Owe more than house is worth?

Question

I was talking to one of my friends, and he was telling me how one of his co-worker is going through a tough situation. He owes about 115k on the home, but it is only worth about 85k. Can a real estate investor find a solution to this so everyone wins? How would you approach this?

Joshua D. · Answer

Short sale is about the only thing I know of. This would take an experienced investor to dive in, and one with money.  If you want to know more about short sales just search the forum. There are all sorts of good conversations about them.  Also there was a good podcast about them... But I can't remember who it was?

Account Closed · Answer

5% interest rate. nearly got foreclosed on 2 years after I bought it (bought more then I could afford at the time), got a loan modification for the past due balance bringing it back up to 100k. right now the mortgage is down to $90,400ish. I pay a little extra on top of what I get in rent every month so I can get the mortgage down to around 80k in the next 2 years then sell so any amount I end up having to pay wont be huge at that time, atleast thats the plan. Yea i looked at refi, bank says since i dont live in it i would need to have 20% equity or downpayment and I wouldnt get much better of an interest rate, after refi costs didnt seem to make since because my intent is to get rid of it in the near future....

soo here i am..

Account Closed · Answer

@Jorge Guerrero

I would LOVE to know if there is a solution for that. and if there is, I have a house in Omaha if anyone is interested :)

im guessing there always has to be someone on the losing end for something to take place in that situation. who knows though.... this is BiggerPockets after all, the geniuses of creative real estate investing are centered here so maybe somebody has something of a solution?

the  house i have in this very situation ( my first one, 18 year old  young and dumb with the ability to get a mortgage back in 2004, talk about the perfect storm!), bought for $100k, worth about $80k-$85k  if the wind is blowing the right direction. Ive had it rented for $830/mo for the last few years. My solution is to sell, take the loss/rip the band-aid off in the next 2 years and consider it my college education.

Jesse T. · Answer

Would your current tenant be interested in buying it?  If they have been a good tenatn you might offer them an option at 85K(or89 if you have to pay an agent) when the loan balance gets to that point.  You might have to bring a little to closing, but it shouldn't be too bad.  Maybe you could charge that amount as an option fee.  I wouldn't add anything to the monthly rent to keep the deal as clean as possible.

Lance A White · Answer

Since it was purchased in 2004, is there no equity in it since they have had it since 2004? What is the interest rate? Just a quick calculation shows that with an assumed interest rate of 6.5% with payments starting on Jan 1 of 2005, would indicate that your balance should be around $ 84,603.26 this month. If you are renting it for more then the mortgage and taxes you may want to do a refi at a lower rate.

Larry Turowski · Answer

@Jorge Guerrero Define win.  About the closest you could possibly get to a win is for him to rent it out, if that covers everything and provides  cash flow.  Otherwise, likely both he and the bank are going to lose financially, but as Joshua D.  said, he could possibly do a short sale and get out from under it.  This could be a win in the sense of relieving him from a burden.

CK Hwang · Answer

@Jorge Guerrero , it really depends on how the deal is structured to determine if the due on sale clause get triggered. I don't generally like to do lease options, but have structured a few. The way I have done it in the past is basically finding a tenant who is seriously interested in buying the house and renting it to them. Then I'll let them know that I'm interested in selling them the house at X price.

The rent will be set at higher than mortgage payments, then every year when I renew the rental contract to them, I will present them a purchase option with say 50% of the rent paid to date against the price of the house.

So each year they stay, the house gets cheaper and cheaper to purchase. Of course you need to work the numbers to figure out how many years you want to do this for, how much rent to set, what percent to give them back into the purchase price as each personal situation is very different.

My strategy in this case is to get out of a sticky situation with a win win for both sides and stop an asset from being cash flow negative, not to make more money. There are strategies to use lease options to make profit out of nothing, but it's too complicated and time consuming for me, so I only use this technique to get out of assets that don't conform to my investment target.

Elizabeth Colegrove · Answer

If you want to get rid if it do a short sale if you can qualify! That's the best way I know to get out of underwater mortgage. The downside is under current regulation the forgiveness is considered income. So you could owe quiet a bit on the forgiven amount.

Brian Gibbons · Answer

Seriously, think of the poor tenant buyer in a lease option, you cant charge above appraisal or perhaps a little above appraisal.

You are talking 30% above appraisal.  That is predatory.

Can you spell "Countrywide"?

Rent it out, house hack - rent out the rooms.  Or short sale.

Jorge Guerrero · Answer

@CK Hwang this sounds like a good idea. I just have a question, do you think the due on sale clause would come into play with a lease option? I am new to the real estate investing scene. I read (I believe it was a bigger pockets book) that a lease option could trigger the due on sale clause. or is that owner financing?

Owe more than house is worth?

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