Can’t I Just Walk Away?
All “upside down” homeowners have asked this question at some point: “Can’t I Just Walk Away? I can’t keep up with my payments anyway, how much worse can it be to abandon the house?” It is true that in terms of loss of credit, being over three months behind on your mortgage payment is well on the way to sending your credit to tragic lows and foreclosure and bankruptcy would only slightly increase the damage. Some analysts believe at that point, bankruptcy will speed up the credit healing process and allow the defeated homeowner to borrow money again sooner. But in addition to credit consequences there are other considerations that cannot be ignored when your home value is “under water”.
First, you have to live someplace. Unless you enjoy camping for extended periods of time and know of free campsites, you will be paying to live someplace. The fact that you currently have no equity in your home is a short-sighted reason to stop paying your mortgage payment if you are able to pay it. Barring another major 9-11 type blow to our economy or a market crash from the looming “fiscal cliff”, time will heal the real estate industry and return the majority of homeowners to a position of growing equity. Even if you can’t pay your mortgage without wiping out your last vestige of savings and retirement, it may take months for your mortgage company to complete foreclosure and evict you. The average time in Virginia from default to eviction is well over 90 days! We have seen defaulting homeowners make decisions on WHEN to move out to save face, avoid harassment, and avoid an otherwise manageable disruption. With legal advice on the exact processes and minimum time requirements of foreclosure and eviction, a homeowner could decide WHEN to move out in such a way as to enjoy months of “free rent”. And in some cases, months can become years, as when the lender has to delay foreclosure to fix document issues or they want to make sure your house has an occupant to prevent vandalism while a buyer is found. For many people this period of “free rent” is essential to a fresh start.
Second, if you give in to the urge to walk away and the house is vandalized or even if it sells quickly at foreclosure, bad things can still happen to you. The person on title to a home is the one held accountable for city or county liens for a variety of maintenance issues from grass cutting to demolition in really extreme cases. Homeowners associations and condominium managers will also take judgments without hesitation against the named homeowner whether or not they have moved out. The value of the house often diminishes when it remains vacant for an extended period of time and that means that the lender will recover less and potentially sue you for a higher “deficiency judgment” when they ultimately foreclose. Even if the mortgage lender decides not to sue you for a deficiency, abandoning a house may also disqualify you from avoiding imputed interest from forgiven debt on your primary residence. If you are not careful, you can end up just trading one creditor (your mortgage company) for a worse creditor (the IRS)!
Thirdly, there is a certain satisfaction at stake when a homeowner delivers – on his own terms – the house to the next owner! I have never had a client regret doing a short sale even though it may take months of their effort, frustration, and some short term expense. The stubborn lender that seems hell bent on shooting itself in the foot will never express appreciation. But many a worn out short selling homeowner has crossed the finish line knowing that they have done the best they could to honor their word, make the lender as whole as possible, and to minimize credit and financial and tax liability losses to themselves. It is also an affirmation of character.
Finally, there is a buyer out there who will be grateful for your house as well. Historically, buyers had several channels for finding new homes. The road most traveled is to find a good realtor as a buyer broker and put in an “arms length” offer. But for the gambler or inner rehabber, some buyers would risk a pig in a poke in exchange for big savings on the sales price by buying a home at a foreclosure auction. Normally, in Virginia, foreclosure auction bidders don’t have a chance to inspect the inside of property before purchase. A 10% (of the successful sales price bid) deposit would be lost if the buyer inspected the house after the auction and found major termite damage or water damage. A little safer and closer to actual market value, a buyer could also buy repossessed homes from lenders (“REO”). In the current market, inventory is so low, that the pricing on just about all home purchases is starting to go up and “deals” are harder to find in any setting. According to TheExaminer.Com, “With the number of homes available for sale at an all-time low, the price difference between standard “equity” sales and bank foreclosures has all but dried up.” A number of factors have contributed to this situation which could change at any time, e.g., low interest rates. But the stars may be aligned for you right now to have a good chance to: (1) sell your upside down home in a shortsale; (2) Minimize losses to your lender (and ultimately to yourself); (3) Minimize or eliminate taxes and/or deficiencies which must be paid; (4) Avoid foreclosure and/or bankruptcy; and (5) bless a buyer frustrated by the historically low inventory of homes for sale.
It all starts with a commitment to not “just walk away”! Or at least to not walk away until you get a free legal consultation with us on the benefits and consequences of abandonment vs. deed in lieu of foreclosure vs. short sale, etc..