What options do I have?

Question

My wife and I moved from Warren, Mi to Houston, TX about 1 year ago due to graduating from college and needing to find a job. We still own a house in Warren that is severely underwater (Currently owe $115k, likely worth around $45k) that we are renting to some people because we were unable to sell it for what we owe when we moved. The people renting the house really want to buy it, but we cannot possibly afford to pay the difference between what we owe and what it could sell for. The problem is, while we couldn't afford to pay the difference between owed and what it is worth, we can reasonably afford the mortgage in addition to our current mortgage in Texas. Would short sale be an option even though we likely could not show reasonable economic hardship? What other options do we have from a legal standpoint?

I could REALLY use some help on this. The renters are looking to buy something and stop renting. So either we sell them our house, or they vacate and find somewhere else.

THANKS in advance for any advice!

I could REALLY use some help on this.  The renters are looking to buy something and stop renting. So either we sell them our house, or they vacate and find somewhere else.
 
THANKS in advance for any advice!

Dion DePaoli · Answer

Bobby B present your solution to them.  Make sure you send all of this in writing, do not just rely on your phone call.

Bobby B · Answer

Thank's everyone for your helpful responses.  I will try and get in contact with the lender to see what options I have.  Is it best to come to the table with some potential solutions to suggest or should I just call them and essentially say "here is my problem, what can you do for me"?

Robert Sharpe · Answer

@Dion DePaoli  A 30 yr note at on the current value of 45k at 6% is about 260/month.  In 20 yrs the buyers will have paid about 45k in interest.  Sorry, it was a typo, it would be about 90k of principal + interest collected.  This was just an example, my intent was provide a loss mitigation alternative to walking away should the lender now allow a short sale or a balance reduction.

As to whether or not someone would buy a property with an encumbered deed, it's the same as with the lender, the answer is NO if you don't ask.

Dion DePaoli · Answer

Robert Sharpe I didn't follow your math.  The present value of $260 at 6.0% over 20 years is $36k which 80% of $45k, the 30 year would drop that payment down from $260 to $218.  The lifetime interest on the 20 year would be $25k.  I don't understand what you mean by recover $95k.  Where did that number come from or what makes it up?

The problem in this situation is the negative equity.  The UPB on the loan is $115k.  Even if he matches his own rate on the senior mortgage and contributes all funds from the seller finance he still has $52k in UPB that he is on the hook for.

This is not a good deal to try to do any subject to finance on.  There is ZERO chance for the current mortgage to get paid off at $115k.  A wrap will work the other way when there is equity but fails when there is negative equity.  How would the buyer ever take an unencumbered deed?  (they wouldn't)

I would say pursue either a short sale or balance reduction, if you don't ask the answer is no.  If you don't want to take the hit on credit look into a property manager and rent the property out until you can get out the house whole.

Robert Sharpe · Answer

If you are not having any trouble making the payment, you could offer them owner financing at a slight premium to rates and prices today.  You should be able to get the premiums because they don't have to go to a bank.  Just a quick example, if you gave them a 30 yr note at 6% with a 20 yr balloon, they will have paid you about 44k in interest. You would recover somewhere around 95k in all. This is just an example, but the payment would only be about $260, I suspect they are already paying a bit more than that for rent now.  If you raise the interest rate so that the payments are somewhere close to current market rents you may be able to recover a little more yet.  Take a close look at what an amortization schedule looks like with the paymnet they they can make and see if it makes sense for all of you.

Dion DePaoli · Answer

Bobby B a question not asked is the same thing as a "No" for an answer.  It is worth your time to contact the lender and explain the situation and ask if short sale is possible for you.  I would recommend you do this both verbally and in writing.  It is possible under your move of over 2,000 miles away they can grant you the short sale opportunity.

Bill Gulley · Answer

No, it posted and was taken off probably as we don't advertise in all the forums, you need to read the rules or you'll get busted....LOL

You can take this post off too.....if ya like....

Steve Babiak · Answer

First you have to figure out whether the people renting will actually be able to qualify for a purchase loan from a traditional lender (bank, credit union, mortgage, broker, etc.).  If they would qualify, then you run the risk of losing them as occupants,  if they would not qualify, then you could use some of the seller financing methods to possibly let them stay put in that house that they now want to call home.

If you had done a credit check as part of the tenant screening, you could take a guess at whether they are credit-worthy enough to get a loan or not.  Income (or capacity to repay) will also be a factor to the lenders.  The third of the "3 C's" (sure there are more C's we can talk about, but keeping it simple here) for a loan is collateral - you've already given us your estimates on that.

Bill Gulley · Answer

I think you need to simply tell them what the situation is, that you would sell it to them for what is owed against the property. You might be surprised if they really like the house. They will know that you can't sell it and pay them to take it. You might point out that the crash has caused values to drop, but they are not buying an investment they are buying a home and values are expected to rebound. (Be postive) It they can assume the payments for less than the rent they are paying, they may not be price buyers, rather payment buyers and go for it.

If you do a Sub-2 you'll need to seek assistance since the property is now a non-owner occupied after one year for seller financing issues. You'll also need to make long term arrangements to allow values to increase so that the buyer can refinance based on the value of the property for that loan amount.

In such assumptions you'll hear all the squak about the due on sale clause, I doubt it would be an issue in this situation and you should get with the lender. If you remain on the note and have a buyer and the payments are being made, they may accept that as opposed to taking another underwater property.....IMO

If they don't buy that, a short sale is the next option to get rid of it. While the lender can't expect you to lease it until the note is paid off, if you are not having any financial difficulty, that could be a problem with them taking a big hit. You took the loan....

Some people have stopped paying a mortgage and simply walked away, I suggest you tell the tenant to pay the bank and not accept rents if you are not paying the note, people have gone to jail for that. But I don't suggest this, it will kill your credit and IMO it's not the way to take care of your moral obligation to pay your debts.

You could remain a landlord, question is how long will it take for values to return to that area, it's not impossible that later on you could sell it for the amounts due, especially paying the note down.

Good luck...