Truth in Foreclosure

The tenants force our hand

Part 5 in the on-going series of posts about selling our home in Virginia with an underwater mortgage.  See the other parts by clicking the My Short Sale tag.

As 2009 rolled around and we looked at out interest rate resetting, we were becoming concerned about what was going to happen to our payments.  We hadn’t actually done the calculations I went through in Post 3 of the series, but we knew the payment was going to go up.

We decided it was time to do something…we knew we couldn’t refinance because:

1. The house is now an investment property, not an owner occupied house, which means there was no way we’d be able to get 100% financing any more.
2. We didn’t have the $60,000 or so it would take to buy the mortgage down to 80%

So when we started evaluating our options, we came up with four:

1. Keep the house, keep our current tenants, who we are very happy with, and absorb the increased mortgage payments.  We might be able to get this money back in the future when we eventually sell, but the question is how long would it take? First, we’d have to wait until the housing prices came back (my extremely optimistic guess says it would take at least 4 years for it to come back to the point we bought it at). Then, we’d have to update a bunch of stuff in the house, which would run another $15 – 25,000, which would mean we’d have to hold it even longer to break even.  All the while, we’d be losing more and more every month on our payments because our interest rate would be adjusting every 6 months (and they’ve got nowhere to go but up).
2. Try to sell it for enough to pay off the mortgages.  If we put $10 – 15,000 into updating the house, we might be able to sell it for what we owe.
3. Try to sell it for whatever we can and negotiate with the lender for a short sale.  Since we expect the home to sell for $20 – 30,000 less than we owe, we don’t expect to have too much trouble getting the bank to agree, the problem will probably be getting a buyer in the first place.  In addition, we weren’t sure we wanted to deal with the credit impact of a short sale.
4. Stop paying and let them foreclose on the house.  In addition to the credit impact of this, we had a hard time believing this was an ethical way to handle the situation. First, we had tenants who are paying us every month so we’d just be taking their money and hanging them out to dry.  Second, we don’t feel it’s ethical to stop paying when we have the ability to pay.  Third…it just didn’t feel right to my wife or me.

After looking at these options, we were pretty sure we wanted to sell.  So I drafted an explanatory e-mail to our tenants explaining we were considering selling the house at the end of their lease.

They responded that they were going to start looking for somewhere else to live and plan to move out, which made our decision for us.  They didn’t want to keep living somewhere that could be soled out from under them and potentially have to move with little notice…which we can completely understand.

There’s no way we could afford to keep the house long term without a tenant and no one is going to agree to rent the house if they know we’re considering selling it.

In addition, with the lending environment right now, we know banks will be more agreeable to a short sale now than they probably would be in the future.

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