I bought 2 homes in 2007 and I still own both of them. It’s also fair to say I am underwater on them both. How much do I wish I had a crystal ball back then?
I try not to be too hard on myself: Nobody had the ability to see the future and nobody knew just how bad the housing industry would get.
Millions of homeowners – including most of the Realtors, loan officers, and real estate attorneys I know - have been affected by this. If you owe more on your home than it’s worth (also known as underwater or upside down), it may seem like you’re throwing away money every month and there’s not a lot you can do about it.
However there are a few options out there and more to come:
As I lay out these options I just want to clarify that I am not an attorney or an accountant and you should always consult these professionals before making a decision on your mortgage. I feel comfortable saying that in many cases the homeowners who I’ve seen lawyer up have better results when trying to negotiate with their lenders.
That out of the way, here are some options if you’re underwater on your mortgage:
WAIT IT OUT
I initally bought my 2 homes in 2007 as long term investments and that’s how I plan to continue to hold them. Since historically real estate values double every ten years, statistically it’s fair to say that over the better part of the next decade, property values will rebound. This strategy works well for those who:
But again, who has the crystal ball? Property values have started to increase in the Seattle metro area as of last quarter and the market is seeing a huge increase in pending sales and a shortage of inventory. Yet economists say it could be years before the local housing market sees a full recovery.
REFINANCE THROUGH HARP 2.0 – IF IT EVERS COMES
HARP aka Making Home Affordable program is a federal refinance initiative program designed to help about 5 million underwater homeowners refinance into a 30 yr or 15yr fixed loan with a lower monthly payment. However, to date less than 1 million borrowers have been able to refinance. This month we are awaiting an overhaul to the HARP program which hopes to reach more underwater homeowners. The new HARP 2.0 program is supposed to go live as of this month but we’ve yet to see it happen. The old HARP program limited underwater borrowers to a loan-to-value ratio of 125% whereas 2.0 has no limit. You must be current on your loan and not have had any late martgage payments in the last 12 months. You current loan must also be held by Fannie Mae.USE THE HARP LOAN CALCULATOR BELOW TO SEE IF YOU MAY QUALIFY.
RENT OUT YOUR HOME
Renting the house out is a viable option in some situations. If the current market rent covers your mortgage payment or more (and especially if your tenant is willing to pay more for the home than you are) and you are willing to be a landlord, this may be a viable option.
Craigslist or Rentometer.com are good sites to find out what the current market rent is for a house of your same size in your area.
TRY A LOAN MODIFICATION – AND I MEAN “TRY”
“Try” being the key word. Homeowners who have missed payments, are facing foreclosure, and want to stay in their homes seem to prefer loan modifications because it seems “easier” and there’s a promise that they can stay in the home.
But the reality is that few lenders agree to reduce the principal balance on a loan and if they do, most tack on sky high fees to the loan balance or they are only temporary modifications. Conservatively I know about 40 people who have tried loan mods – with and without attorney assistance – and I don’t personally know of anyone who has been granted a true, permanent loan modification.
Furthermore, I see and hear about lot of loan mod scams so please be aware of who you engage with.
FORECLOSURE
Your last option… The “F word”. In most cases you should try to avoid foreclosure. Although more people than ever are walking away from their homes, foreclosure can have some very serious, negative affects on your credit. And there may be tax consequances for allowing a foreclosure.
A foreclosure can damage your credit for up to seven years, according to the National Association of Realtors. Even if you walk away, your credit also affects your ability to rent an apartment and in some cases get a job.
In speciific cases it may make sense to let the bank foreclosure or just give the home back via a deed in lieu rather than spending money and time fighting to save a home that’s just not worth it.
DEED IN LIEU
With a deed in lieu you voluntarily give the deed back to the bank via an approval process. You can’t just simply sign it over, the bank does have to approve and authorize the deen in lieu. If you know you won’t be able to make up the deficiency and are behind on payments, you may consider a deed in lieu of foreclosure.
A deed in lieu will also negatively impact your credit and you’ll forfeit any equity in your home.
DO A SHORT SALE
With a short sale you will actually list the home on the market with a Realtor, procure a buyer, and negotiate with the bank to allow you to sell for less than what you owe on your mortgage. The bank may or may not release you from the deficiency and there may be tax consequances on the forgiven amount. And be prepared as short sales are a very long process. Closings generally take 6 months to a year.
The process still damages your credit but generally not as badly as a foreclosure.
Finally, keep in mind that when you’re upside down on your mortgage, your options vary greatly depending on whether or not you’re late on any payments, are employed, and wether your lender has filed a Notice of Default or Notice of Trustees Sale on your house—the legal prerequisite for foreclosure.
Market Heats Up at an Incredible Pace, Fast Acting Buyers Win
Eastside Real estate brokers are busier these days as they manage the rush
It’s tough for Eastside buyers out there right now- just ask most of you! This past week I’ve had to have “the talk” with the buyers I’m working with to explain just how continuing to sit on the fence could hurt them. For the past few weeks pending sales on the MLS outnumber new, active listings by 30%. Inventory is dry, dry, dry. Just try and find an FHA approved home that’s in decent shape under $300k in this areas that’s been on the market for more than 10 days. This is the most popular product on the market and every one of them has multiple offers. And FHA approved condos under $150k? Forget it! The week before last I submitted exactly 11 offers for buyers ranging from $150K-$425k and from Arlington to Maple Valley. All had multiple offers and exactly 2 were accepted.
You know me, I am not an alarmist and I don’t send distress messages unless it’s warranted. So I say this in all seriousness – if you are a buyer in the King County or Snohomish housing market and do not have a home under contract, you should seriously think about doing what you can to contract a home for youself soon.
The WSJ, Inman News, Tulia, Zillow, Active Rain, Windermere, Redfin, Seattle Times, and the MLS himself have all issued reports this week about the continuing price increases and low inventory in the Seattle market. Statistically this is no longer a phase but the “new balanced market”.
My colleagues and I are seeing this first hand, as are many of you. We’re busier than ever. overnight Realtors prayed for this for the past 3 years. Well, be careful what you wish for because many brokers heads are spinning they are so busy. Just friend me on Facebook or visit my Facebook page Jennifer Nilssen Real Estate to see the comments from other brokers! It;s clear the good old days of a buyer’s market are ending. In the past month I’ve seen nothing but full price offers and multiple offer situations. Buyers are making 4-6 offers before one takes. It’s across the board – all over and every price range. Pending sales for the last 5 weeks have outnumbered new inventory by over 30%. I believe we’ve hit the bottom and prices will continue to increase moving forward. Perhaps slowly, but surely they are increasing.
What can I do if I am a buyer?
You want to make sure you take advantage of the end of the buyer’s market. There are a few things buyers can do to position themselves in a tight market:
I Don’t Want to Be in A Competetive Market. Should I Just Wait for it to Die Down?
The level headed, blog writer advising the masses in me wants to say “It’s not adviseable.” If we were sitting at my kitchen table I’d tell you ”Absolutely not”. Increased prices are likely a trend that will continue through at least the next few quarters. By waiting, you may miss the bottom of the market and you are not assured that mortgage interest rates will remain low.
For those of you actively looking, keep at it! If you’ve been passive until now, I say this lovingly, but it’s time to get off the fence or risk paying more than you should down the road. If you get in now, you’ll have that equity you’ve been waiting for and has been keeping you on the fence when prices really start taking off here soon.
Sellers pay attention! If you have a popular product, say, a home or FHA approved condo in King County or Snohomish County under $300k, and you’ve been considering selling, this may be the time for you.
Keeping You Informed….
Make sure your landlordship starts out on the right foot
Due to uncertainty in the markets, renting has become more popular and more of a neccessity than ever. Renters today commonly find leasing less expensive and more stable than owning and former homeowners may find that renting is a more reassuring option after losing confidence in homeownership.
Many homeowners find that their life circumstances have changed and their homes no longer suit them but because they are low on equity, they cannot afford to sell. So renting is a viable alternative to selling via short sale or foreclosing.
In June 2010 Trulia called Seattle the 3rd most renter friendly area in the nation and Zillow reports that in December 2011 the median rental list price in Seattle for a single family residence was only $1400/mo. This is far less than the average mortgage amount based on the current median home price in King County and current interest rates.
New landlords can curb the competetive renter’s market to their favor by implementing the following tips the next time they go to negotiate their lease:
Super Landlord Tip #1: Include in your lease the following wording: “Tenant shall be required to pay the landlord a service charge of $75 if it becomes neccessary for the landlord to deliver a legal notice for any violation of the rental agreement.” I had a tenant that consistently paid her rent 5-10 days late every month because she was just the type of person who was chronically behind. Around the 10th day I would deliver the ”3 Days to Pay or Quit” notice and sure enough I would get the rent money the next day. I beleive if I had added this languange into the lease up front, she would have had significant incentive to not be late and I would get paid on time every month. Or I would have had an extra $500 in my pocket.
Super Landlord Tip #2: Put together a list of 5-10 churches or agencies in the area who will help residents who are unable to pay their rent one month. This can and does happen even to good tenants. Times are hard and life happens. Although it’s frustrating and you don’t want to make it a habit, assisting the tenant if they apear unable to pay will increase the chances of you getting paid rent. When you have a tenant that has a good track record of paying rent but has a legitimate problem one month, give them the list.
Super Landlord Tip #3: Charge $50 per person for a tenant screening even though it’s typically $25-35 per person. I think at the $50 mark it gives people pause and you’ll be able to weed out the tenants who are serious. Oh yeah, and actually DO the tenant screening including the credit and criminal checks.
Super Landlord Tip #4: Tell a tenant that you’re looking forward to helping them as a “preferred” tenant who pays on time and has no complaints against them. Tell them that preferred tenants receive special service such as a free carpet cleanings once a year in addition to writing a glowing recommendation for them to their next landlord or employer.
Super Landlord Tip #5: Lease your parking spaces and storage units seperately if you’re renting a condo. If you have a parking space or two or a storage unit, rent that for an additional $35-75 month in order to generate more income. This is in keeping with most apartments in the Seattle area.
Super Landlord Tip #6: Ask tenants if they would like a ceiling fan, alarm system, espresso machine, furniture or tv added to their monthly rental. If they say yes you’ll recover your expenses within months and profit thereafter.
Super Landlord Tip #7: Make sure that in the lease agreement it states that the tenant must give the landlord at least 45 days notice before leaving because most of the time the 20 days notice that is required by law just isn’t enough time for a landlord to regroup and prepare for the next tenant. Also make sure that there is wording in the lease that allows you to show the home to prospective tenants (while the tenant is still living there) at a time and date that’s predetermined or mutually acceptable. For example the landlord would be able to show the property between 1pm and 3pm on the 2 Saturdays prior to the tenant vacating.
Super Landlord Tip #8: Be on good terms with your tenants and communicate. Be more than just the landlord collecting their money. Make sure that your tenant knows that they can come to you if they need anything within reason or see changes or problems down the pipeline. If the lines of communication are open you’re more likely to get courtesy calls when they’re going to be a day or two late paying rent, rather than you chasing them down and losing sleep wondering what’s going on with your renter.
Super Landlord Tip #9: Trust your gut. If a prospective tenant shows up to the showing with their steady girlfriend who owns 2 giant dogs and the tenant says that he is going to be the only one living in the home and declines to pay a pet deposit, your inner voice is likely going to say ”there is a pretty good chance the girlfriend is going to be here in home with him most of the week and likely those dogs are going to be on my hardwoods.” And you’d be right. So although the single tenant will be the person responsible on the lease, clarify up front in the lease that the girlfriend, by name, will be able to stay in the home but the dogs will not. Or whatever you agree to. And even if they agree to not have the dogs in the home, increase the damage deposit because your gut is telling you that those dogs will be there at least some of the time.
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