Under water on house- Is forclosure an option?

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Under water on house- Is forclosure an option?

John Backus
Goodyear, AZ · Member since 2016 · 3 posts · 0 votes

Hello, I'm looking for some advise on what to do. In 2006 my wife and I purchased our first home in Lansing, MI. Honestly, I believe we overpaid unfortunately, and it cost us $107,000. We had an FHA loan with no down payment.

Enter 2008, the economy tanked and particularly in the state of MI work was non-existent. My wife and I found jobs in Phoenix, AZ and moved out of state. The home directly next to us sold that year for $4,500 (nope, not missing any zeroes, gotta love Michigan), so needless to say we opted to rent our house out and hope that some day the economy picks back up.

Since that time everything that could possibly need to be done on the house the renters have complained about and we have had to fix. The rent we receive for the home is $80 shy of our mortgage, so as it is we are losing money every month. in the last couple years we have had to scrape together over $6,000 for a new front porch, $1,500 for a new water heater, hundreds for a new window that allegedly broke during an earthquake, a new washer. a new sink and so much more. I am now being told by the property manager I will need to put a new roof on the home and something will need to be done about the leaky basement that is causing mold. It would cost us thousands to make the repairs.

We have tapped out our savings on this home, and it is currently worth around $60,000 while we still owe $90,000 (and even that would be assuming we put a new roof on and figured out what to do about the basement). We have no money left to make the repairs. Last I looked my credit score was around 815, with my wife's around the same. As much as it pains me to ruin our credit, something has got to give at this point and it is either this home that we don't even want or our current home in AZ.

At this stage I would love to just walk away from the disaster that is that home, but I have seen that in MI the lender can come after you for the lost funds even in the case of a short sale. I would hate to destroy our credit, then have my wages garnished and end up in a situation where I can't afford my AZ house either.

I am just looking for advice on where to go from here. Speak with the lender? Get a mortgage attorney? Stop making payments?

Any advice would be greatly appreciated. We are doing well in our current home and state, but that bad purchase in MI will be haunting us for the rest of our lives!

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Bob B.
Investor · Jasper GA · Member since 2015 · 1k+ posts · 1k+ votes
9y

With an 800+ credit score you should be able to borrow enough to pay off the shortage.

I think you're getting taken to the cleaners by the property manager.

How long has it been since you have seen the property?

I know you didn't plan on this problem and I bet there are a lot of other absentee owners in similar situations. That's why I don't invest out of state.

Do you own other property?

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  • Joe HomsBusiness Member
    Flipper · Mission Viejo, CA · Member since 2014 · 2k+ posts · 1k+ votes
    9y
    John Backus sorry to hear about your situation. I was helping 10 clients a month do short sales here in California several years ago. I'm surprised to hear that the bank will come after you for a deficiency. Not common. My suggestion is that you investigate the above further and if you want to save your credit follow this advise. Keep making your mortgage payments while you sell the home in a short sale. This way it will only affect your credit when you actually close on the home and will be less of an impact. My two cents. Good luck.
    [email protected]949-625-4533
    0Reply
  • Bob B.
    Investor · Jasper GA · Member since 2015 · 1k+ posts · 1k+ votes
    9y

    With an 800+ credit score you should be able to borrow enough to pay off the shortage.

    I think you're getting taken to the cleaners by the property manager.

    How long has it been since you have seen the property?

    I know you didn't plan on this problem and I bet there are a lot of other absentee owners in similar situations. That's why I don't invest out of state.

    Do you own other property?

    4Reply
  • Jeff Schneider
    Residential Real Estate Agent · Phoenix, AZ · Member since 2016 · 155 posts · 117 votes
    9y

    I would seek the advice of a real estate attorney before making any big decisions. It will probably run you $100-$150 but you will know all your options and the ramifications.

    0Reply
  • Mark Jacobsen
    Real Estate Broker · Lansing, MI · Member since 2016 · 5 posts · 2 votes
    9y

    @John Backus I'd agree w/ everyone above. Feel free to PM me the address if you want and I'll do a quick look.

    0Reply
  • Jeff Kehl
    Rental Property Investor · Charlottesville, VA · Member since 2012 · 1k+ posts · 726 votes
    9y

    @John Backus I'd talk to several people here on BP from Lansing and get their take, I see one right above but I'm sure there are a lot on here that you can get a balanced opinion from. I attended Michigan State for a couple years so I used to know the Lansing area 30ish years ago and would be happy to give you my opinion if you post or pm me the address.

    I think letting it go in foreclosure is a good option if it truly is worth $60k. Where did you get that number? I have no real knowledge but I would be surprised if the Lansing area is still depressed given it is a big college town.

    I've not heard of anyone that had the banks actually go after them for the deficiency. I'm sure it happened but they would probably only go after amounts that were worth it and $30k would not be. 

    Do you need to borrow money in the next few years? If not foreclosure or short-sale would make sense. Or find someone to take it subject to.

    0Reply
  • Robert Orel
    Investor · Lansing, MI · Member since 2014 · 27 posts · 9 votes
    9y
    I'm pretty positive FHA does not come after the borrower for the balance owed after a repo even in Michigan. If you have questions about the Lansing area feel free to ask. I have several rentals here and know the market pretty well. Good luck!
    0Reply
  • Jeff B.
    Buy & Hold Owner · Redlands, CA · Member since 2015 · 5k+ posts · 2k+ votes
    9y

    @Jeff Kehl --I've not heard of anyone that had the banks actually go after them for the deficiency. I'm sure it happened but they would probably only go after amounts that were worth it and $30k would not be. 

    They don't have to -- they issue a 1099 for  the deficiency!!

    @John Backus  There is a process called Deed In Lieu, where the property goes back to the lender - - investigate.  As you are not defaulting or going BK, it should not effect your credit - - investigate this too.

    0Reply
  • Aaron Kite
    Investor · Lansing, MI · Member since 2011 · 19 posts · 19 votes
    9y

    maybe it's worth more than you think... And maybe your property manager is the reason you are not making more money... Send me the address and I'll give you my take.

    We don't know what the market is going to do we don't know what's going to happen with inflation but one bad outcome for you would be if you sell it at the wrong time and property value start to go up in a few years with rising inflation. If that's the case I bet you sure wish that you would have hung on to it

    1Reply
  • Ralph R.
    Investor · Bethel, AK · Member since 2013 · 1k+ posts · 852 votes
    9y
    John Backus John. I have 9 out of state properties. I get along well with it. First off I agree with the other poster. Get rid of that Pm. The pm on a long distance rental will make or break you. The repairs he's telling you you need seem goofy. A new porch?? Roof and basement maybe. A sump pump in the basement maybe. Couple hundred dollars tops. Roofs take 20-30 years to wear out and this one needs replaced immediately?? I smell a skunk here. That one should never be a surprise unless you had a big hail storm. Then your insurance should help with that. Get another opinion. Hows your rent compared to market rent?? Second you are trying to rent a 100% financed property. Change that loan. I had one like that. My first rental also. Too much loan, too high of an interest rate. it beat me around for several years. After all these years I just cash out re-fied and got 20k back out. I finally got the financing right and now it performs well. 5 years ago I refinanced and put in the 20% down payment that would normally be required. Now I get that you are underwater with this property and it would need to appraise well enough to get a new loan. Remember you have several years of loan pay down too. That plus adding some cash might get that payment down enough to cash flow. Is this smart investing to force a rental to pay by infusing cash?? Hell no it isn't!! But what's your credit worth and does that make it worth it? You need to figure out if you want to save your credit and then take steps to do so. A bankruptcy last a long time and many credit apps will ask if you have EVER filed. That short sale idea may bite you in the butt also. Get some other opinions on value, repairs needed and by all means check out other pm's. For me theres lots of red flags in what he's telling you and I've dealt with a lot of them. Make sure you have explored all options before you give up. RR
    0Reply
  • Brett Goldsmith
    Investor · Los Angeles, CA · Member since 2012 · 1k+ posts · 500 votes
    9y

    On FHA short sales, deficiency will be waived. Servicer will be made whole from mortgage insurance if SS is approved and closed.

    Tough position though if you are current and have not lived in the property for years. Very possible you may run into big hurdles if attempting a short sale due to HUD guidelines.

    Consult with a tax professional about insolvency and potential tax liabilities. 

    1Reply
  • Bob B.
    Investor · Jasper GA · Member since 2015 · 1k+ posts · 1k+ votes
    9y

    What would happen if everyone walked away from their financial obligations just because they were underwater?

    We don't share the appreciation on our properties with the banks and we should not walk away from them when they don't go as well as we expect.

    I'm not saying you are less than honorable, but foreclosure should be the last thing suggested.

    4Reply
  • Greg H.Pro Member
    Moderator
    Broker/Flipper · Austin, TX · Member since 2013 · 4k+ posts · 4k+ votes
    9y
    Originally posted by @Bob B.:

    What would happen if everyone walked away from their financial obligations just because they were underwater?

    We don't share the appreciation on our properties with the banks and we should not walk away from them when they don't go as well as we expect.

    I'm not saying you are less than honorable, but foreclosure should be the last thing suggested.

    The OP appears to have done everything.  He could have walked away when he owed $100,000+ and the house next door sold for $4,500

    Since he purchased in 2006, he has easily paid $10,000+ in MIP(Mortgage Insurance Premiums) and probably $1000s in above market interest to the lender.

    Millions have walk away from homes while doing much less so let's not pass judgment.  And no, I have very rarely borrowed money in my life and have not been foreclosed on 

    1Reply
  • Bob B.
    Investor · Jasper GA · Member since 2015 · 1k+ posts · 1k+ votes
    9y

    Walking away when there are other options isn't right.  I don't care if millions did it.

    I'm not passing judgment.  He asked for advice and I gave it.

    If he can pay the shortage, I think he has an obligation to do so.   

    I guess I'm a little bias, as I was a banker for a number of years.

    2Reply
  • Greg H.Pro Member
    Moderator
    Broker/Flipper · Austin, TX · Member since 2013 · 4k+ posts · 4k+ votes
    9y
    Originally posted by @Bob B.:

    Walking away when there are other options isn't right.  I don't care if millions did it.

    I'm not passing judgment.  He asked for advice and I gave it.

    If he can pay the shortage, I think he has an obligation to do so.   

    I guess I'm a little bias, as I was a banker for a number of years.

     So when you made a loan let's say back when interest rates were 15%, you also advocated giving interest payments back when rates were cut in half right? 

    This is a business for both parties.  Both parties in the transaction take risks and in this case the bank required the borrower to take out insurance to further protect the lender

    I am not advocating any borrower walk away from a property. However, I do not believe they are required to devastate their life to do so after they are required to "protect " the lenders interest 

    1Reply
  • Bob B.
    Investor · Jasper GA · Member since 2015 · 1k+ posts · 1k+ votes
    9y

    I wouldn't suggest anyone "devastate their life" for a piece of real-estate.

    I just think too many people have the mentality that walking away from their obligations is ok.

    Again, If he has the means to make up the shortfall then I think he should.

    3Reply
  • John Backus
    OP
    Goodyear, AZ · Member since 2016 · 3 posts · 0 votes
    9y
    Originally posted by @Greg H.:
    Originally posted by @Bob B.:

    What would happen if everyone walked away from their financial obligations just because they were underwater?

    We don't share the appreciation on our properties with the banks and we should not walk away from them when they don't go as well as we expect.

    I'm not saying you are less than honorable, but foreclosure should be the last thing suggested.

    The OP appears to have done everything.  He could have walked away when he owed $100,000+ and the house next door sold for $4,500

    Since he purchased in 2006, he has easily paid $10,000+ in MIP(Mortgage Insurance Premiums) and probably $1000s in above market interest to the lender.

    Millions have walk away from homes while doing much less so let's not pass judgment.  And no, I have very rarely borrowed money in my life and have not been foreclosed on 

     Thanks. I would like to believe I have done everything I can to NOT walk away from my obligations. My credit score is high because I always DO pay my bills, and have never been delinquent on an account in my life. At the end of the day though I have a family, and I am not exactly going to sell off our current home and put us on the street because I really want to pay back the bank. And just for the record, we may not share the appreciation on our properties but that certainly doesn't mean banks are eating all the costs when things go south. In case people have forgotten, when banks go under taxpayers like myself bail them out. I'm not the type to use that as an excuse to not pay my bills, but please don't try to make it out like banks are some innocent victims that wouldn't dare put their burdens on others when things don't work out.

    Back on topic though, while I am willing to look at all possibilities, I really don't think my property manager is the issue. She has been pretty good to me, she has been the one covering the cost of the expensive repairs as it is and letting me pay her back in payments interest free. The house is just in terrible shape, our first realtor took us for a ride.

    The front porch was leaning badly and sinking into the ground. She was concerned not only that it was a safety hazard which could get a sued, but also it was starting to come down and if it fell it would have torn the front awning down with it. This is a photo before it got really bad, and you can see it leaning in the bottom right. So $6,000 later we replaced it. 

    porch now

    Here are the most recent photos she sent of the roof.

    I'll be honest I have no idea how it got that bad, it was in good shape in when we moved in 2008. Bad storms I'm guessing.

    Here's just a few of the basement photos she sent

    I don't think she is wrong about any of the repairs being necessary, I just can't afford them. And that's the issue. I would just leave tenants in the home until I pay off enough of the loan to sell it, but the tenants are complaining and at some point here I won't even be able to have renters, and the home is only going to decrease in value as it falls apart.

    The $60,000 quote came from a market analysis the property manager had done on the home, and it is right in there with every AP like zillow etc (I know they aren't typically accurate, but the market analysis should be). And in the state the home is in now I doubt it could even be sold for the $60,000. There's just no way around it, in 11 years all we have done is lose money on the house.

    Thanks for all the help. I will PM the address to the Lansing guys and see what they think. At this point it looks like a real estate attorney is my best bet.

    0Reply
  • Account Closed
    Professional · Canton, MI · Member since 2016 · 296 posts · 230 votes
    9y
    Originally posted by @John Backus:
    Originally posted by @Greg H.:
    Originally posted by @Bob B.:

    What would happen if everyone walked away from their financial obligations just because they were underwater?

    We don't share the appreciation on our properties with the banks and we should not walk away from them when they don't go as well as we expect.

    I'm not saying you are less than honorable, but foreclosure should be the last thing suggested.

    The OP appears to have done everything.  He could have walked away when he owed $100,000+ and the house next door sold for $4,500

    Since he purchased in 2006, he has easily paid $10,000+ in MIP(Mortgage Insurance Premiums) and probably $1000s in above market interest to the lender.

    Millions have walk away from homes while doing much less so let's not pass judgment.  And no, I have very rarely borrowed money in my life and have not been foreclosed on 

     Thanks. I would like to believe I have done everything I can to NOT walk away from my obligations. My credit score is high because I always DO pay my bills, and have never been delinquent on an account in my life. At the end of the day though I have a family, and I am not exactly going to sell off our current home and put us on the street because I really want to pay back the bank. And just for the record, we may not share the appreciation on our properties but that certainly doesn't mean banks are eating all the costs when things go south. In case people have forgotten, when banks go under taxpayers like myself bail them out. I'm not the type to use that as an excuse to not pay my bills, but please don't try to make it out like banks are some innocent victims that wouldn't dare put their burdens on others when things don't work out.

    Back on topic though, while I am willing to look at all possibilities, I really don't think my property manager is the issue. She has been pretty good to me, she has been the one covering the cost of the expensive repairs as it is and letting me pay her back in payments interest free. The house is just in terrible shape, our first realtor took us for a ride.

    The front porch was leaning badly and sinking into the ground. She was concerned not only that it was a safety hazard which could get a sued, but also it was starting to come down and if it fell it would have torn the front awning down with it. This is a photo before it got really bad, and you can see it leaning in the bottom right. So $6,000 later we replaced it. 

    porch now

    Here are the most recent photos she sent of the roof.

    I'll be honest I have no idea how it got that bad, it was in good shape in when we moved in 2008. Bad storms I'm guessing.

    Here's just a few of the basement photos she sent

    I don't think she is wrong about any of the repairs being necessary, I just can't afford them. And that's the issue. I would just leave tenants in the home until I pay off enough of the loan to sell it, but the tenants are complaining and at some point here I won't even be able to have renters, and the home is only going to decrease in value as it falls apart.

    The $60,000 quote came from a market analysis the property manager had done on the home, and it is right in there with every AP like zillow etc (I know they aren't typically accurate, but the market analysis should be). And in the state the home is in now I doubt it could even be sold for the $60,000. There's just no way around it, in 11 years all we have done is lose money on the house.

    Thanks for all the help. I will PM the address to the Lansing guys and see what they think. At this point it looks like a real estate attorney is my best bet.

     Since you're out of money, I'd get a good realtor to approach the bank about doing a short sale. Tell them (and show them) that you're broke and let them know that if they don't do a short sale you'll walk away. Then, if they agree, great. If not, let it go. 

    There is nothing unethical about walking away from a property. Both a bank and a buyer know going in what the deal is. Everyone is well aware that a bank can foreclose if payments aren't made and that a buyer can walk away if he runs out of money. 

    0Reply
  • Keri Middaugh
    Rental Property Investor · Ypsilanti, MI · Member since 2016 · 230 posts · 86 votes
    9y

    If you think the home is worth $90,000 or so, you could connect with a wholesaler in Lansing and try to get a quick sale that way.  If you need the name of someone, let me know.

    0Reply
  • Bao Nguyen
    Investor · Lansing, MI · Member since 2014 · 86 posts · 31 votes
    9y
    Originally posted by @Bob B.:

    What would happen if everyone walked away from their financial obligations just because they were underwater?

    We don't share the appreciation on our properties with the banks and we should not walk away from them when they don't go as well as we expect.

    I'm not saying you are less than honorable, but foreclosure should be the last thing suggested.

     The question here is not about walking away because one is underwater.  The question is should you walk away if that's your best financial move?  Do you believe banks think about ethics when they take people's homes via foreclosure?  No, they think about dollars, and what's the best decision based on max dollars returned.  Banks expect homeowners to walk away when it doesn't make sense for the owner to stay the course.  Banks even have a process to handle this very common situation: foreclosure.  A property owner should think the same way.  If walking away makes the best financial sense, then not doing so means you are thinking not with your mind but with your emotions.  Good luck with being a successful, emotionally driven, investor.  

    0Reply
  • Bao Nguyen
    Investor · Lansing, MI · Member since 2014 · 86 posts · 31 votes
    9y

    @John Backus So let me recap your dilemma:

    1) Your property is worth $60k, and you owe $90k, and it needs more repairs, and it's giving you headaches.  Let's examine the options you have:

    1) Keep the property: this means you are paying your tenant $80/month to live there while you stress out about fixing the house up constantly.  Doesn't sound great, but you will have great credit. 

    2) Short sale: you are making the bank as whole as possible, and whatever the bank lost on your mortgage, they will get the government (aka you and I) to pay them back via mortgage insurance.   Anyone with experience with short sales will tell you this: it takes forever to get the bank to play ball, and once they approve, your buyer already bought another house.  During that time, you have to get your tenant out, clean up the house, fix it up and make it sale-presentable..etc etc.  Headaches after headaches on your end just to sell the house so you can get the bank as much money back fro them as possible, so that you only get "semi-crappy" credit instead of "fully-crappy" credit.  You are now picking between eating dog food (walking away/foreclosure) and Purina Premium Cat food (short sale).  Both suck if you ask me.  

    3) Wholesale to investors: Investors are not dumb.  They will not buy this house for $90k if it's worth $60k. 

    4) Sell it on the MLS for $90k.  Buyers are not dumb, they will not buy a property for $90k if it's worth $60k.  

    5) Walk away: unless one of the above makes sense to you, this may be it.  Deed-in-lieu means you are quit-claiming the property back to the bank and then walking away.  If you are planning on walking away, there are investors in Lansing that may pay you some cash for keys, and they try to work out a deal with the bank.  You might want to explore this.  

    0Reply
  • Aaron Kite
    Investor · Lansing, MI · Member since 2011 · 19 posts · 19 votes
    9y

    I agree with @Bao Nguyen but I think you could make money with a better property manager and just ride this one out. You could also save a bit of money by having someone fit the property taxes to save money.

    I would just ask for you to keep the house. What amount of income is worth the headache. Do you need to break even... or do you need $100 a month or ?

    1Reply
  • Bob E.
    Queen Creek, AZ · Member since 2014 · 2k+ posts · 1k+ votes
    9y

    We use Jill with 1st choice and she has treated us very well.  If you decide to short sale it let me know we might be interested.  

    0Reply
  • Michaela G.
    Investor · Atlanta, GA · Member since 2013 · 3k+ posts · 3k+ votes
    9y

    How much is the tenant paying in rent and how much is your mortgage. 

    What if your tenant was able to buy the house and have a little higher payment than rent, but then have the yearly mortgage interest to write off? If they pay 30% in taxes, that would get them to pay a chunk less in taxes every year and then they'd actually pay less than rent. 

    Let's say they have 5 years to refinance. By then the values should have recovered quite a bit and you will have paid your loan down a bit more. 

    If they can buy the house with 100% owner financing, they might not be so concerned about the price, but more about the monthly payment. 

    Talk to your tenants and see if they're interested in doing that, if the problems that are there were fixed. Then try to scrape up enough to deal with that. 

    You will no longer need a property manager and any future problems would be on your tenant. 

    Use a loan servicing company to pull the money directly out of the tenant's/new owner's account and make the payment to the mortgage company. 

    If you're on this site, because you want to invest in real estate in the future, then a +800 credit score is worth gold. If you're not planning to buy any more houses in the next few year, then it might not matter.

    0Reply
  • Michaela G.
    Investor · Atlanta, GA · Member since 2013 · 3k+ posts · 3k+ votes
    9y

    And if it's not this tenant, then maybe you can convert another party, looking for a rental, into buyers, by offering 100% owner-financing for 5 years and having their monthly payment match your mortgage payment or be a little higher. You might be surprised how many people would jump at the chance to own, instead of rent, for the same price. They even might be willing to put some work and fix some things. 

    0Reply
  • Connie Bhimireddy
    Real Estate Agent · Morgantown, WV · Member since 2016 · 100 posts · 41 votes
    9y

    So sorry to hear of your situation. Truly. I can't imagine your frustration/stress level over this. Good on you for reaching out.

    That >800 credit score and good job history can do wonders for people. So don't give up before talking with a great, local (to the MI property), small bank lender. Ask them "do you do in-house loans for needed home repairs?" And don't give up til you can talk to 3 that say "yes" to that question. (Or even try the bank the loan is with!) Let each of them tell you "what they've seen" and "what they can do"...

    While I too thought of @Michaela G.'s Lease Option "creative REI solution" idea, I worry people forget about the Due on Sale clause it can potentially trigger. (Google it or BP search it.) PLEASE take others' advice and pay the money to consult with a skilled real estate attorney, or two!

    (And even after you read up on DOS clauses, take your actual mortgage loan paperwork (or contact info) to him/her to find out how the Due on Sale clause may/may not relate to your situation).

    ~All the best and do keep us posted. Will be thinking of you and your family as u work through this to get answers...

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