Being in real estate and finance for over 30 year and having a degree and background in personal development makes it difficult to confront these kinds of choices when offering advice to clients I’ve known and respected for a long time.
By all account responsible & caring people, this older couple is facing a dilemma that will impact their life in ways they cannot anticipate completely.
That is the purpose of this writing and my request to you, my readers. Please offer your advice and comment on impacts you see they should consider before making their decision.
This couple in their late 50’s, have raised 3 children all of whom live in Silicon Valley with their families. They have a modest home in a safe and quiet neighborhood that has held its value well in these turbulent times. Their credit is excellent, they have little credit card debt and most of their savings has been consumed during the recent economic downturn through lack of work.
In the high times when real estate appreciating was exciting and financing was freely available to even those with poor qualifications, they purchased a 6 month old property in California and put it up for rent with a reputable agency they still have and have developed a close relationship with. Tenants moved in and are still there today paying the same rent since the beginning.
Expenses exceed income for this couple and all that can be cut has been they tell me and now it’s time for the decision to stop making payments they can no longer afford. Since the rent does not cover their expense and the debt on this property is 1/3 again as much as the value of the property, the bleeding must stop. By all calculations & the best of estimates it will be years before the value returns to a level our couple could sell just to break even, losing even more along the way.
So I ask you the question, if a short sale to the current tenants doesn’t work, should they simply stop making payments on this property and turn in their keys?
Do you see other options for them to consider?
If they do this, what impacts should they expect now and in their future?
January 23rd, 2009 at 9:39 am
One option is to increase the rent of the property. Another option is to work with the bank. I believe that if they approach the bank, they would be willing to work with them given the fact that most banks do not want more foreclosed homes on their books. They can ask the bank for a modification of the mortgage. They should also seek God’s guidance on the decisions that they make.
January 26th, 2009 at 8:52 am
What we don’t know is how much they put down when they bought the home or what the current rent might be if re-rented. With home prices falling, rents have risen.
They might talk to the bank about a few things, including deed in leiu of foreclosure or a workout. I do not know if a bank will do a short sale when other property is owned. It would have to believe that there was no equity in the Silicon Valley home, I believe.
Another option is to see if the current renters would like to buy the property, find out what “fair market value” would be and ask the bank to consider a short payoff (do a short sale) if the tenants want to purchase it.
It all begins by communicating with the bank. They need to do that ASAP to see what the options might be.
If they have a shortsale or a foreclosure, it will trash their credit for seven years. They will likely have a host of unforeseen consequences, possibly including canceled credit cards or higher interest rates on credit cards, higher costs on insurance (because there is a correllation between poor credit and more claims made), and who knows what else. At one time there would also be extra taxes on any forgiven debt, but that may be non-applicable right now.
My biggest concern for them is that if they go down that path, it could result in them losing the home they live in now.
Best wishes for a positive outcome for them!