Walk Away From Home and Mortgage and Gain: Homeowner Scenario
Mark Anderson, Owner’s Network Real Estate- Broker, Realtor®, Green designation
Published July 15, 2009

Here’s the scenario; Homeowner owns home, purchases it for $325,000 on 2003. In 2006 the value of the home rose to $450,000. They refinance the original mortgage of $305,000 to $405,000 or 90% LTV, loan to value. In 2008 the home resale market drops 30% so their home is now valued at $315,000. They would like to sell their home because the payments are more than they can afford with the wife laid off from her job and the husband was forced to take a cut in salary.

If they try to sell their home now, after commissions, they would receive approximately $299,000 after commissions. This is obviously $186,000 less than they owe on their mortgage and creates a dilemma. One option is to scrimp and save to make payments till the job situation improves and put off selling their home until home values rise enough to cover their mortgage. This could be 5 to 7 years or more. In that case they would only be able to recover what was lost, effectively no gain.

However, if they walk from the mortgage, they think they can avoid owing $186,000 to the bank by ‘giving’ the home by a process called ‘deed in lieu of foreclosure’. This is a mistaken assumption since it requires a home value greater than the loan amount. The bank won’t accept this agreement. So the home owner waits three months until the foreclosure auction takes place, living effectively rent free. The bank forecloses on the home and now has a new REO in their portfolio. The home owner figures that it would take 20 years to pay down the mortgage to be able to sell it, and still have what they already own. But, if they walk from the mortgage and allow foreclosure they believe they got away free from a $186,000 debt. They can now go forward and find another home in a great buyer’s market.

There are two problems with this thinking. First the bank is still legally owed the difference between the results of the sale and the balance on the mortgage, although the likelihood of collecting on the debt is slim. Second there is a foreclosure on the husband and wife’s credit which will make getting a new loan extremely difficult if at all. It they can pull it off, they do not have the debt burden to live with in the short term. If they are able to buy a home now even with a high interest rate, they are in a great position to have their new home appreciate from $250,000 to 325,000 with a rebound in values and normal appreciation in 7 to 8 years, a gain of $75,000.   That’s a $261,000 total gain, possibly more by allowing foreclosure.  The alternative is a $0.00 gain by staying in the home for that period of time. To many families, this is a no-brainer decision. Double the value of the home in another scenario and the foreclosure path gain is even greater.

I am not advocating allowing your home to go in foreclosure because there is a great financial gain with that option. I discourage it because it hurts the neighbors who tough it out in their homes as the foreclosures erode the value of their homes. It hurts me financially as a Realtor in the real estate community since it is more difficult and time consuming to sell and buy homes for my clients, I must work harder and longer to maintain my income, and of course, it reduces my commission with the lower home sale price. It also hurts the banks that are ‘Shorted’ out of their money they originally loaned to the defaulted homeowner.

It’s a difficult decision some families are forced to make but understandable considering their financial plight. However, in the end, it appears that they are the clear winners in these tough financial times.

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