Suggestions on managing underwater mortgage and cross-country move
June 26, 2012 7:52 AM   Subscribe

Due to a new job, my family and I (wife, 2 kids, 2 cats) need to relocate from the DC area to Oregon in the near term future, ideally before the start of the Oregon school year (approximately September 1st). The wrinkle: how to deal with our currently-somewhat-underwater house in the Maryland suburbs of DC.

We had an initial meeting with a realtor earlier this week to go over what we need to do to prep the house, discussing timing of listing, and so forth. We're looking at somewhere between 3K and 8K worth of work to get the house into the condition where we could list and show it (which includes both some needed repairs as well some packing and purging that we're going to need to do anyway).

Based on what the realtor is advising we list the house for as well as our current "pay-off" numbers on our first and second mortgages, we're going to loose between 25K and 50K if we sell the house (that includes the difference with what we owe, the realtor commissions, and the money we need to spend on "prepping".) Now, we *are* going to make the move -- jobs have been accepted and it's the right long-term thing for our family to do -- I'd just like some input on other options we might have that can reduce or minimize the amount of money we're going to lose. Important to note is that our income will stay approximately the same after the move, and while we could handle paying our mortgage and rent in Oregon for a short period of time, we'd rather avoid that if at all possible.

The options on the table are:

1) Take the hit and sell the house -- in some ways this is the most appealing option, because it largely resolves things. We would need to get a loan to cover the difference between the sale price and the pay-off number, possibly with the assistance of family co-signers, and would be able to pay it back off with a few years due to the lower cost of living in Oregon relative to DC (we're going to go from ~$4K/month mortgage to ~$1K/month rent).

2) Rent the house out (through a management company) and sell it a few years down the road, once the market has improved further and we've further paid down the mortgage. The idea would be we keep paying the mortgage as we are now and use the income from the rental to cover our rent in Oregon. This seems like a potentially good way to go, but we have no idea how one goes about renting out their house, how to evaluate management companies, how long we might have to wait before getting tenants, and so on.

3) A strategic default: line up housing in Oregon, move, and just stop paying the mortgages. This is more of a "last resort" solution, and the short and long-term consequences of this approach aren't very clear. Can we notify the bank that we're giving back the house and just mail them the keys and have them handle selling the house? Do we try to get them to allow a short sale or do some sort of principal reduction? I know that Maryland is a recourse state and that makes this approach less tenable than if we were in a non-recourse state. Are there lawyers that specialize in this type of stuff that I should be talking to? (And how does one evaluate them? This isn't exactly a pool-side conversation with the neighbors...)

4) Some other option we're unaware of that you can suggest.

Throwaway email for contact purposes:

TL;DR: Need to move cross-country within the next few months; have to figure out how to deal with house with underwater mortgage in the least financially painful way.
posted by anonymous to Work & Money (14 answers total) 4 users marked this as a favorite
Which Maryland suburb is it?
posted by discopolo at 7:59 AM on June 26, 2012

The reason I ask is because there is a glut of new housing in some desirable suburbs and that may affect the market for your house. In my own study of housing in this area, it's one thing if it's Gaithersburg or Germantown and another if it's Bethesda.
posted by discopolo at 8:02 AM on June 26, 2012

The rental market in DC is really, really tight right now. Depending on the suburb - and when you bought your house - I'd be willing to bet that you'd easily make your mortgage payment plus the management firm's fees on the rental market, maybe with a little left over to boot. And I'd also bet that that would be true for the foreseeable future.

Option B, definitely.
posted by downing street memo at 8:02 AM on June 26, 2012 [2 favorites]

Agreeing with discopolo that it would help to know the neighborhood. The rental market seems pretty strong right now - I would check to see what other properties in your area are renting for. You might even be able to cover the mortgage and turn a profit.
posted by procrastination at 8:03 AM on June 26, 2012

It seems to me that a strategic default in a recourse state is very much the same as the first option you listed, except that a bank is unlikely to try very hard to get the best price for your house, and you'll have more hassle and a default on your credit history.
posted by Houstonian at 8:03 AM on June 26, 2012

I'm rather of the opinion that you do a strategic default combined with a bankruptcy, since you're in a recourse state. The bankruptcy prevents you from having to deal with the recourse amount. (which walking away from the house would leave you liable for, if I'm not mistaken)

Also, there is no guarnatee that renting out your house will cover the mortgage. Can you afford to carry the house indefinitely while you wait for the market to recover. Also, being an absentee landlord, so far away from your house is not optimal.

If I were you, I'd probably just work with the bank to sell the house and take out an unsecured loan for whatever the difference is. It would suck paying all that money back, but it leaves your credit in tact.

I acutally fantasize about sticking my house up the bank's ass. But at the end of the day, I have to live somewhere, so I just keep paying.

It's worth it to get some good advice from a bankruptcy attorney, so you know exactly what to expect and how to deal with this.

The good news is, you don't have to spend any money to improve your house with bankruptcy, just put your shit in a moving van and get out of dodge.

Also, while going bankrupt, you can just sock away all that cash for starting out your new life in Oregon.

The good news with this option is that everyone and his brother is in a similar boat, and you'll be amazed at how quickly you can recover from a bankruptcy. Like a couple of years, not decades.
posted by Ruthless Bunny at 8:07 AM on June 26, 2012

Not knowing how much you would actually lose in a sale, or how much you could clear from the rental, you can still make some broad estimates of how long you could rent the house without losing more money than you would if you sold. In other words, if you cleared 3k on the rental, so you only had to pay 2k toward the mortgage each month (I have no real idea if this is a reasonable assumption), you would be paying 24k to keep the house off the market for a year. Do you think the house will appreciate (the market will improve) 24k in a year? Of course the time changes if the assumptions change, but you might consider thinking a bit about it this way.

Is a refi an option? Interests rates are really low, and if you can refinance your payments might come down...
posted by OmieWise at 8:20 AM on June 26, 2012

I don't have much to add other than I just went through something similar. We just relocated from Allentown, PA to Austin, TX and sold our house. I don't know much about rental markets in MD -- we certainly couldn't have covered our mortgage at all if we took that option.

Some questions -- what exactly is the work that would cost 3-8K? There were a lot of things that some realtors recommended to us, that we did not do and it did not impact selling our house. I estimate we spent about $500-$1000 prepping our house to sell.

Also, keep in mind holding costs, and if you choose to sell you may be paying both your mortgages and your rent -- could you afford to do this? We opted to price our house to sell, and ended up only paying both for 1 month (and we got 95% of our asking price). Although we lost everything we put into the house (in terms of down payment) we ended up a little better than breaking even on the sale, and then got a refund for our tax escrow.

If we were in a stronger rental market, where it would fairly easy to find a management company, and recoup all or most of mortgage payment we definitely would have taken that option over defaulting, especially if you and your family want to buy a house in the new location.

Good luck, and congrats on the move. Once you get through the housing part, it is a great relief.
posted by hrj at 8:25 AM on June 26, 2012

Is this true?

2) Rent the house out ... The idea would be we keep paying the mortgage as we are now and use the income from the rental to cover our rent in Oregon.

If the rental income on this property covers your mortgage payment AND your rental payment in Oregon, sounds like a good deal to me.

Now, in some places here in Oregon, the rental market is very tight: that means more expensive than usual because of people unable to buy homes or in a similar situation as you.

If you do rent it, have you looked at refinancing? Do you have a really good rate? If refinancing knocks down your mortgage payment such that you get more profit on renting... renting may be the thing to do.
posted by amanda at 8:28 AM on June 26, 2012

I just moved from Maryland 3 months ago and my house is\was underwater. I agonized for years over what to do and ended up just renting it out. I can't imagine defaulting on a home with a family. I'm fairly single with no debt or commitments and couldn't bring myself to do that.

I went with a local property management company to save myself any headaches of long distance landlording. You should be looking for one that takes no more then 10% a month in my opinion. I think mine is taking 8%?

It took them 1 month to get someone in the house but that's because I went to them a few days before the start of the next month which is a rough time trying to get someone to sign a lease.

Rent it going up and up so unless you REALLY want the extra security I would only do have the tenants sign a year lease. For instance, I could already rent my place out for $100 more a month.

Also, look into doing a streamlined refinance. Even if you had a really good mortgage rate rates are really low right now so it could save you even more money making it an even better idea to rent out.
posted by zephyr_words at 9:01 AM on June 26, 2012 [3 favorites]

In early 2008 I moved from central Massachusetts (Worcester area) to the DC suburbs for a job. I attempted to rent my house out AND had it on the market. No one bit on the rental (and it was on the market for a year and a half before it sold). I was paying a mortgage on my empty house in MA and apartment rent in northern Virginia and that HURT my finances considerably -- particularly when my insurance company decided to cancel my homeowner's insurance because they "somehow discovered" my house was vacant -- you have no idea how difficult it is to get insurance on a vacant home, and once you find it, the premium rates are usurious (I paid 4x my homeowner's premium to keep that house insured because it was vacant -- and I was in a fairly desirable suburb).

Now, the DC area has weathered the housing crisis a bit better than most areas due to government employment. I had the disadvantage of my house being quite far from Boston so jobs weren't as plentiful. Depending on how close you are to DC you will likely be able to rent your house for a decent rate. (I was not underwater, though, so I could afford to take that risk; you may not be.)

My suggestion would be to put it up for sale and for rent at the same time, if possible. Chances are if you get a renter, your rental income will at least cover your mortgage/taxes/insurance payment.

Failing that, see if your bank will accept a short sale. That doesn't hurt your credit nearly as much as a foreclosure would, and presumably you are still current on your mortgage payments.
posted by tckma at 9:58 AM on June 26, 2012

It seems to me that there's little risk and little lost by first trying B, with A or C as your fallback. Even if your rental loses money, it would presumably be less than the monthly outflow to pay off 25-50k in just a few years. And then you retain an asset that presumably will recover its value, rather than locking in your losses. Even if you assume the market will not recover and you'll always end up owing that 25-50k, why not still rent it out, lose a few hundred every month, and save whatever else you would've made in loan payments under Option A to close that 25-50k gap, while the money is loaned to you at 5% (or whatever your mortgage interest rate is), rather than at whatever interest rate your unsecured line of credit would be. You may even end up being able to use the rental's passive losses to offset some of your income, but don't take my word for that -- ask an accountant to help you analyze the tax implications. Then, worst case scenario, if it doesn't rent out or B falls through for some reason, you could look into option A or C. Just retain the money you would otherwise put into repairs and upgrades now to use after any renters.
posted by salvia at 1:45 PM on June 26, 2012

Depending on where in Maryland you are, your best option is probably to rent it out - it is an owner's market if you are renting. We were looking for a house to rent for a couple of months in the DC area and most of the time by the time we replied to an ad, the house was already gone. There are tons of crazy people like me that will spend more to rent a house than we would on a mortgage for the same house for a number of reasons - in my case it's that we're not ready to commit to living in DC for long enough to make buying a house worth it, but also people who need a house b/c they were recently divorced, people who are stationed in DC temporarily (military, diplomat, world bank/IMF, non-profit, IT, etc...), etc...

In terms of finding a property management company - search online, and look on Angie's List and any local real estate forum for recommendations. I read somewhere that there is a website specifically for renting to military families that people highly recommend - I think.
posted by echo0720 at 5:39 PM on June 26, 2012

Deed in Lieu or short sale offer and compromise. IRS forgiveness of debt exemption expires this year, and if you are underwater, just get out and move on with your real life. I'd also put a shade-tree half-retired real estate attorney on retainer in order to respond to all written correspondence plus make phone calls to keep me updated. If the stress or fear became too great, I would not rule out a Bankruptcy if I was under thirty and had toddler aged children. I am not an attorney, nor ever wanted to be.
posted by vozworth at 7:15 PM on June 26, 2012

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