Monday, October 13, 2008

Townhouse Status

[Photo: claybennett.com]

So, I’m finally getting a handle on the whole townhouse issue. Last week I talked to a couple of advisers and got all the relevant info sorted out. The bottom line is that I can start the sales process at a moment’s notice, depending on how things shake out with my job, the economy and every other ball that is still up in the air. This is an awesome development and has allowed me to breathe a little easier this week. Here is a summary of my thought process on this whole issue:

As I mentioned in an ealier post, the options on the table are the following: (1) rent; (2) sell; (3) short sale; (4) deed in lieu; or (5) foreclose. At this point, it is pretty clear that it makes no sense to rent the townhouse, unless I am prepared to kick in a not-insubstantial amount to cover the mortgage every month. This wouldn’t be a problem if I actually expected to be able to sell the townhouse for some kind of profit in a couple of years. However, that’s just not realistic. Selling the house outright is probably not going to work either given the state of the market and the fact that even if I were to find a real buyer they might not be able to secure financing (banks are basically turning down people with great credit due to the credit crunch).

One option that I’ve already discounted is to just walk away and let the banks foreclose. It’s something more and more people are doing the longer this housing crisis continues. On my end, I am the perfect candidate for walking away. As I’ve mentioned before, I paid literally nothing, nada, 0, zip, to buy this place. The mortgage was fully financed and the seller paid all closing costs. All I did was put my stuff in a moving van and unload when I got there. As for the monthly mortgage expenses, let’s just say that after getting a check from my tenant and annualizing my home interest tax deduction I’m paying a ton less than what my peers pay for housing. Put it another way, since I moved into my townhouse I am actually SPENDING LESS $ on housing than anyone I know. Bottom line, I don’t feel as if I have anything invested in this house so why shouldn’t I just walk away outright?

The answer is it would be the worst possible decision. Aside from all the moral qualms that walking away from a mortgage elicits, anyone who does walk away may face a ton of tax liability, not to mention the fact that the banks may come after you to get their money back. This is stuff that I just do NOT want to deal with in any way shape or form.

Which basically leaves me with two viable options on the table: a short sale or finalizing a deed in lieu. There are some drawback to both options, but nothing insurmountable or horrendous.

SUMMING IT ALL UP
So, to sum it all up, I will most likely put the house up for sale first and see if I get any bites. If not, I will just negotiate a short sale or, if that fails, a deed in lieu. Not the most simple process in the world. But hey, there is nothing wrong with facing some complexity in order to secure long-term simplicity.

16 comments:

-jd said...

Can you explain a deed in lieu to me? I have a similar situation...house I don't live in. It's been for sale...running out of options. Thanks Jack.

Jack said...

Basically, when all else fails, you negotiate with your bank to basically hand over the house to them directly. In theory, it eliminates any liability you may have with them. Not sure how that works when its not a primary residence. I think it's the same concept, but there might be some additional steps to take before they accept it.

J

Jade of the Jungle said...

Whatever you do, make sure you get a decent real estate lawyer. There are some real shabby operators out there...eating tea and crumpets all day and doing nothing but surf the internet....

Fifty-One-Fifty said...

Are you sure you can't rent it out long enough to wait for the market to come back? Raise rent? Change renters?

The market will come back and probably sooner than any pundit has said.

Why ruin your credit over all of this, if you can avoid it? You may, horrible as it sounds, need your credit sometime in the next seven years?

Anyway, I know nothing about these things, simply asking questions.

Elizabeth said...

I hope it all works out for you.

a square peg said...

I don't see what it would hurt to put it on the market. You don't pay a realtor unless it sells, and if it doesn't you still have your other options as your "freedom" date approaches. You might be surprised; if you price it right, it could sell. Especially since you're considering just turning it over to the bank (in which case you would get nothing from it money-wise). If you price it just to pay off your mortgage and the realtor's commission, you'd be no worse off, and like fifty-one-fifty said, your credit would be secure for the future. No sense burning all your bridges...

btw, i'm not really updating my rich interior world blog anymore so you might want to take it off your bloglist.

Jack said...

Jade,

I think I know just the one...well, the shabby operator kind.

Fifty,

Well, I could rent it, but only if I wanted to shell out anywhere from 13K to 16K a year. As for credit, my current credit rating is 783 and in a worse-case scenario it may drop to 620 or so for a couple of years, which is average for most people anyways.

Elizabeth,

It's all good. Just part of the process. Either I continue to be a slave at work for the rest of my life, or focus on the best, most efficient way to find freedom.

LivitLuvit said...

Sounds like calm and rational reasoning. Hopefully you'll get a bite and someone will just snap it up, and you won't even have to worry about it...

anita said...

hmm, if the cost of living there is lower than most, couldn't you just keep it and continue to live there for awhile until the market comes back up? sorry, but as someone who earns their living mainly off real estate investments...that's how i think. also..i have issues with borrowing money and not paying it back, via foreclosure, short sale, or whatever. i know a lot of people do it, but if you're looking for a more authentic life, you might want to think about it....just some thoughts, take 'em or leave 'em.

Anonymous said...

Give it all up and be like him:
http://www.youtube.com/1mustruggle

Jill said...

I am glad you decided not to foreclose. That easy-out is a hard pill to swallow for those of us who own no property but still feel the painful ripple effects on the economy because too many people let their greed get away with them.

Good luck in selling!

Jack said...

A square peg,

That is precisely what I am doing! Definitely want to give a sale a chance, so will start with that. And duly noted on the blog status. Already made the change.

Livitluvit,

Let's hope you are right:)

Anita,

The problem is that I could not really do that if the idea is to leave and do something totally different, without wasting too much cash. I would be shelling out more than I would like if I did that.

Heather's Moving Castle said...

Gee whiz! I'd like to know how you came to all these conclusions? It would make an interesting book. You'd have to change a lot of names. lol.

How does a person decide to be a lawyer in the first place? No easy task. Then decide otherwise. And then have the guts to find a way out. Most ppl are too afraid of change or of disappointing mom and dad.

Classic story! Or is this a common situation now-a-days?

~Heather in Iowa

Jack said...

Anonymous,

Interesting videos...Hey, why not?!

Jill,

I am totally with you. Just a dreadful thing to do. BTW, do you have an email address? Bicycle-related stuff is afoot and would love some guidance.

Heather,

It's going to take me a while to put it down on paper. Honestly, if any of my friends had come to me over a year ago and told me they were doing what I was doing, I would be blow away. Not sure if anyone else is contemplating the same thing.

Bodhisattva said...

You - and millions more similarly situated - may be in luck regarding "phantom income" from debt forgiveness if you manage to avoid any mortgage deficiency by shortsale, Chapter 7, etc. See

http://www.taxgirl.com/foreclosures-debt-forgiveness-and-mortgage-losses-explained/ (see IRS Publ. referenced at the end) FYI - a fully underwater junior lienholder (your description suggests that your seller may have taken back part of the purchase price as a junior mortgage)can be "lien-stripped" or crammed down in a Chapter 13 case (see Lamm v Investor's Thrift - 9th Cir. google for the full cite). Chapter 13, unfortunately, would keep you in bondage. Good luck on your chautauqua. My own also has begun. Consider "being of service" to those truly in need of your special skill sets. A lifetime of moving money around for people who have too much anyways (the only type of person who can afford your firm's services) will lead one to the very conclusions you have reached. You might find true worth and self meaning in helping the helpless.

Jack said...

Bodhisattva,

Thanks for the info. Already discussed this with a tax attorney and a real estate professional. Definitely not thinking Chapter 13 though. All is doable. Thanks again.