What Would Abe Lincoln Do?
by Evan Vanderwey on 17/03/10 at 8:27 am
I have advised 100′s of clients in the past couple of years who are in the following situation:
They’ve purchased a new home while their home was on the market. Thinking that they would sell their old home in time, they made the move. Sometimes because they needed to – a move to a new area for work, or because their forth child would otherwise be sleeping in a bath tub. And sometimes, because they wanted to – they found a great opportunity, a home with land in the perfect location or a home they have always wanted just went up for sale.
The result for some of these clients is that in addition to the home they live it, they also hold a vacant home with one or sometimes two mortgages on it, and no offers are coming in at the price they need to get out clean. They’re making mortgage payments each month and utility payments too. The costs are mounting, and a way out is all they want. “Frustrating” only begins to describe the situation.
I get calls like this a lot. Below is an overview of the options that exist if you are in this situation. What I would say to you before you read them is that what seems like the easiest option up front, may not be the best or the easiest long term.
What are the options? I can think of six main options. Let me know if you are doing something different than these – I’d love to learn about other good options:
- Hold the home as a rental. This would require a license as well as potentially some repairs. The aim here is to hold the property until you can sell it for more than you owe, during which time the renters are offsetting your payments. This option is somewhat less attractive than some of the others because the time line is undefined and the potential for you to have to put more money into the home to pass rental inspection exists. Its main positive point is that you will suffer no loss of credit standing, and in the end you will have paid off the entire loan amount(s).
- Sell the home on a land contract. You would get more than the “market” would bear because the buyer would be getting land contract terms that they won’t get in a conventional sale. The plan here would be to have the LC for 3 or 4 years during which time you work to get the mortgage (at least the main one) down to the amount of what the LC holder owes you. When the LC holder pays off (usually by getting a new mortgage themselves) then you would have any second mortgage bank give you unsecured terms on their loan and you would eliminate the first one with the buyer’s payoff. This is more attractive than the first option because the new owner keeps lower homestead taxes, is responsible for all home repairs and will make a payment to you that offsets much of your payment. The rest is just simple math to determine the loan amount you need to achieve within the time frame given.
- List the home for sale and pay the difference between what you get and what you owe. This would be possible only if you used other personal investments. If you have a lot of cash sitting around, this would be easier to do. If you have to take money out of longer term investments or retirement funds, it would not be advisable.
- Sell using a short sale. This involves getting approval up front from the main bank – you will submit financial information and wait to hear from them on it. They will decide first if they are willing to take less than is owed and later, when offers come in, they will decide whether or not any one offer is sufficient. This is a prolonged process. The negatives here are a credit hit and the fact that the bank is not getting everything that is owed. The rule says that a short sale is like a foreclosure. Credit scores will not suffer as much as will your ability to get a mortgage again. If you were to leave the Lansing area and want to buy a home in another town, a short sale here could impede that next purchase. You can get an FHA loan within 3 years and a conventional loan in 5 to 7.
- Give the home to the bank. The smoothest method here is a “deed in lieu of foreclosure.” This would hurt the homeowner credit-wise and would add to the challenges that our region is facing by adding another bank-owned home to the homes listed for sale. This is nothing short of a full foreclosure except that the homeowner took the initiative and did not require the bank to pry the home from his cold dead fingers. It’s a little cheaper for the bank, and so they will sometimes offer it over against having to go through the expensive process of taking ads out in the local paper and sending a financial counselor to talk with the homeowner. By no means is this beneficial for the bank – in the long run they have to sell the home and will lose money on it.
- Hold the home and keep up the payments. You could potentially put a house sitter in the home. What about offering it to grad students who go to your church as part of your charitable giving? I have one self- employed client who uses his home as a compensation method. He has given the use of the home to an employee and then was able to compensate them less because the home was free to them. Having a home for use could help build your organization or your business. You would have your utilities paid and the home would be lived in and generally cared for.
The ones I advocate for most strongly are the first two and the last.
I have researched dozens of down markets and have found that even though it takes five years or more, markets always rebound. This bears repeating: Markets always rebound.
With these three options, although they are more work for you along the way, everyone gets paid, your credit doesn’t suffer, and perhaps more important than both of these is the fact that you know you did the right thing.
These options also meet a need in the current marketplace – folks who cannot buy a home right now are able to take advantage of your under-utilized resource. Don’t rob the market of a resource you have to offer. An education on these options is not difficult. Read a book and pay for some advice.
I’m calling my clients and those who are referred to me to make payments on their mortgages and follow through on all of their obligations if they are able to.
Some have made significant cut backs personally and have tried to make payments but were unable to keep things going. I understand and do not pass judgment on them. There are situations where there is nothing else that can be done. This is sad, and I feel for those who have gone through this. If it’s happened to you, I would say this: Don’t let that event define you. You may have made some mistakes, you may not have. This is not a defining moment. Learn what can be learned and move on.
But I have also seen folks give their home back to the bank right after signing a new expensive car lease and booking a trip to Disney. That feels wrong to me.
I know that it is not chic to talk about right and wrong these days, and I get a lot of emails from Realtors and some clients telling me that I’m arrogant and uncaring to suggest that someone may have done the wrong thing.
I have even been told that because I was a lender that sells Adjustable Rate Mortgages to clients that I had no right to talk about right and wrong – as if to suggest that writing ARMs was wrong.
That is nonsense.
If you borrowed money – then do everything you can to pay it back.
Remember Abe Lincoln? He is remembered by many children as the honest man who walked six miles (through deep snow up hill both ways as I recall the story) to return a penny to its rightful owner after he realized he had short changed the customer. Our decisions today ought to mirror that kind of commitment to following through on past decisions.
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