Questions about strategic default
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.
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.
Comments
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!
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!
:shock: Please tell me that's a typo.
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.
of course, I'd advise her to check with an attorney in any case...
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.
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?
Your friend is right, there is money to be made here. As mentioned by another poster, she could buy another condo, then stop making payments on the current one. This will only work if she can qualify for another mortgage on her salary and she would have to buy the new condo before letting the old one go. Yeah she'll have bad credit after it is all said and done, but she'll be a "homeowner" still and won't need good credit for a few years anyway. This will essentially give her a retroactive 50% discount on her original bad decision, at the expense of ruining her credit for a few years. Example assuming 400k current mortgage and 50% price decline:
Now
400k debt and good credit, homeowner
Could be
200k debt (or 400k debt on a bigger place) and bad credit, still a homeowner
She could even rent out the old condo while it is in foreclosure. She might get a year of rent out of it before the bank takes it from her. Her tenant will likely get a cash bonus from the bank for moving expenses as well.
To me, that reduction in debt qualifies as "money to be made". She should check with an attorney and/or CPA on deficiency judgments for the defaulted 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:
I think this is her Plan A. She thinks she has enough of a down payment for a new place. She's quite confident she can rent it out and carry any difference between the mortgage and rent. At this point though, she'll own two properties for the price of two. In other words, she'll still be underwater but not by nearly as much. And the stress of being an accidental landlord. Ira nailed it when he said
While I appreciate the warning, my friend has become quite circumspect about any move she makes and won't do anything without first talking to a lawyer. I'm trying to make a compelling case that home ownership isn't the best move, at the moment, and that cutting one's losses now saves much more in the future.