Keep our house or give it to bank and take dead uncles

Ok guys, we got some thinkers in here, so help me out with a really huge decision my wife and I are considering.

We own a duplex (well, our half of the duplex) in a reasonably decent neighborhood in Charles Town WV, considered to be in the DC metro area (extreme eastern panhandle of WV). My wife (before she was my wife) bought the approx 1200 sq ft duplex at the height of the market, in 2005, for $177,000. It was the cheapest house in our entire county that wasn't a complete dump. Fast forward 8 years, and similar duplexes in our neighborhood have sold for far less. We have $154,000 left on the loan and according to the mortgage company (which was wells fargo, but the loan was packaged and sold to Freddie mac, though its still serviced through WF) we will have equity in around 11 years at current market rates.

When she moved in she bought new appliances, the kitchen and bathrooms had been redone in the past 8 years or so, and she installed hardwood floors on the first level. It has central AC. Other houses in the neighborhood that have not been remodeled so original early 80's appliances, cheap carpet and lineoleum, and no central AC, have been selling in the $80-100k range. One that had been foreclosed and had a water pipe leak on the second floor sold last year for $50k, but had to be gutted to the studs and redone. The one next door was foreclosed and vacant for nearly a year, but a man just bought it for $86,000, though he said the AC system had been gutted and there had been a minor water leak along with some other damage. At any rate we are probably $50k or more in the hole on this. We tried to get our principal reduced as part of the big bank settlement, but thats when we found out freddie mac owns the load. Ironically, if wells fargo had kept the loan they probably would have reduced the principal through the bank settlement. But Freddie mac said no. Our mortgage is $1053 a month including PMI and etc. Its not that we can't make the mortgage payments, we are doing ok financially. the issue is that we want to start a family and move out of this 2 bedroom duplex eventually, and right now we are basically renting it from the bank for the next decade. We consulted with the attorney general's mortgage division and they advised us just to walk away from the loan and rent for a few years until our credit started to improve again. But thats a hard decision to make.

My wife's uncle just died. He lived a few miles away in Ranson, WV. Its a bit more "in town" then where we live now. He had a duplex there that he only owes around $50k on. He died debt free aside from the house. The house was built a few decades ago and has not been remodeled in any way. Its not in as nice of an area as we live now (closer to the casino, etc) and its not really as nice of a house (no remodeled kitchen or bathrooms, no hardwood floors) but on the plus side, it has 3 bedrooms and it has a reasonably large driveway where I could work on my vehicles (our current house doesn't, we only have street parking). The big draw in taking over our uncles house is that we would have instant equity as it would probably sell for around $75k currently in the shape that its in. If we were to take it over and continue to pay on that note what we currently pay on our note, we would own the home in 3-4 years. Its not the house we want to live in forever with our future family, but the lure of owning it free and clear and being able to sell it to put money down on a real home with a a bit of land and a garage really has me thinking that might be the way to go. Now, my wife's credit would take a big hit if we were to do that and hand the keys back to wells fargo/freddie mac, but being underwater in our current mortgage isn't doing anything for our net worth either.

Sorry for the novel, but I feel like there is a lot to consider here. What do you guys think?

Better put your flamesuit on.

What would your current duplex half rent for?

$900-1000 most likely. Several of the others are rented for around that.

Why flamesuit?

andrave wrote: $900-1000 most likely. Several of the others are rented for around that. Why flamesuit?

For the idea of walking away from a financial commitment.

-Rob

Forclosures stay on your credit for a long time (7 years?), and current market rates are current only for the current time. Seems to me that either renting out the duplex you own and living in the uncle's home, or selling the uncle's home and throwing the money at paying down the mortgage, might be safer options. I am pretty seriously upside down on my own house and wanting to move mysekf, but I've pretty much rejected a strategic default out of hand. Just seems a bit catastrophic, and I'm worried of the consequences.

andrave wrote: $900-1000 most likely. Several of the others are rented for around that. Why flamesuit?

Because walking away from your house (especially in this case) berkeleys everyone around you. Then they berkeley two friends, and those friends berkeley two friends. But hey, it's your dignity, your reputation, and your credit, and it's a dog-eat-dog world. Do what you think is right. For me, personally, a wallet on the ground doesn't equal "Take it before someone else does."

YMMV.

Also, is your wife the executor of your uncle's estate, or is someone else in the family just trying to "help you out?" If it's the latter, would you really berkeley the immediate family by selling the house for a profit and pocketing the cash?

I like Matt's suggestion of renting out the duplex till things turn back around or it's paid off. Win-win-win.

A foreclosure would stay on wife's credit for 7 years, but if we are 10 years or more away from equity then whats the loss there??? Especially when we could be just a few years away from owning a house with nearly the same value outright.

People can flame about walking away from a financial commitment, but we pay a bundle for PMI so the lender isn't going to be out anything. We are both attorneys so I guess we see a contract for what it is, and there are 2 sides to it. We pay the bank the money and the bank owns the house and lets us live in it, until we have paid them what we owe on it. We didn't think the bottom would drop out of the market and we would be decades away from equity. Neither did the bank. Oops. If it was purely a business decision we would have handed them back the keys a couple years ago, but of course, there is an emotional attachment to a home, as well as the fact that for most of us our life sort of centers around where we live. Besides that, finding someplace as nice as our place would probably require us paying rent of $1100 a month anyway. We figured we might as well just keep paying our "rent" to the bank for the time being because there was no better alternative. But now there is an other option...

Renting out the duplex is an option... we would probably advertise it at $1100, but I think eventually we would have to drop it to $1k or less, and then we would be losing money every month. The other issue is that father and mother in law are executing uncle's estate, and I'm not sure they would like the thought of us taking over and using it as what some might see as a business venture. Renting property is work, and we would be on the hook for home owners fees, repairs, and damage... I'm not sure we have much of a desire to be landlords.

the market situation here really has zero chance of ever getting back up to the 2005 numbers. Since then, a half dozen massive developments have went in, a few big employers have tanked or moved away, prices closer to the city have dropped as well, and a few major planned developments went belly up. there are still many foreclosures throughout the county. prices have started to stabilize, but for most areas, they have stabilized at half or less than peak prices. I think the market has established the number of people willing to commute into northern VA and DC area from what is 90 minutes or more away in rush hours. Who knows what things will be like 10 years from now, but in 10 years, even if things recover and the duplex is worth double what it is now, we would only be back to zero.

Speaking of walking away, that's what I'll do. Best of luck.

It pains me to see people pouring large sums of money into a house only to have it upside down to the point of hopelessness. Makes renting not look so bad afterall once you add up everything.

If it were me, I'd be tempted to rent out both duplexes and go find a single family home. Combo of uncle's home and yours should put you near or above a positive cash flow. If you have cash flow, ride it out till you can walk away clean (or better).

Real estate sucks... I can tell you my experiences, but it probably won't help you make a decision-

Wife and I bought our First house in 2005 during the boom. We had a child and I took a job 2 hours away within 3 years. This made us about 60k upside down on our mortgage. Same as you- nobody would readjust it because our loan was one of the few they were actually making money on!

We ended up renting. The first year, we lost almost $300/ month and sucked it up at the expense of saving our credit. Now, we are up about $200/ month and the house is nearing positive equity after 5 years. I can't Tell you what to do,but I can say with a bit of patience and time that eventually you will come out on top... It's jut but whether you can handle the storm, so to speak, until it happens...

Good luck either way.

I guess I just look at things differently. The bank lent my wife money because they thought she would either make all the payments and make them $200,000 in the process (on 178k) or she would default and they would get a house they could sell for a profit (or, more realistically, collect PMI on and break even). They did it to make money.

It was a business decision. If her credit wasn't good, or the house was too expensive, they wouldn't have said "well we need to give this lady a loan so she can have a house, its the right thing to do and we are good people," they just would have said "nope, the numbers don't work, its a business decision, sorry." And right now, we could say "well the right thing to do is to keep paying even though we are well in over our heads, and just hope that things will get better even though there is no sign of that and even if they do get better we will end up paying more than the house will ever be worth," or we could say, "nope, sorry, its a business decision."

As far as dignity goes, pride would indicate you shovel the E36 M3 back across the table and walk away once they refused to reduce the principal. But I'd prefer to make decision based on sound financial principals, and not on pride.

I guess it sounds like I've made up my mind, but I really haven't. I'm still mulling things over. I just want what is going to be best for us and for my future kids and family. I don't want to have a kid or two and be stuck in this 2 bedroom 10 years from now and be no better off than we are now... to finally owe what the house is worth (and still not able to sell it and make money).

As I said, its a major life decision, one that will affect pretty much everything.

Keep it and rent it out. Eventually you will have equity in it. Most truly wealthy people I know have real estate at part of their portfolios.

Man, houses are cheap in the US.

You're both attorneys? Maybe it's a stereotype, but it seems like attorneys make better money than schoolteachers and you shouldn't have any problem paying that little guy off in a few years with some serious saving. I'm a single income military, two kids guy living in Arlington with a $3k/mo nut, and don't have a problem making it. But I'm a cheap bastard. Maybe it's the steady job too. I don't know.

ZOO wrote: Man, houses are cheap in the US.

No E36 M3. I'm soon going to write a cheque for just under $200k for half of my 1200 sq' house to my soon to be ex wife.

Start checking the classifieds for job postings for attorneys in DC metro area... there aren't any. I'm actually working a non legal job right now and trying to work my way back into an attorney job. I was making $50k a year and that was pretty good money in this area but I'm now making around half that. Wife is fortunate to have a pretty good job and making around $75k a year. You would think with a combined $100k a year we would be doing ok, and honestly, we are. But there isn't a whole lot to save at the end of the year. Right now between my insurance and my truck payment, my truck is eating up around $630 a month. It wasn't that bad when I was making 50k but its a lot right now. And of course, we both have substantial student loans from law school. Hers is around 52k and mine closer to 90k. My income right now is about enough to cover "my" bills... my truck, my insurance, my fuel costs to commute, my student loans (federal loans are in an economic hardship forbearance, but making payments on my private loans).

And she has credit card debt from prior to our union that she is paying down.

Neither of us have perfect credit. My credit is pretty lousy, owning largely to some stupid decision in my somewhat distant past that will continue to show up on my credit for a while longer.

Neither of us is perfect... we are just trying to do the best with what we have and the options we have available. We hope the market will pick up. I hope I'm going to find a better paying job. I was actually on unemployment for a year before taking my current job, though, so there is still a big question as to whether or not I'm going to find something in this area. Moving isn't really an option for us as this is where wife's family lives and sort of where we have put down roots. My wife would almost certainly have great difficulty finding another job making near what she makes right now.

I think the perception that attorneys can go anywhere and find these amazing jobs is just that, a perception. Most attorneys I know work hard to make $50-75k. Thats not bad money, but its hardly like winning the lottery when you consider most have a ton of student loan debt and most work 60 hours a week to earn it. There are few good job openings and those that appear are fiercely competitive. Additionally, I'm only licensed to practice in WV. I live 15 minutes from virginia, 20 minutes from maryland, and 40 minutes from PA. That kind of limits the jobs available. This year I'll finally have my 5 years in so I can waive into some surrounding jurisdictions, but its so competitive that it doesnt' seem like employers are willing to consider someone who isn't licensed in their state when they have people with better education and more experience applying that are.

Also, to put this into perspective, there are firms in the DC metro area (which I live on the outside fringe of) offering full time jobs for attorneys for $40k.. thats with a 60 hour work week expectation. I applied, and with 5 years of experience, didn't even get an interview. Its pretty sad. We just graduated way more attorneys in the past few years than there are jobs, and in fact during the recession most larger firms shed jobs and leaned up their entire operations. Outsourced a lot of jobs, too.

Using the uncle's house as a financial windfall might end up biting you for years down the road with bad feelings between you and the rest of the family. I know I'd be upset if my brother got a bailout from Mom and Dad when he was perfectly capable of paying for his mortgage.

Anyway, I see two real ways to do it:

Honorable way: Keep your house, and rent it out or stay there and make payments. If making payments, pay it down quickly. Sell the uncle's house for profit, and split the money with other family members equally.

Capitalist way: dump your house on your lender. Rent out your uncle's house, and find a cheaper place to rent yourself. If that's not possible, sell the uncle's house and keep all the money yourself.

In reply to andrave:

As an attorney, why do you need a truck that costs you $630 a month? Our two family cars with insurance cost less than half that, and the oldest is a 2006.

As to debt to income burden, my wife and I are in a similar situation. We make combined about $100k a year - our combined student loan debt is about $200k. But we have found a way to start paying down debt. We're now free of credit card debt, and should have another $20k of our loans paid off by the end of this year, and we just got to $30k in savings. We bought a house in 2011, and had a daughter last year.

The two of you need to look in the budget and see why you're not doing better at saving and paying off debt. Between your loan debt and income, and if I read it right you don't have kids - you guys should be able to pay down at least $30k in debt per year.

$630/mo for a truck? I'm sorry but that right there is a huge waste unless you need a truck for your job. I have a 250k mile little Honda gas miser I picked up for cheap as my daily driver.

Not saying that your are, but keeping up with the Jones's usually will dig you deeper financially.

drainoil wrote: $630/mo for a truck? I'm sorry but that right there is a huge waste unless you need a truck for your job. I have a 250k mile little Honda gas miser I picked up for cheap as my daily driver.

Just like these two folks, that is the first thing that jumped out at me. $630??? Seriously? We have $0 car payments. $630 is insane.

You can't just "take over" someone else's mortgage, even if they are deceased. You're not on title, and therefore have no legal right to his property. His mortgage note is an agreement between himself and the bank...and the property is the collateral. You have noting to do with that...and can't.

His estate (?) can sell the house to you and give you a gift of equity (the value of the difference between the appraised value and the selling price)...the concern would be getting a mortgage on it. You'd need to rent the other place to do so.

If/When it comes time that you must "dump" the other place, do a "deed in lieu of foreclosure" or a short sale.

In reply to Datsun1500:

Yep, I just checked out of curiosity - WV is a recourse state. Not sure how long they can come after andrave's wife but they can (and probably eventually will) sue for the difference.

My suggestion - and that was why I originally asked what the duplex would rent for - would be to go and rent out the duplex if andrave would then take over the uncle's mortgage. BTW, taking it over is most likely not directly possible, you'll need a new mortgage for that.

Feeding the duplex a couple of hundred bucks a month is probably not that big a deal - I had to feed my house in the UK a lot more than that until it sold on top of a rent payment similar to your mortgage payment (although I admittedly have a slightly higher income than andrave) - especially if the cost of the other mortgage is suitably low. One problem I can see with that is finding a lender who is interested in taking on a 50k mortgage (plus the estate complications and all that).

There's also one really good reason not to walk away from your house if you are after employment rather than putting out your own shingle:

A large number of employers check your credit as part of the customary background check, and it's not uncommon for people to get passed over for jobs because of lousy credit. Especially in this economy where there are more people looking for jobs than jobs looking for people.

Unless your situation was desperate, I in your position (and trust me, there has been a point in my past where I have been desperate enough to seriously considering topping myself) would not even consider dropping that sort of a turd on my credit. You really don't want to ensure that your job search turns out to be even harder as it already is, thanks to something entirely self-inflicted.

I have never suggested someone walk away from a loan. You might be the first.

It's not a terrible strategy, given the specifics of your story, HOWEVER (and this is really big) you are NOT READY FOR IT.

As others have noted, you've got to get on top of your budget. You are not prepared to handle the windfall of the uncle's equity. As is, you will continue down the rabbit hole.

Couple of questions I don't think you have addressed:

• How does your wife feel? Is it all about the money, or will she be really unhappy in the uncle's house?

• Are you inheriting the uncle's house completely, or are there family complications?

• As Datsun 1500 noted, does the loan contract obligate you to paying the balance? You are lawyers- can you get out of this?

If you own the uncle's house, I would suggest defaulting on the current house, tanking her credit, and selling the uncle's house, and using the equity for a 20% down payment on a house you like (which should involve minimal documentation, or can run on your credit and her income). If there are family complications, no can do. This assumes you can walk from the existing loan. If you cannot, the ONLY answer is to rent the current place.

But before ANYTHING, you've GOT to work on budgeting. I am a personal finance and budget coach. Find one.

Datsun1500 wrote: You do realize if it is foreclosed on they can and will come after her for the balance. IF they decide to forgive any part of that balance it can count as income as far as the IRS is concerned. You can end up with no house and a lot of debt.

This bears repeating, because it's the one thing everyone seems to forget about whether it's a home foreclosure or a bank repo on a vehicle.