Diary of an Underwater Home Owner and R2I

[goodtobeback]

My situation seems pretty common these days and it places a significant road block to those of us who want to R2I but are underwater on their mortgages. I have searched through the forum, got valuable information and opinions from wide variety of people but did not find a start to finish kind of feedback from people who have gone through this situation.

So here is my attempt to keep a running journal of my endeavor to solve the getting rid of the mortgage dilemma. I will outline my current situation below and then keep coming back to this forum to post updates as i make progress and until I feel I can safely say the case is closed.


Current Situation:
Purchase price: 400k
Improvements: 30k
Mortgage: 310 + 40 (1st & HELOC)
Zillow Home Value: 333k
Possible Loss: 122k (Assuming 10% closing costs)

Possible Options:

1) Normal Sale. Suck up the losses and move on.
2) Short Sale.
3) Foreclosure a.k.a walk away
4) Rent. Although this doesn't solve the problem will only postpone it.

I will post an update with where i stand on the above 4 options later today.

I would like to keep this thread objective and please avoid posting the morality argument on some of these options. There are already plenty of them out there and lets try to keep this informative to people who are in similar situation as myself.

[goodtobeback]

1) Normal Sale:
In talks with realtors to get the house listed to get a feel for the market. Ideally if i can sell the house for around 330-340k I will suck up the losses and move on. But I am afraid i might have to reduce the price closer to the 300 range to get sellers to bite in this market. Anyways target date of May 1 has been set for listing. So We will find out soon.

2) Short Sale:
Spoke to an attorney 2 days ago who works with the realtor to do the paperwork that needs to be submitted to the bank. He thinks its very hard to get the bank to approve without showing some kind of hardship as in loss of income, divorce etc. It is even harder if we are current on our payments. We have never intentionally defaulted on anything before so finding it very hard to take this step.

3) Foreclosure:
If above 2 options fail this becomes a reality. Although i don't like it, there is no way around it. Have set an appointment with a lawyer who specializes in this area for tomorrow to arm myself with all the facts and consequences. Did plenty of internet search, read blogs etc but need to spend the dough and get some legit advice.

4) Rent:
Least favorable option as I would need to pay down the mortgage to make it viable cash flow vise but still wouldn't have gotten rid of the house. With interest rates nowhere to go but up, i don't see a recovery in housing markets back to the bubble levels and not to mention the head ache of managing a property from India.

[rgk]

Rental market seems to be good.. If you find a good property management company, u don't have to deal with any maintenance issues..

1)

4) Rent:

[2009R2I]

goodtobeback - thanks for starting this thread and sharing the information. I am in NOVA area too and in the similar situation. For now, I am going with the option of renting and want to think about this after an year...do not want to mix this in the already complicated r2i process; I am r2i end of May 2011.

[rgk]

I recently refinanced my home and i can't believe how much paper work is needed along with other checks. So for any new buyer, mortgage is not that easy which improves rental market.

http://money.cnn.com/2011/04/19/real_estate/low_risk_mortgage_denied/index.htm

[goodtobeback]

I would say if you can be cash flow +ve by renting then its a good option. Here is my case for not renting in my scenario:

- Mortgage + property taxes + Home Insurance = $2100
- Approximate rental value = $1900 - $380 = $1520 (Factoring 10% for property mngmt + 10% maintenance/vacancy)
- Net result = down $580/month

If I pay about $75k of principal down then it would probably work out. But as i mentioned before house is still not sold, problem has been postponed for future. Ideally i would like to resolve this and not have to deal with it remotely.

[goodtobeback]

2009R2I - All the best for your r2i. Renting for a year and dealing with it separately after a year is something i hadn't thought about. You just gave me an idea to mull on!

[r2i-mumbai]

I don't see how your potential loss is 122k. Your purchase price + improvements is a sunk cost. If you can bring down your selling costs (by way of fsbo etc) to 10k and you can sell your home for 335k and pay down your debt your cash loss is max 25k (335 - 310 - 40 - 10). You can now check if you want bite the bullet and be done with it and move on.

[samv]

Your selling expenses could be as high as
$5000 + 0.05*(333,000)+3000 =24650 ; assuming you repaired/painted/staged the house, hired expensive RE agent and paid closing costs of the buyer (but no points)

or as low as
$500 + 0.03(333,000)+0 =10490 ; assuming you just cleaned your house, sold FSBO while paying 3% to the buyer's agent and paid nothing towards closing costs of the buyer.

Going by your numbers, if you choose option 3, you might save 310K+40K-333K+selling expense(above)=27K. The question you want to ask yourself is if that amount is worth the hit on your credit history.

Personally, I think you are an excellent candidate for option 2, (but you will have to be careful that your credit does not get dinged.)

[samv]

Rental market seems to be good.. If you find a good property management company, u don't have to deal with any maintenance issues..

Don't put a lot of faith in property management companies. Most people I know who use them are very unhappy with the experience. Not saying that there are no good companies there - just that they are very few!

Also, even if you are using one, you still have to PAY for maintenance, you just don't have to arrange it yourself..