Real Estate Pickle

[Niko]

This is a long post so bear with me. My wife and I are in a bit of a pickle with our house. We bought our house in 2006. Do to a job change, we are in the process of moving to a new city. The job is an excellent improvement (better pay, better work, better city, closer to family, etc). But we are stuck trying to get rid of the house. By my calculation, we are upside down to the tune of $20,000 - $40,000, depending on sale price, realtor fees, etc. Zillow actually says we have $6,000 in equity, but I think Zillow is wrong and, in any event, doesn’t account for the closing expenses. I’ve watched what similar houses are listed and selling for and think we’ll be lucky to walk away without bringing at least $25,000 to the table in this market.


Problem is, we do not have $25,000 in ready cash, and we will not cash out our IRAs or 401K. We have only $5-6,000 in ready cash. I imagine we could have $8-10,000 by year end, but that’s only a guess.

We have considered (and still are considering) renting it out, but similar rentals in the area go for $800-$1100/month, while our monthly mortgage payments are $1600. Of our $1600 payment, about $250 goes to principal while $1350 goes to interest, insurance, and taxes. So we would eat at least $300-$550 a month renting it out (and that doesn’t even consider the variable expenses of being a landlord, esp. from two hours away). Our budget is incredibly tight right now, with significant student loan payments and my wife not working until next August. The house is 50 years old, but has given us virtually no problems for the two years we have been there.

We have also also considered (and are still considering) “walking away.” The thought of it makes me sick, but in my state there are no deficiency judgments following a residential trust deed foreclosure. Part of me thinks the credit hit will be more manageable than the $40,000 +/- cash hit. But there are some legal risks to walking away. First, we have two trust deeds (an 80/20). Even if 1st position forecloses, the 2nd position may elect to sue us on the note rather than foreclose. In that event we’d have a foreclosure on our record AND still be on the hook for $40,000. I suspect the 2nd position will not sue us (unless they learn what my new income is . . .), but it’s a risk.

We’ve also considered asking for a deed in lieu or short sale, but this too is complicated greatly by the fact that we have two trust deeds.

I know this is an early retirement forum filled with people who are in a much better financial position than me. And I know the best answer is "I never should have bought a house to begin with." But I am still a young dreamer, and I know that many of you have been in similar, if not worse, positions when you were a young pup like myself. This is not strictly a retirement question, but it is a money question and this forum has the best collective knowledge of personal finance I've seen on the internet. I appreciate your candid advice.

[OAG]

You need a Lawyer. What has been done is done don't beat yourselves up over it. Sincerely, you should see a RE Attorney - if you "go it alone" there are too many pitfalls IMHO that could ruin your new job, to say the least.

[FIREd]

Can you borrow money from family members? Can you take a personal loan for $40K, get rid of your mortgage debt once and for all and repay that loan over time (think of it as refinancing)? Can you sell a bunch of stuff before the move and help raise the money that way?

[Niko]

Quote:

Originally Posted by OAG You need a Lawyer. What has been done is done don't beat yourselves up over it. Sincerely, you should see a RE Attorney - if you "go it alone" there are too many pitfalls IMHO that could ruin your new job, to say the least.

Thank you. Oddly enough, I am a RE attorney. I feel comfortable with and understand the legal risks of our different choices. Even RE attorneys make mistakes with their personal RE!

I am mostly looking for advice on the practical side of things. Eg, what are the pros and cons of renting the property out in this situation? I've never been a landlord, so I'm curious to hear from other LLs who have been in a similar boat.

Also, we are current on our mortgage.

[Niko]

Quote:

Originally Posted by FIREdreamer Can you borrow money from family members? Can you take a personal loan for $40K, get rid of your mortgage debt once and for all and repay that loan over time (think of it as refinancing)? Can you sell a bunch of stuff before the move and help raise the money that way?

Borrowing from family members is probably a non-starter. We've talked about taking out a personal loan from a bank, but I'm not sure any bank will loan such a large amount (unsecured) in today's climate. What do you think?

To me, getting a loan for the difference is best obtained by asking for a short sale and offering my current lender a new note for the difference in exchange for their release. It seems like a lender, when faced with the prospect of having to foreclose or sue against a homeowner, would jump at the chance of getting paid most of their money now with a promissory note for the rest -- especially from a high income earner.

[FIRE'd@51]

Have you looked into the possibility of getting a "hardship loan" from your 401K? Also, you can "borrow" tax-free and penalty-free from your IRA by taking a distribution and returning it back to your IRA within 60-days.

[Niko]

Quote:

Originally Posted by FIRE'd@51 Have you looked into the possibility of getting a "hardship loan" from your 401K? Also, you can "borrow" tax-free and penalty-free from your IRA by taking a distribution and returning it back to your IRA within 60-days.

I hadn't thought about either possibility. I'll look into both. My gut tells me the 60-day IRA deal will not work, as I couldn't possibly repay 40K in 60 days.

Also, my 401K is still with former employer, which I believe means I can't take a loan. In any event, I'm hoping to roll the 401K (which is with a terribly expensive plan sponsor) into VG now that I'm out of the old job. But I'll look into this some more. I would almost rather rent the house for a while and take the monthly loss, hoping to ride out the RE mess.

[OAG]

Being a long distance Landlord is not easy. You could turn it over to a RE company that specializes (or at least has a good rental management section) to manage it for you. You are not too far away but your new job may not give you much opportunity to get into being a Landlord. If you have the cash flow to anticipate about a 60 day period of "no rent". They usually have a standard fee schedule (which usually does not cover need repairs, if any). I think that would be a good route to go if you are intent in "saving" your credit rating. Your finances do not look like they would support that. Any way you can get an "advance" out of the new job? Probably a non-starter but maybe there are others that were in the same boat there. Alternatively, if this is possible (and from the last post, it may not be), I guess you could turn the new job down and just stay where you are.

[Niko]

Quote:

Originally Posted by OAG Being a long distance Landlord is not easy. You could turn it over to a RE company that specializes (or at least has a good rental management section) to manage it for you. You are not too far away but your new job may not give you much opportunity to get into being a Landlord. If you have the cash flow to anticipate about a 60 day period of "no rent". They usually have a standard fee schedule (which usually does not cover need repairs, if any). I think that would be a good route to go if you are intent in "saving" your credit rating. Your finances do not look like they would support that.

How much do management companies typically charge? Is it a percentage of rent, or a flat fee? Why would there by a 60 day down time?

I actually think our finances could muster a 60 day down time. We have $5-6,000 saved now and could have $8-10,000 by YE. Moreover, I (already!) get a raise (7-9%) at my new job effective Jan 1. For a number of reasons that aren't relevant here, we should get a $4-5,000 tax refund in Feb/March. Finally, when my wife resumes working in August, we should have a net increase of $2,500-2,800/mo.

[boont]

Let's say that you go on Craig's list and lease the house for one year at $1100 a month. You ask for first, last, and a security deposit.

Now you have $3300 in your hand and another $1100 coming in a month. You move and have a new place and a new job.

You go to a handy man guy and say look, I will give you all the repair work on this house if you will look in on it once in a while and email me if you need to. Here is an advance of $200 in cash.

This will buy you one year at small cost. Who knows what will happen in a year. You may be dead, the house may burn down, or you may be better able to sell it then or go for another year in rental.

As the old joke goes(having promised the King his horse would talk), "In a year the king may be dead, in a year I might be dead. Hell, in a year the horse may talk.

boont

[kumquat]

What is the job change? My former mega-corp would eat the difference on a transfer and I might ask a new employer to eat it they really wanted me to join them. Just a thought.

[simple girl]

Quote:

Originally Posted by Niko How much do management companies typically charge? Is it a percentage of rent, or a flat fee? Why would there by a 60 day down time?

It varies, but typically they charge a "lease-up" fee and then a monthly management fee. Our mngmt company charges one month's rent as the lease-up fee and then 10% of the monthly rent for ongong mngmt.

You may have the 60 day downtime (or more?) depending on how hot (or not) your market is for renters and how good (or not) your mnmgt company is.

We moved for DH's job a few years ago (was supposed to be a temporary assignment, ended up not being temporary). We have been renting out our townhouse via a rental property mngmt company ever since. There are pro's and con's, here are some con's:

http://www.early-retirement.org/foru...rds-39357.html

Overall, however, we are glad to have had a renter rather than have to try and sell right now. Not making any money on this, just breaking even.

[Martha]

You might think about offering a deed in lieu to transfer possession, even though the first lender might still have to foreclose. You might also look at settling up with the second lender for maybe $5000. I suggest talking to a bankruptcy lawyer. A bankruptcy lawyer often is the person to work out a settlement, with the threat of bankruptcy as leverage, even if you have no intent to file.

[FUEGO]

You probably have this under control, but make sure a judgment against you wouldn't adversely affect your law license. Particularly if you are applying via comity to a new jurisdiction. In my jurisdiction, the bar application requires extensive disclosures of suits to which you were a party, judgments you owe, financial disclosures, credit reports, etc.

[Niko]

Quote:

Originally Posted by boont This will buy you one year at small cost. Who knows what will happen in a year. You may be dead, the house may burn down, or you may be better able to sell it then or go for another year in rental. As the old joke goes(having promised the King his horse would talk), "In a year the king may be dead, in a year I might be dead. Hell, in a year the horse may talk. boont

Thanks, Boont. I'm starting to lean in this direction. I'm pretty sure we can make it a year. And in a year my wife will be working. With my wife working, we can make it another year. Etc.

[Niko]

Quote:

Originally Posted by kumquat What is the job change? My former mega-corp would eat the difference on a transfer and I might ask a new employer to eat it they really wanted me to join them. Just a thought.

One law firm to another. They won't eat the cost of my deficiency. They offered $XXXX as a reimbursement for a mover. I asked if they could just give me $XXXX and I'd move myself. They're thinking.

[boont]

You are welcome Niko. I hope it works out.

b.

[Niko]

Quote:

Originally Posted by simple girl It varies, but typically they charge a "lease-up" fee and then a monthly management fee. Our mngmt company charges one month's rent as the lease-up fee and then 10% of the monthly rent for ongong mngmt. You may have the 60 day downtime (or more?) depending on how hot (or not) your market is for renters and how good (or not) your mnmgt company is. We moved for DH's job a few years ago (was supposed to be a temporary assignment, ended up not being temporary). We have been renting out our townhouse via a rental property mngmt company ever since. There are pro's and con's, here are some con's: http://www.early-retirement.org/foru...rds-39357.html Overall, however, we are glad to have had a renter rather than have to try and sell right now. Not making any money on this, just breaking even.

Thanks for your input, SG. I'm inclined to try managing myself. I know a handy man in the area. He does his own work on 8 or so rentals he owns. I suspect I could talk him in to covering mine too for a reasonable price. How does one go about picking a "good" management company? Having gone to college in this town, I know of most of the management companies, but I have no clue which are best from a LL's point of view.

[Niko]

Quote:

Originally Posted by Martha You might think about offering a deed in lieu to transfer possession, even though the first lender might still have to foreclose. You might also look at settling up with the second lender for maybe $5000. I suggest talking to a bankruptcy lawyer. A bankruptcy lawyer often is the person to work out a settlement, with the threat of bankruptcy as leverage, even if you have no intent to file.

I have offered a deed in lieu, but they won't consider it until I've had it on the market for a long time and I'm in default. Even if I market the property and am in default, the DIL is problematic with two trust deeds. My fear trying settle up with #2 is that the will not settle for peanuts once they see my earning potential. They may take their chances in court knowing that I am not judgment proof.

[Texarkandy]

Don't feel too bad - we have a recent transferee who lost approx 40k on a house in N. VA to move to our office here in E. TX