Dealing with being stuck

[RosieTR]

I've been going round and round with this in my head so I thought I'd ask for advice. Here's the deal: we have an upside-down house in Phoenix and a paid-off house in Colorado. We'd like to move to Colorado in the near future, and I'm wondering what to do about the Phx house, which we're stuck with. As I see it, the choices are A) rent it out, B) pull equity out of the CO house to pay the difference of selling it or C) leave the Phx house empty and just pay the mortgage on it. Choice A means dealing with renters in a place we don't intend to ever move back to, with potentially questionable wear and tear on the house, choice B means back into not having the security of a paid-off house plus selling the Phx house and the myriad of fees on both ends and choice C is possibly more expensive esp since it's unlikely the housing market with revive with any great intensity any time soon so it's the most distant choice in my opinion. With renting out the Phx house we'd likely be losing anywhere from $200-500/mo (plus any damage renters do to the place) but selling would lose on the order of $80K or maybe more, plus bank fees and the like. In a purely financial sense, even losing $500/mo would mean losing the full $80K after 160 mo which is 13 years, when the loan will be more than half over anyway. On an emotional sense, dealing with this house for a decade is pretty depressing. Not as depressing as staying in Phoenix for a decade, however. Anyway, any thoughts?

[iris lily]

My instinct is always to cut the loss and move on. But I don't know how much of a dent $80,000 makes in your net worth. I also sympathize because for me the idea of living in Arizona is just ugh. I am not a desert person.

I will be dumping one of my tiny houses in the next couple of years, at a loss, and DH will be crazed by that. But I had fun with it, time to move on before it before it becomes a giant albatross around our neck. Our tiny house is condemned for occupancy, and renting it is not an option.

[redfox]

Have you called any local non-profit housing groups to ask them if they might be able to benefit from having it? If you go with pulling equity out to pay this house off and giving it to a non-profit, you'd get a hefty tax write-down. If you get interest from a non-profit, perhaps you can agree to split the bill of paying the mortgage off & they get title. See if there is a Community Land Trust in your area; call the local Housing Authority and see if they have a scattered site program (HA owned houses in various neighborhoods rather than an entire HA development), see if there are any agencies that are reputable and manage rent-to-buy properties, etc.

Good luck.

[Spartana]

I have a friend who owns an underwater house in Palm Springs, CA. and one in San Clemente, CA near the beach where she now lives. She makes over $100K/year but is choosing to walk away from the Palm Springs house (had it rented for awhile) and let it go into foreclosure. I don't know how that would effect (or is that Affect :-)?) her financially but she seems to think it won't. Aside from the moral/ethical issues I have with doing this, I personally can't think that a bank would let a person who makes $100K/year walk out on their loan without some sort of fight or law suit. But she says they won't.

[Spartana]

Have you called any local non-profit housing groups to ask them if they might be able to benefit from having it? If you go with pulling equity out to pay this house off and giving it to a non-profit, you'd get a hefty tax write-down. If you get interest from a non-profit, perhaps you can agree to split the bill of paying the mortgage off & they get title. See if there is a Community Land Trust in your area; call the local Housing Authority and see if they have a scattered site program (HA owned houses in various neighborhoods rather than an entire HA development), see if there are any agencies that are reputable and manage rent-to-buy properties, etc.

Good luck.

Also the VA (Veterans Admin) and Habitate for Humanity often buy houses that are underwater. They make some deal with the bank to buy the property at much less than the loan - a sort of govmint/charity short sale - that allows the homeowner to walk away. I think HUD (Housing and Urban Development agency) does this too.

[RosieTR]

Hmmm, we have a VA loan which is why any kind of strategic default or short sale is not a good option. This isn't a moral debate, just economic: even if we did walk away or manage to do a short sale, the VA would come after us with either wage garnishment, a lien on our CO house or something PLUS our credit would be trashed. It would be much better to just get a HELOC or something on the CO house to pay the difference with the Phx house without trashing the credit. If CA is a non-recourse state and your friend has a standard loan, she'll take a big hit on her credit but yeah they won't go after her other assets. AZ is non-recourse too but the VA supersedes that, is my understanding. Pretty sure the VA won't buy the house underwater from folks who can afford to pay the mortgage (unless we both have extended unemployment) and who have a whole other house with lots of equity. It's slightly possible we could refinance to a lower interest rate though I still sort of doubt that a house worth about 50% of its loan amount is going to get any takers. I have no idea how donating a house to some sort of charity would work as Redfox suggested. I could look into it though my instinct is that charities aren't really going to want people to be dumping their upside-down houses on them in a saturated market. But it's possible I am not understanding how this works.

[fidgiegirl]

If you did the rental thing, how about hiring a management company to take the stress out of it? We have considered this for our eventual rental, but since we're going to be right in the neighborhood, we decided against it. But if we were moving out of state, we would definitely do it.

However, I just went back and read your OP more closely, and so that would be even MORE of a loss if you did that . . .

Uff, 80K. Huuuuuuuge bummer there. Wild idea, could there be a compromise financing solution where you somehow take some of the equity out of CO house to at least reduce your payment on Phoenix so the renting scenario wouldn't leave you in the red every month? Or is that just really shifting one part of a payment onto another payment? Is your interest rate such that you would benefit from a refinance? Or is it too far underwater to do so?

Sorry if dumb questions :( Hopefully they help . . .

[fidgiegirl]

Another wild idea: Any way to convert into a duplex, or even put in a mother-in-law apt? I know more $$ up front, but maybe you could recoup that $$ plus make a little if you could rent out two units? Is the house close to a rental population like a college? Or the additional unit could get some cash flowing in while you think of the ultimate solution to the situation, even if you continued living in the other part of the house?

[fidgiegirl]

We found this helpful (and depressing, for us at least): http://www.kiplinger.com/tools/renthouse/

[fidgiegirl]

Ok, now I realize these posts are being really annoying, I could have put them into one . . . :)

If you are going to lose the money over many years anyway by being bled to death, take the hit, save your sanity and move on. If there is no way to make money on the rental you might as well not expend any life energy on it. I'd say if you could make money or at least break even if might be worth it to hang onto the property and later if the market rebounds you could sell it and recover some of the money, but if you are losing monthly, well, it just doesn't seem worth it at all.

Done now, really :)

[puglogic]

Rosie, this part in the link fidgie posted was interesting:


Modified adjusted gross income (MAGI). This is your income from taxable sources minus certain adjustments (see below). If your MAGI is less than $100,000, you can deduct up to $25,000 of rental losses each year to reduce the tax bill on other income.


Have you talked to a tax professional to see if renting it out and taking the loss might actually be a good thing in some way?

[RosieTR]

Been sort of busy and checking other topics when I had the time. Thanks for the advice, Fidgiegirl and Puglogic. We do have an accountant so yes, maybe we can talk to him about it. Also a friend at work's wife is an accountant so she may also know. We will use a property management company if we rent out the house. We did this with the CO house and while there were some irritations with it, it is much easier to deal with from hundreds of miles away. I would like to get rid of the house but I'm trying to figure out which would be worth it.

[madgeylou]

hmm, channeling dave ramsey here ... i think he would tell you to take the monthly hit and rent it. as you said, it takes a LOT of months losing $500 a month (or even $1000 a month) to equal an $80K hit. if the housing market comes back at all in the next 5 years, you still come out substantially ahead.

but i can also see and understand your desire to just be done with it ... and if you have $80K to lose without hurting you too badly, it might be worth it.