Profile picture for bobafetts3

Best Option - Short Sell, or wait?

My (now) wife purchased a condo back in 2005 for 267k, and it is now worth maybe 100-110k. I'm not on the title to the condo (we weren't married at the time), but she had to have her dad cosign so he is on the title as well. At the time we put a 30k downpayment on the place, but with it being so far underwater it doesn't seem worth trying to wait for it to come back.
We both work far away from where we live (50 miles for her and 70 miles for me 1 way). I got my job after we lived there for a few years and she has always had the 50 mile 1 way commute. Both of us would like to move someplace that is closer to work, but with owning a condo we can't get out from under it doesn't seem possible.
I'm thinking it would be the right thing to short sell the condo and go rent someplace for the next few years while we try and save up again for a down payment. Or is it just better to stick it out until we've got enough saved up for a new place first, then rent out the condo or sell it then?
  • October 18 2011 - Mission Grove
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Answers (29)

Profile picture for the_country_hick
A short sale of foreclosure will mean you hurt dad's credit and put him on the hook for paying that mortgage off.
  • October 18 2011
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Profile picture for bobafetts3
I would understand that if I wasn't in California. From my understanding it is a non-recourse state. So it would hurt my wife and her dad's credit, but the only thing the bank can take back is the house itself. We also are paying PMI, so I don't think the bank will be out anything since we are paying for the insurance anyway.
  • October 18 2011
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bobafetts3.

You asked should we stay or should we go?
Short sales are for those who can not afford a place. Short sales are not for those who just decide to go.  Just because you are paying PMI does not mean the bank or you or your wife or your father in law will not be impacted.  In fact you and everyone around you  and those within a 1/2 mile away may feel the impact.  Yes California is a non recourse state. However it does not mean Your wife and your father in law will not have a major impact on their credit over the next couple of years. 
During the short sale the financials will be asked for from the sellers to the lender.  This means if lets say you have over 5000 in the bank combined with dad, you may not qualify.  Falsifying anything is Bank Fraud.  Should you walk away? That is for you to decide. When you do decide, I sure hope you, wife and Dad discuss it and think about the impact.  Foreclosure impacts you for 7 years plus.  I know it is not an easy decision.  southern california short sales dot org may give you some input as well. 
  • October 18 2011
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Profile picture for bobafetts3
I didn't think there was a way to get away scott free. I know a short sale hurts one's credit on average between 2-3 years. The thought of waiting around for 10+ years for the condo to come back anywhere near to what we paid for it is very difficult to contemplate.
Like I stated we can make the mortgage payments, but we don't really have any way of saving money (Student Loan debt, auto maintenance etc - if you calculate it costs an average of 55 cents per mile driven we pay nearly 40k a year).
I'm not saying we should be bailed out (like the banks), but there has to be a better option then having to suffer the inflated 160k loss. We only bought a place we could afford at the time, so I don't think we qualify for any of the programs the government has put out. I've had multiple neighbors that put 0 down on the condo and have short sold and walked away. To me it seems like people that got something outside their price range get benefited, while those that thought the decision though get penalized.
It seems like it is almost the best option to just walk away and let the bank have the property back. Again, from my understanding, the contact between us and the bank is for only the property. There is no moral obligation, although it may seem like there is one. If we don't pay, they take the property back, and that is all.
  • October 18 2011
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Profile picture for shasta_steve

Bobafetts as long as your loan or loans were purchase money and you did not refinance then you will have no problems with the banks or taxes. Ignore those who say you will.   It will affect your ability to buy a new house for a few years. 

Even if you did refinance and have only one loan you have little to worry about from the bank because they would have to sue you before they foreclosed and they never do that.  The PMI only covers the amount between what you put down and 20% of the original loan. 

There are not hard and fast rules about how short sales are handled in California.  Hardships are not always required or they can be pretty minor things.  My personal opinion is short sales are for the most part another real estate scam brought to us by the same people who have been doing it for years.  Atleast in my area they are not better for neighborhood as they are almost always priced way below market value to drive business.  In the end a non-recourse short sale and a non-recourse foreclosure are not a whole lot different as to what will happen.You may be able to buy a little sooner with a short sale but if you end up going FHA they are the same for short or foreclosure. 

If I were you I would have a long talk with my father in-law before I did anything though.  He may have nothing to worry about as far as the bank coming after him, he is going to take a major credit hit.   I could see where that might not make him too happy


  • October 18 2011
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Profile picture for bobafetts3
I can see your point there as well. I would have taken his name off the title if we could have when we got married, but that would have required us to fork over the difference in the loan which would have been paying down the balance and just throwing out the money.
I'll have to get everyone together and talk about what to do. I was just looking for some advice on what was a good idea to start with. My main concern was for his credit as well, since I wouldn't want to take the hit if I was planning on moving in the next few years myself.
Like I said, I'm just looking for information: good or bad.
  • October 18 2011
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Shasta - what do you think foreclosures do to neighborhood values? Short sales may sell for a little less than other homes...but foreclosures sell for a lot less. Also you can get any loan faster after a short sale rather than a foreclosure.
  • October 19 2011
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I think you need to know that if you walk away from the property and the bank forecloses not only will you hurt your credit you will owe the tax man along with your Father-in-law. Walking away is never good. Have you check into the rents in your area? Sometimes one can rent the home out for the same amount as the mortgage payment. You will have someone else paying your mortgage until values come back up and in California there is a good chance they will come up again.
  • October 19 2011
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Profile picture for shasta_steve
@Minna 

I don't know what your market is like but around here it is definately not the case.  Short sales around here usually sell for less than foreclosures because of how they are marketed and how non-recourse loans operate.  Around here we have door to door agents who go around telling about how great life would be if you just let them short sale your property.  Mostly with misinformation that is so common in your industry.  

Here is how it works around here.   An agent lists a short sale for 10-20% under market value and by market I mean what REO's are listed for. Now of course the bank will most likely not sell the house for that price but they get many buyers to put bids in.  If you are a first time buyer are you going to buy the REO for 250k or are you going to bid on an identical short sale listed for 220k?

What we now have here are a bunch of "strategic" short sales going on.  Because California is non-recourse banks will often gamble that they are better off with just a short sale than a foreclosure.  This is all RE industry driven so they can make another profit off what they have already distroyed.  The kicker is they have convinced themselves that they are actually doing the right thing but really all they are doing is what is right for their bottom line.  Not to mention  the amount of RE fraud that is still going on with both short sales and foreclosures. 

As far as being able to buy quicker that is just another RE industry sales pich that is pretty far from the truth.  The truth is, if your credit is otherwise ok, you can buy conventionally 2 years after a short sale.  What you never mention is you need 20% down to do that. Now if someone is able to save 20% in two years, do you really believe they had a hardship?  You have to wait 5 years for less than 20% and 7 years if you have a foreclosure.  What you agents never mention is FHA allows you to purchase after 3 years with aa short sale or foreclosure.  VA is only two either way. 
  • October 19 2011
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Profile picture for shasta_steve
@Patricia

I don't even know where to start with your post as in my opinion you should not even have a license.   How come agents are not supposed to give legal or financial advice and they still do it.   Worse yet is when it is so wrong it is unbelieveable.  I know a RE license is a joke but really I would love to see agents held accountable for statements like yours.  

You are in California so you should know some things about California law.  First off if the original posters loan is non-recourse and it almost certainly is, neither he nor is father in-law will own any money to the bank or any income taxes to the IRS.  In a non-recourse loan the property secures the debt.  If the bank forecloses then the bank gets the property end of story. Since there is no money to foregive there are not income taxes due the IRS and this will not change even if the Mortgage Forgiveness Act were to expire.  Every state has it's own rules and if you want to be an agent in California then you should have a clue about ours.  That is unless you are just using scare tactics to drum up business.   
  • October 19 2011
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Profile picture for mr.longbeach
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  • October 19 2011
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Recent short sale legislation now helps sellers because if the first and/or 2nd mortgage holder approves of the short sale, they cannot go after the seller for any deficiencies. The unintended consequence of this legislation is that since lenders lose the option of collecting money from you later, if they agree to your short sale now, there are some who are simply not approving the short sale and letting the home go to foreclosure so they can pursue you later. You mentioned that your lender has PMI so if you try to do a short sale, you not only need to get your lender approval, but also the approval of PMI. I don't think that the short sale would be approved because there is no real hardship. You may just need to rent the place out. May also be good to talk to Dad to see what he thinks about the whole thing. He may not care if he has a foreclosure on his credit report?
  • October 19 2011
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Profile picture for prodropbox
Have you thought about possibly renting or leasing it out?  That might be a way to at least cover the mortgage payment.  Of course, location could be a factor as to how successful of an option that could be.  But at least it might 'buy' you some time to take everything into consideration. 
  • October 20 2011
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Profile picture for Frieda Triebel

It is a tough decision.  Look at the mortgage payments and what you could get in rental income.  Also, talk with the individual that co-signed on the purchase, as it will also affect that person.  You may want to talk with an attorney to see if you could qualify for a loan modification.

  • October 20 2011
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@Shasta Steve

As bitter as you are; you are correct. I forgot to write in my comment if the $267K was the full purchase price and you have NEVER refinanced with money out. My bad. Sorry for omitting that portion.
  • October 20 2011
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Profile picture for Rita Walker
The best option is to stay put.
Short sales are out there for those who are not financially able to meet their obligations and have exhausted all other measures.
The lender makes those decisions after after checking your financial history and determining that a hardship is taking place.
Attempting to short-sale this condo would put your Father-in-law in the position of taking on the financial obligation or ruining his credit.
Don't do it!!
  • October 20 2011
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Profile picture for bobafetts3
I'm not sure if renting the place would will cover the mortgage + HOA fees etc. From my asking around the neighborhood the rent on these places is about $1200. So right there I'm under my current mortgage payments and I've got the additional $250 a month for HOA. Even if I was to lose say $200 a month on the place, it would be OK for the time being as long as I can find someplace to rent that is close to the same amount.
My real question is what is considered a real hardship? Seems like paying nearly 40k a year in automobile expenses might qualify, not to mention I'm not sure how much more I can put up with having a 3 hour average commute per day + working 9 - 10 hours 5 days a week. If it isn't financial it is becoming a physical hardship on me.
I guess my best bet would be to go find a CPA, a real estate lawyer, or attorney. At least that way we can get everything down on the table and try to work out what is best.
  • October 20 2011
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It has been my experience in Riverside (Mission Villa) the typical rent for a 2 bedroom condo is about $1,200. I would think it is best to discuss your options with your mortgage company. As for a hardship you should contact a lawyer

  • October 20 2011
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Shasta - I dont live in your neck of the woods to see whats going on there, but what youre describing sounds like inexperienced agents attempting short sales.
Also I can say CT - where I live and work -  is a recourse state, making foreclosure a much worse option here.
And btw I just put one of my former short sellers into a new mortgage 7 MONTHS after his short sale with an RD loan - 100% financing. FHA will also lend immediately after a short sale if no payments were missed.
  • October 20 2011
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Profile picture for SteadyState
I am not an REA, a tax consultant or an attorney so I would seek advice from a tax consultant and a real estate attorney in your area and stop listening to REAs.

If it were my home I would walk away. The reason is simple economics. The lender choose to lend you the money and use the interest as a way of generating profit. Your wife choose to buy the home with the goal of some financial benefit - avoid rent, etc. Some transactions loose money while some make money. You and the lender need to write this one as one that lost money.
  • October 22 2011
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I bought a condo for $235k and put 25k into it. I'm in for 260k and am underwater myself. I currently rent this property out and it has become a income producing investment property. I make about $525 per month after paying my mortgage, common charges, and taxes. I would see what your mortage, taxes, etc. are and see what you might expect to get by renting it out. This would allow you to rent another place that is closer to both of your jobs which would be more convienant and give you more free time. I wouldn't think so much on how long you will have to wait before the property appreciates to the price you paid but focus on the rental income you might realize right now. You might be in a position to turn a negative into a positive and reach your goals. I'm not happy about being underwater on one or more of my investment properties but with the tax write offs and the return on my investment it's ok. I feel its less risk then the stock market and decided its the way to go for me. It also keeps my credit score intact for future purchases.
If you plan on using your wifes income on a purchase in the future you should give my idea more thought. Good Luck!
  • October 22 2011
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Profile picture for SteadyState
Richard Breglia -

I do not believe what you stated in your post. So lets puts some numbers on the table to prove me wrong. Please provide the interest rate on your loan (since this loan must be at least 3 or 4 years old it should be around 6.5%). With property taxes (say 1.5% per year; Maintenance 1% per year and Insurance at 1% per year):
Yearly expenses: 6.5% + 1.5% + 1% + 1% = 10% * $260K = $26K per year

Thus Monthly cost: $2166/month
You state you make $525 per month in profit.

Thus you get roughly $2700/month in rent.

According to buy vs rent calculators you break even in 2 years. I do not believe your numbers. So please provide the total monthly payment you make on this property (all costs included) and  the monthly rent you get else I am to assume that you misled us in your earlier post.
  • October 22 2011
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Profile picture for sunnyview
"I bought a condo for $235k and put 25k into it. I'm in for 260k and am underwater myself."

I do not think that is something that I would advertise if I were an agent. I am not really comfortable with your numbers either, but it is late so maybe I missed something.
  • October 23 2011
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You may want to consider renting this out and moving in with friends or family for awhile untill you can save up some money to get something else.  Who knows maybe the home values will go up in the mean time and you will not be in a short-sale situation any more. 
  • October 24 2011
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Profile picture for bobafetts3
Well.. I could gather around a 10% payment for a new place in the next few months if I needed. So maybe renting the place out is the best option for now. Even if I do lose a few hundred a month it might be worth it in the long run. The thing that bothers me the most is when we got the original loan it was a 5/1 arm. So we are in the adjustable part so right now it is great, but the thought if interest rates go up scares me.
Now just as a second thought what would happen if I bought a new place (lets say with a 10% down payment) and couldn't find a renter for the condo. Would then the best option be to short sell it? Since after we got moved into the new place I wouldn't really have to worry about credit for a few years.
The housing prices in my area (IE) seem to have been hit very hard over the past years (hence how far underwater I currently am). I'm sure everywhere else will come up before my area. So even if I do wait it out I'd most likely have to pay a lot more for a place in an area that is closer to work for both me and my wife.
  • October 26 2011
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Profile picture for shasta_steve
For me it would be a great idea if you did not have the father in-law on the loan.  I guess I would have to ask if you have spoken with him yet?  I know I would be furious if someone just let a property go back after I co-signed.  Of course I would never co-sign for a house or a new car.  If my daughter wants to buy a house I might help some with the down or help her buy a used car but I don't ever want to be on the loan. 

That being said if you want to buy another house or condo you will have to have enough income to pay both mortgages without the use of the rent from your old condo.  Even if you have a lease most banks will not accept income from a house that is underwater.  You will also have to have a reason to buy the other house.  Things such as needing a bigger house or needing to be closer to work may be helpful. 

Now if you do buy another house it is very unlikely that the bank will allow a short sale but you never know. My neighbor bought a house 200 yards away and was allowed to do it.  If it were me I would determine if your house was non-recourse and it most likely is.  If it was I would either short sale or let the bank have it.  Others may not like this advice but it is almost certainly the best for you financially.  Your credit is not affected, because you are not on the loan, and if the loan is non-recourse, the bank will not be allowed to pursue you and you will almost certainly not owe any taxes.  There are other things to consider but for the vast majority they are better off doing what I described. 
  • October 26 2011
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Profile picture for karlaw
Great advice on this thread, however, I would recommend contacting a real estate attorney for professional advice before proceeding. Good luck.
  • October 30 2011
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If the you can rent the condo and the rent covers all your expenses then rent it. If you can not rent it do a short sale.
  • January 25 2012
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Profile picture for NileMorin
Obviously your father-in-law's opinion will weigh into the final decision, and should be respected. In most cases, you would be able to have the bank forgive the debt and will receive a 1099. Because it is your primary residence, there will not be tax implications. The last Real Estate downturn took 15 years to recover. In my educated opinion, it will be more than ten years before your condo is valued at your purchase amount. At that time, you will still be in the negative if you choose to sell, given real estate commission, deed and tax stamps, etc. Unfortunately, the most responsible decision would be to cut your losses and take a credit hit now, which can be repaired in three to four years, rather than take the 10-15 year gamble.
  • February 04 2012
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