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Seattle Bubble Forum Archive • View topic - Questions about strategic default

Questions about strategic default

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Questions about strategic default

Postby paco_serpico » Mon Feb 15, 2010 4:15 pm

Hello Everybody!

I have a friend who owns a condo that she bought in 06 or 07 in belltown for waaaaaaaay too much money. I've put the bug in her ear to strategically default, and she's starting to see the benefits. Now she wants to sell it, and then buy another one because she feels if her credit gets destroyed at least she will be locked into another mortgage because real estate is so cheap right now. I've sent her multiple articles touting the benefits of walking away and renting for a couple of years before buying again while the market is more sane, but she won't listen. I've tried showing her the nytimes rent vs. buy calculator but she is still unconvinced. I want to know how to calculate the true cost of ownership vs. renting. I'm not a homeowner so I'm in the dark about that stuff. What else can I use to help convince her that walking away now, nuking the credit for two years, and renting in the mean time is the best solution? Is that even the best solution? Comparable units in her building are now for sale nearly fifty percent below what she bought hers for.
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Re: Questions about strategic default

Postby Markor » Tue Feb 16, 2010 9:23 pm

How could she gain by selling and buying another one? She'd have to sell at 50% off, plus eat transaction costs, just to buy at 50% off. You mean a short sale? If so, how could she qualify for a mortgage for the next one? That would wreck her credit too.

Or do you mean she wants to buy another, then walk away from the current one? That could work, if she can qualify for a second mortgage.

Sounds like she doesn't want to risk not being able to buy again soon, more than she doesn't want to lose money. That's reasonable, to a point. Some people really hate renting. (I'm renting, and it's saving me money, but I would be okay with losing a couple $hundred a month to buy.) Maybe that is the best choice for her. And if some comparable units are down 50% then maybe they are indeed near the bottom, considering that's about double the decline of single-family house prices.

What you could recommend to her is that if she doesn't qualify for another mortgage (on top of her current one), in which case she probably has no choice but to either keep paying on her current place or eventually become a renter, then she stay in her current condo without making payments until the bank kicks her out. Then rent. Possibly she could live there mortgage-free for a year or more. If she still wants to own she could move to Florida and pay cash for a condo with her savings!
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Re: Questions about strategic default

Postby paco_serpico » Sat Feb 20, 2010 8:53 pm

I'm not sure how she would gain by buying another place after either leaving this one, or renting it out at a loss. She's convinced there's money to be made. That's my whole issue right there. I didn't realize the short sale would damage her credit so I'll have to let her know about that.

There is a chance that she wants to be an owner more than a renter, but that is nonsensical to me since it's a condo. I don't get the difference between owning a condo and renting an apartment. She's said that she's fine losing a few hundred each month renting out her place and renting another apartment and trying to ride out the slump. I think her ultimate goal is not to take a bath on this whole thing. I think it's too late and she should cut her losses.

Another twist in the plot is that she wants a bigger place. Her current condo is about 333 square feet. She wants a one bedroom, I think the price of buying one is too much. She thinks otherwise. And around we go. Thanks for the input!
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Re: Questions about strategic default

Postby Lake Hills Renter » Mon Feb 22, 2010 4:46 pm

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Re: Questions about strategic default

Postby ira s » Mon Feb 22, 2010 6:03 pm

Her place is 333 sq ft and she wants something bigger? Who could have imagined?
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Re: Questions about strategic default

Postby paco_serpico » Tue Feb 23, 2010 2:06 am

It's not a typo, unfortunately. Three hundred and thirty three square feet. Who cares how small it is when every one was telling her, "Now is the time to buy!"

The worst part is that she wants a one bedroom so her cat can't pee on her stuff, and keep it confined to the living room.
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Re: Questions about strategic default

Postby deejayoh » Tue Feb 23, 2010 1:16 pm

Why not a short sale? I think there is less impact on one's credit rating than a foreclosure

of course, I'd advise her to check with an attorney in any case...
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Re: Questions about strategic default

Postby paco_serpico » Tue Feb 23, 2010 3:01 pm

I thought a short sale would be all right. Markor mentioned that it can wreck a credit score ruining a chance of being able to buy again after the short sale. Which I think strengthens a case for a strategic default. In the short sale she scenario she's only out the money she spent and doesn't get the benefit of months without a mortgage payment. She's very cautious now so her first action is to consult with an attorney.
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Re: Questions about strategic default

Postby Civil Servant » Wed Feb 24, 2010 9:29 am

Paco, you are a nice friend to do this research. But you write that your pal is convinced that there's money to be made. You might not be able to talk her out of this and you might drive yourself crazy trying. In my experience a lot of people -- some of them are my friends -- still believe that real estate is de facto a good investment, and that if at any given moment it seems not to be it's because they haven't figured it out yet, there's some secret yet to be discovered. (Or, alternatively: "The market will bounce right back!") I've given up trying to convince them otherwise because I don't want to give myself an aneurysm. Logic, statistics, and common sense may not prevail for you.
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Re: Questions about strategic default

Postby ira s » Wed Feb 24, 2010 10:17 am

Civil Servant has a good point, and that's been my experience as well, that some people already have their minds made up and there's just nothing you can do to change that, despite all the logic and common sense in the world.
1. It's probably going to be more than a few hundred dollar per month difference between her current mortgage payment and what she could rent the place out for. For example, if she paid 400,000 and actually put down 20%, her monthly payments might be in the neighborhood of 2100-2200 per month, but if that unit is now worth half of what it was, she'd probably only bring in 800 per month in rent.
2. Even if it were a decent time to buy, even if one is convinced that prices have bottomed, she's already made this colossal mistake by buying a couple of years ago, so buying another unit and renting out hers seems to be like tightening the albatross around one's neck. It's unlikely that we're going to see significant price increases in the next couple of years. Sure, she may feel like a failure seeing the value of her condo go down by half. But what are her choices? Keep it and keep living in it, but it's too small ( ya think?) Keep it and rent it out at a 1300 per month loss while renting something else. If she has all kinds of money, maybe. Prices will likely go back up eventually. But she might be a grandmother by then. Walk away, and rent something larger and less expensive not in Belltown. That'd be the thing I'd be looking at pursuing after talking to an attorney or someone who was an expert in strategic defaults.
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Re: Questions about strategic default

Postby paco_serpico » Wed Feb 24, 2010 6:39 pm

Civil Servant is right, she's not budging on her position. Not that I'm trying to push her too hard. I figured if I was making a 50k mistake and someone showed me that I can keep my losses at only 50k then I'd be skeptical, then if the numbers worked, grateful. Ultimately, it's her decision.

She seems convinced that she can afford the loss of renting out the current unit and buying another. I don't know how much money she makes but I bet it's not even the median for King county. So I don't know how she figures she can afford one and a half mortgages, even for another property at like 150k.

I agree with you Ira, her choices aren't great. That's what brought me here in the first place. Is there anything I'm missing as far as data, or options,that can elucidate with absolute clarity the fallacy of purchasing more real estate?
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Re: Questions about strategic default

Postby SummitSeeker » Thu Feb 25, 2010 2:13 pm

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Re: Questions about strategic default

Postby explorer » Fri Feb 26, 2010 12:35 pm

Summit Seeker's plan seems to have a major variable, that could be a fatal flaw, in the part about renting out the first condo.

First, you have to assume someone is going to want to rent something like that for even $800 a month. If you can pass that hurdle, you assume someone is going to not think of the obvious--This is going to be a forclosure in a year. Some deals are too good to be true.

For myself, I avoid like the plague, condos to rent that even have a hint of that sceanario. Counting on the naive to rent something like that is not a winning strategy right now. There are a lot of decent choices out there, and rents seem to be dropping for much better places than a crackerbox condo in Belltown.

Sometimes one has to take responsiblity and the resultant bath for their own mistakes and greed. Just another factor to consider. I would stop advising that friend about what to do, because if it works out badly, you wll be blamed. :evil:
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Re: Questions about strategic default

Postby SummitSeeker » Fri Feb 26, 2010 1:06 pm

Renting out the old place isn't necessary for this to work, it would just be extra gravy. The major hurdle will be qualifying for a second mortgage while still paying the first.
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Re: Questions about strategic default

Postby paco_serpico » Fri Feb 26, 2010 6:09 pm

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