Options for underwater home if I want to move

Buying & Selling Real Estate
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Options for underwater home if I want to move

Steve Ellison
Laurel, MD · Member since 2015 · 7 posts · 0 votes

Hello.  I have a simple problem which might have an obvious solution, but I’m hoping that someone more knowledgeable can provide feedback in case I’m missing something.

I bought a very nice condo/apartment in a new mixed-use development as my primary residence.  Unfortunately this was in 2007 and things quickly deteriorated.  Condo buyers backed out leaving the building half-empty.  Neighboring residential and retail development stalled and ended up in foreclosure.  Eventually all of the units sold for rock-bottom prices.

Fast forward to 2015 and although not fully recovered, the neighborhood is on the upswing with new construction and is guaranteed to be a more desirable location in the next 2-3 years.  But I need to move in the next year.  I can easily find a preferable house for the same (or somewhat lower) monthly payment.  Unfortunately I’m at least $75,000 underwater.  The condo is an ideal rental property (the immediate area has a high concentration of rental units), but if I rent at current market rates, I will lose more than $6,000/year.

I already did a HARP refinance six years ago, so that option isn't available. My front-end DTI is 28%. I am frugal and comfortable with my monthly payments, which I have never missed, and I have excellent credit and no other debt.

Assuming that staying is not an option, renting it seems to make the most sense.  Instead of coming up with $75,000 upfront to sell, I would only have to come up with $6,000/year to cover my rental losses, with the assumption that my equity will increase over the next few years (and maybe rental rates will increase too).  However I assume it’s impossible to qualify for the new mortgage based on this debt.  From what I’ve read, I’d need a year or two of rental income and not all of it would be recognized.  I’ve only talked to one lender and he said the same thing, which obviously isn’t possible while I’m living there.  Do I need to move to an inexpensive rental property in the meantime so I can start establishing rental history on the condo?  Or am I foolishly attempting to live beyond my means by trying to buy a house while I have this debt?  I guess I could walk away, but that doesn’t help in my goal of buying a new place.

Any thoughts or creative solutions?  Thanks in advance.

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Jesse T.
Herndon, VA · Member since 2014 · 1k+ posts · 324 votes
11y

Is your $6K figure just rent minus mortgage payments or does it include costs like property management/vacancy/repairs etc?  You might talk to your mortgage company about options for selling and handling the deficiency as an unsecured loan.  Depending on the terms it might be less than $500/month+repair/maintenance/etc costs.

The costs/complications might make it hard to do this, but what about buying your next property with seller financing and using it as a rental initially?  Once it has established history, you could probably get an investment loan on it.  Another option if you can get seller financing would be finding something where you can cover the costs with your rental income.  So your housing costs will be similar.

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  • Account Closed
    Investor · Dunnellon, FL · Member since 2014 · 37 posts · 10 votes
    11y

    I did almost the exact thing! I bought a house in 07...should have never done that, but I learned a lesson. After 4 years we decided we did not want to live there and had the option to buy my Aunt's house, which was perfect for our Forever House. I asked her if we could rent her house until we had our finances in order to BUY her house. She said yes. We quickly moved into her house and our old house became a rental. Like you, I eventually refinanced with HARP and lowered the payment. It was hard, but I was able to show on paper that the house paid for itself. The bank doesn't exactly look at your taxes and insurance. They wanted to see that the Rent Paid for the Mortgage Payment. It took me 2 years and 6 months to get it all organized and get my financial stuff is tip top shape so I could buy our new house. It Worked! I don't know if you will be able to manage your condo from far away, that is another expense to consider. I was able to manage mine myself. It was not easy, but that is another post in Tenants From Hell thread. 

    I know a lot of Creative Investors and they love the Lease Option Deals! Lots of people looking to buy that want to take ownership in something but need to get their finances in order look for Lease Options. This is also something to look for yourself when you move. 

    Good Luck!! I really think Lease Option might be your savior! @Steve Ellison

    Raven Dorminey

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  • Account Closed
    Investor · Dunnellon, FL · Member since 2014 · 37 posts · 10 votes
    11y

    And you are not foolish! Don't let a Condo and Mortgage hold your back from living your life! There are ways to make it take care of yourself! I didn't let my Upside down house ruin my credit or stop me from moving. 

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  • Brian Gibbons
    Investor · Sherman Oaks, CA · Member since 2008 · 6k+ posts · 3k+ votes
    11y

    @Bill Gulley

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  • Bill Gulley
    Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes
    11y

    What @Brian Gibbons, LOL?

    The standard message is 2 years rental history under your belt as to rents received and your ability to manage with 75% of rents counted to offset the mortgage payment. 

    But, it is possible to go to a portfolio lender, usually a smaller bank with 20% down and get a mortgage if you have some related management experience, or financial management job, like an insurance agent, F&I guy at a dealership, general manager in business where you can show dealing with the public and collection efforts that relate to landlord activities. 

    That rule is in the secondary market, not so much with a portfolio lender who holds the loan, it can be done, need to shop and convince them you can manage the rental. Good luck :)

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  • Steve Ellison
    OP
    Laurel, MD · Member since 2015 · 7 posts · 0 votes
    11y

    @Account Closed Thanks for sharing your experience.  A lease option is not something I had considered.  The only thing I can't figure out is why a tenant would want to pay the option fee, instead of just renting for a year to see how they like it.  There are always other similar units for rent and/or sale in my building; there is nothing so unique about my unit that anyone would need to make a commitment like that - they could just rent/buy another unit if necessary.  Unless I am missing a scenario that would make sense for a buyer.  In your case it sounds like you really wanted your aunt's house and didn't want to risk losing it to someone else - that makes sense to me.

    Unfortunately the rent would not cover the mortgage payment, let alone HOA fees, taxes, insurance, and management fees. So it seems like I'm going to have to rent a new place while I rent my condo and wait for it to appreciate. To your point, maybe I can find someone willing to do a lease option for my new place, although I'm looking in a "hotter" area where homes sell quickly, so they probably don't need to mess around with stuff like that.

    Good insight though, this poor decision I made eight years ago is definitely holding me back.  It didn't seem like a poor decision at the time of course!  Oh well.

    @Bill Gulley Thanks for the information.  I will look into smaller banks and ask those questions if/when the time comes.  I do not have the collections experience you mentioned, but I wonder if using a professional management company would be enough to convince them of my ability to collect?  

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  • Bill Gulley
    Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes
    11y

    Yes, a property manager under contract would certainly help. :) 

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  • Account Closed
    Investor · Dunnellon, FL · Member since 2014 · 37 posts · 10 votes
    11y

    @Steve Ellison

    There are lots of people that can't get financing right away or need to get their life in order before trying for a loan. They still want to take ownership in something. Have pride in their home. Like us, we needed time to set up our rental to show on the books that it paid for itself and took that time to pay off some cards and get our finances looking just right. I wanted the house. Someone might want to live there and need a little time. Time that others will not be able to give them because they want the cash now or just strictly rent with not option to buy. -Because I took the time to get everything in order I was able to get a USDA Loan with 100% financing. So, giving them time is a bonus for both of you. 

    You should look into if you can put your condo into a Land Trust. Then, maybe you can sell it Subject To the existing financing and somone can take over payments and use the loan you have in place. That is kind of tricky, so it will need lots of research and someone experienced in Subject To financing.

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  • Jesse T.
    Herndon, VA · Member since 2014 · 1k+ posts · 324 votes
    11y

    Is your $6K figure just rent minus mortgage payments or does it include costs like property management/vacancy/repairs etc?  You might talk to your mortgage company about options for selling and handling the deficiency as an unsecured loan.  Depending on the terms it might be less than $500/month+repair/maintenance/etc costs.

    The costs/complications might make it hard to do this, but what about buying your next property with seller financing and using it as a rental initially?  Once it has established history, you could probably get an investment loan on it.  Another option if you can get seller financing would be finding something where you can cover the costs with your rental income.  So your housing costs will be similar.

    1Reply
  • Steve Ellison
    OP
    Laurel, MD · Member since 2015 · 7 posts · 0 votes
    11y

    Thanks @Account Closed. You do make a good case for a lease option on both sides.  I feel like the stars would really need to align in order for me to find both an interested buyer and a seller willing to do it, but I guess that is where a Realtor could help me.  I'd never heard of Subject To before, but I'll add it to my list of possibilities!

    @Jesse T., yes, the $500/month was the absolute minimum.  It does not include management (which I'd need), vacancy, or repair.  $900/month might be more realistic.  So that is a very good idea regarding an unsecured loan compared to the rental loss.  The thought had occurred to me, although I never considered working with my current mortgage company on such an arrangement.  It's worth asking.  As for seller financing, I assume that is the same as the lease option strategy mentioned above?  That may be my best solution if I can find a match.  Thanks.

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  • Gilbert Dominguez
    Investor · Chicago, IL · Member since 2015 · 677 posts · 309 votes
    11y

    Note holders often will sell a non performing or a performing note. I would first try to have a talk with your mortgage company and see if they may not be willing to discount your mortgage down. 

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