I got an email this morning from a reader who will, for obvious reasons, remain anonymous:
Let me give you a brief history and see if you have some advice from me. I am a physician who bought an investment home in Nevada for 230,000. My note is 208,000. The house if sold would be lucky to be worth 130,000. My note is 1700 per month and rent only brings 900 per month. Credit aside, I was thinking of foreclosure. I don’t need the credit. The problem is I live in million plus house with about 500,000 of equity. Keeping the investment house makes no financial sense. I feel like I was misled by a real estate broker. I only have myself to blame. My question what is the chance of them coming after me for the difference being that I have equity in my primary residence and have a well compensated job? I wish I lived in California right now.
Actually, living in California wouln’t help here, from a legal perspective: only mortgages on primary residences are non-recourse.
From a financial perspective, there’s an option value on walking away rather than simply selling and paying off the balance of the mortgage. Either the lender will come after you for the difference, or they won’t. If they don’t, you’ve saved yourself $80,000. If they do, then you can just pay them the balance – which you do after all owe them.
So now the question becomes, do you walk away, or do you continue to pay your $1,700 a month in mortgage payments and receive your $900 a month in rent? Bleeding $800 a month like that is not pleasant, especially when the value of your home is going down rather than up: you don’t want to pay for the privilege of seeing yourself get further and further upside-down.
My advice would be to talk to the lender. Explain to them that you don’t live in the house and that you have no desire to keep it, and ask them if they would accept a short sale. There will be some negotiation — you might want to get yourself a lawyer — and with any luck you’ll be able to come to an agreement which will preclude any legal action against you. After all, the lender would much rather have you fully on board, actively selling the house in good condition, rather than being forced to go through expensive foreclosure proceedings.
Any other advice from Market Movers readers?