When to walk away from a house?

They've lived in the house for 10 yrs and still have little equity? That's rather unbelievable. Be that as it may, 10K is not that much money in today's world. Ever thought about negotiating with the bank? Renting the house out?

I cannot see how they can avoid their loss by walking away from the house. They owe the bank a fixed amount and the bank can sue them if it cannot recover the full amount from the sale of the house. So if they have any assets, the bank could choose to sue them and would likely get what is owed to it.

I would at least consult a lawyer about it who knows specifics of your particular state law.

Some states are "non-recourse", which means that all the lender can do is foreclose on the home and take it over. It can't come after any other assets.

Even in a recourse state, if there are no significant assets to pursue, the bank usually won't bother.

The family in this case should also investigate a short sale with the lender. Usually such a sale would result in owing federal taxes on the balance between what's owed and the sale price, but the new Mortgage Forgiveness Act provides some relief for that:

Brian

You could discuss this scenario with the people at your bank in the same matter-of-fact way you have presented it here. They don't want the house on their hands and might be cooperative and helpful.

But your daughter may be able to turn this apparent disaster into a great opportunity. She should consider renting the house to tenants and then holding it long term as income property. Things look bleak in the housing market today, but they will not always be that way. Going that route may seem like a big hassle at the moment, but I would bet that getting started in the rental business and thus avoiding foreclosure would cost considerably less than the $10,000 figure you mentioned.

I believe that non-recourse applies to new house purchases only, whereas the OP's relatives refinanced, at least in some states like California.

That depends on the state.

See, for example,

re: "non-recourse and anti-deficiency" statutes.

Nevertheless, walking away to avoid a $10k loss may be pound-foolish. The effect on their credit and increase in future borrowing costs as a result may be much worse than owing and paying off aht $10k.

They should definitely consult with an attorney well versed in their particular state's rules.

In many markets, that's a negative-cashflow proposition. In many places, even after the fall in home purchase prices, the amount of rent one may take in is not enough to pay the mortgage and all the other associated costs of property-ownership. They could be going deeper in the hole each month tha way.

On top of that, make no mistake - owning rental property is at least as much of a *job* as it is an investment. It's absolutely not a passive investment like owning stocks or shares in a REIT.

I wouldn't make that bet without a hell of a lot more information about the property, the values, the local rental market, and the folks ability to manage that property (and their ability to save money on some expensive things like doing repairs themselves).

Some folks do great owning rental property. And many folks learn shortly after giving it a try that it's just not as easy as simply owning the property.

Not a problem if they can pay cash for repalcement cars for next five years. And if they dont expect their kids to attend college. Wont be able to get decent loan then. Bad credit affects many transactions these days.

No. It refers to the "first mortgage" on the property, which means the primary loan. So, not second mortgages, HELOCs, that sort of thing.

California is not a non-recourse state anyway. It's a "one-action" state, which means that the lender has to choose whether to go through a judicial or a non-judicial foreclosure. If they choose the latter, they can't ever go after the borrower for any shortfall. In practice, they generally prefer the quicker and less costly non-judicial process.

Brian

Yes, there are risks and uncertainties in owning rental property. But I wonder if they are not somewhat less than the risks of walking away from a mortgage and trashing your credit. As you point out, it is not everyone's cup of tea, so for the OP perhaps talking to the bank and hopefully working something out is the better choice. But personally I would opt for renting instead of foreclosure if those were the only choices.

The family in question is moving out of state. It's difficult enough to manage a rental in the same city, let alone a different state.

Brian

Good points. I have had similar experiences. Another thing: It is always possible to hire a rental agent and/or a property manager to look after the place, and that does away with a lot of the hassles that people often mention when downplaying the advantages of rental property. It is costly, of course, but that expense too is tax deductible. I own rental property around 3000 miles away from my personal residence and have never had any serious problems.