Rich Dad Education – Real Estate Blog

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Should the owner walk away or stay?

As a real estate investor, it behooves me to stay on top of current events. This is especially true for economic news, both local and national. So, I have a daily routine where I first read my local newspaper (I’m old fashioned when it comes to this – I read the ink-on-paper edition) and then I peruse various online news sources. One of those sites is USA Today. I usually check this site via my USA Today smartphone app. A few weeks ago I was reading their Money Watch column. This is a personal finance column that runs every Saturday and it features a financial planner from the National Association of Personal Financial Advisors who answers reader questions. The article was entitled, “MoneyWatch: When to walk away from a mortgage.” Here is the question a reader posted:

Q: I bought my house in February 2007 for $362,000. It is now worth $150,000. The loan is interest only. I’ve tried to get another loan at a lower interest rate, but no bank will help me. Should I walk away or stay? I am on time with my payments, and I don’t have any other financial problems. Please help me.

The reader’s situation is not unique as real estate investors we have all come across our fair share of property owners who are upside down, yet are able to make their payments. (We have also found many more where the owner is upside down and cannot make their payments.) In the column, the advisor first responded with several good alternatives to walking away. Then he mentioned that walking away would have a negative impact on the borrower’s credit.

So, what do you think the reader should do? Should he do a “strategic default” where he walks away from a $200,000+ negative equity position? Or, should he decide to continue on with the commitment he made with his lender back in 2007? Vote your opinion … click on “comment” at the top of this posting and let us hear your point of view.

Eric Buchanan
Rich Dad Education Elite Education Trainer

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14 responses to “Should the owner walk away or stay?

  1. Teresa February 27, 2013 at 12:45 pm

    I am old fashion and feel that it is better to honor your commitments. The first thing I would ask is how much are properties like his in the area renting for at this time. Buying another home that is not under water as his main residence and renting this one out for more than his payments would net passive income that would help pay for his new home. Letting someone else make the payments is a good alternative to letting it go and ruining his credit.

  2. Lori Teakle February 27, 2013 at 1:05 pm

    He borrowed it based on knowledge he had at the time, signed his name making a personal COMMITMENT to repay the loan and he owes it. If he owed it to YOU, you’d want YOUR money, wouldn’t you? Let’s be honorable in our dealings people. Raise the bar for everyone! THIS is why we have to understand what is happening in the markets – so we don’t make foolish commitments!

  3. Marc D February 27, 2013 at 1:18 pm

    Try to get a modification loan through the existing bank that gave the loan,banks are in the lending business not the real estate business. They are more than willing to try to keep you into your house rather than sitting on a vacant house.

  4. John Madison February 27, 2013 at 2:39 pm

    This is tricky. Whenever someone tells me they’re underwater the first thing I say is “do you plan to sell the house?” If not, then being underwater is not the end of the world. In fact, this person should be heading to the assessor’s office to challenge their property taxes! If the plan is to sell then getting out from under the loan is the way to go.
    Why an interest only loan??

  5. Mary February 27, 2013 at 10:20 pm

    I would certainly look at the ramifications of a default strategy like a short sale, which wouldn’t be as damaging as a foreclosure.

  6. margaret February 28, 2013 at 6:17 am

    No, I do not feel that he should walk away from his commitment. First of all, it will negatively impact his credit. Secondly, if he is in fact current on his mortgage means that he is capable and is not struggling to make the payments. Thirdly, please do not “relieve” yourself of your financial commitment. Contact your current lender to see what options are available.

  7. Alan Orruel February 28, 2013 at 9:36 am

    I would walk away from the mortgage. The price gap between the loan and actual value of the home I believe to be too great to hope for a rebound. The home owner could repair his credit while planing out a new strategy with the confidence that things will improve. By keeping the house there is no certainty that the market will spike high enough for him to be able to at least break even.

  8. Patrick T. thaichinda February 28, 2013 at 1:41 pm

    Walk away. Or find an investor.

  9. Scott March 3, 2013 at 11:46 am

    What about HARP? Check out the criteria and see if this is a workable solution.

  10. Barb March 4, 2013 at 3:05 pm

    Some of the suggestions above are valuable: MarcD – modification loan; Margaret – Contact your current lender to see what options are available; Patrick T. thaichinda – find an investor; Scott – Check our HARP, or HAMP.
    I think interest only is awful, your balance is never going down and he has owned this home for 6 years now. That is the first thing I would change about this mortgage; work with the mortgage company that owns the note. Generally speaking, owning a home that is underwater but that you plan on living in and not selling is not a terrible thing. The market will turn around and has already started to do so. But with this interest only, there is no advantage to keeping this mortgage except that he has a place to live. Basically, he is renting the home. If he is good with that…. It’s a tough decision.

  11. Adam B March 6, 2013 at 9:08 pm

    Even with tenants in the home it would not produce positive cash flow, especially with that much of a gap from FMV. This is an underperforming asset. I believe the owner should attempt a strategic default…….short sale or deed in lieu would be the least harmful to their credit.

  12. Adam B March 6, 2013 at 9:10 pm

    By the way Eric, my wife and I did the 3 day real estate training with Dina this past weekend and thought she was great!

  13. Jude Detloff March 11, 2013 at 7:00 pm

    After trying many banks, many strategies, HARP, HARP II, due to a Freddie Mac Loan;
    and attempting negotiation with bankers who have my Home Equity Line of Credit, I’ve
    been told a HELOC is a second. Obviously, by not asking the correct questions in procurement
    of the second, I was ignorant of that. It is not acceptable in inclusion of the first… when looking for
    bank assistance and/or trying to refinance at a better rate. The second is another loan
    entirely and you are responsible for it even if you foreclose or sell. Problem is that it makes
    it more difficult to work with the banks. Even though.

    I have found that they have a ratio, income to debt- and even if suggesting to the second’s
    owner (bank) that they would be better off with refinancing the loan… so if I walked or lost
    my home, they would not lose out as well.

    It is all about the interest and they want the interest forever…. wouldn’t you?

    So, why not be more flexible for a person like me, who has purchased, owned,
    developed, maintained, improved, financed, paid taxes and paid, paid, and sacrificed for
    with body and other and paid for… for 16 years. Did I mention…. I paid, not the bank, but
    rather for them, as it appears now for my home is theirs…. right?

    Point being, unless you tried it, you may find that the banks are not as workable as
    they would like us to believe, they have mismanaged their systems costing us billions,
    they throw out families, they are too happy to have you continue to lose by staying in
    your home as they take it away because of vandalization, squatters and by staying, you
    keep up the house and property by keeping out the pests, human included, and all
    the time, continue to pay…. I say, in this situation… possibly walk.

    So, where you going to walk to?
    If you are older, bigger problem.
    If you are older/disabled or?… bigger problem
    unless you have bucks…. so that’s why we’re here, right?
    Jude

  14. N. Muhammad June 10, 2013 at 1:50 am

    stay with the commitment. my word is bond.

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