sale. Then we move into a cheaper place. And probably 5 years from now we will be financially ready to buy again… Gotta pay down debt, build our business back up, and save a down pymt again. #!#! This time of my life sucks! Cant wait until we dig out of this hole! Here’s to the light at the end way down there at the end of the tunnel… I’m a comin outta this mess!

Thank you all for your words of wisdom!

13

I can definitely help you understand the short sale process as well as the ramifications. I am an agent/investor here in Phoenix and short sales happen to be my specialty. Shoot me an email and we can start the communication there.

14

Hi~
I feel your pain and am wondering what you have decided to do…I am in a similar situation and am looking for advice too. It has been such a difficult time for our family trying to work this out, however, I am encouraged by all the advice information you have received. There seems to be some good people here willing to share their helpful knowledge for those of us who are not so savvy…yet. I wish you the best. “This too shall pass”. g

15

I think you have options with your current property. The ultimate goal is to lower your monthly housing expense. Your secondary goal is to move to a less expensive house.

What if you lower the monthly cost of your current house? You can afford your current house today, but you say the high payment makes your budget a little tight.

Call your lender’s customer service department and ask about a loan modification. Because you are so far underwater, the lender could reduce your principal balance, lower your interest rate, recast your loan as a 40 year (or longer) loan, or some combination of all three to make the property more affordable and get your debt to income ratio below 41%.

The second thing you can do to lower your monthly payment is to appeal your property tax assessment. Since home values have fallen so dramatically in the past couple of years, you should see that reflected in a lower property tax assessment., If you don’t, then appeal the assessor’s opinion of the value of your home.

Lastly, to purchase a second home, you will need a 20% (or higher) downpayment. No more 80/20 piggyback loans. Lender’s want your money out of your pocket for the downpayment. If you don’t have $30K cash on hand for a downpayment, then you will have to go the owner financing route.

BTW, If you got 100% financing for your home purchase, then you are not out of pocket the downpayment money, unless you have already paid off the second mortgage. Is that what happened?

16

I am in the same boat, only not as bad as you.

My house was purchased for 110k. Total investment today is at $140k, plus a lot of sweat equity. Cash value today is in the 70’s. Payment $950, rental value $750. I owe 103k.

I wanted to buy a duplex. Payment $1350, each side rents for $950. I live there for $400, and my old place was $950. I am also saving $200/month in gas.

My decision was to rent it. I found a very good deal on a duplex in the area I wanted to live in and rent one side while living in the other. I understand the comment about using a good investment to support a bad one - but I had to make a decision. If I sell I use my down payment money to pay down the loan at closing and can’t take advantage of an opportunity. I bought it, and improved my cash flow situation about $650/month. I am now saving up to whittle away at the other loan (at a higher interest rate) and then refi when it’s at 80% LTV. This gets the bad investment behind me and leaves me with a rental property with some positive cash flow. At least then I can get on with my life.