Help a Reader: Upside Down on a Condo

A reader named Brian recently wrote in with the following quandary:

We own a condo in Las Vegas. It was purchased 5 years ago at a value of $200K. It currently is valued at $125K. The loan we have is for $163K and it is interest only with a 4 point margin on top of the current Fed* interest rate. We cannot re-finance because of this and feel handcuffed as a result. Can you offer any advice to me?

If you read through the comments, you’ll see that Brian and his wife are currently renting out the condo. Unfortunately, they’re paying substantially more on their mortgage than they can get in rent, and they have no prospect of moving into it to save money because they currently live in another state.

This is definitely a tough spot to be in, and I’m afraid that I don’t have any magical words of advice that would fix this situation. It’s a slow market and, even if they were able to sell for the current value of $125k, they’d have to come up with an $38k in cash to pay off the mortgage ($45.5k after factoring in a 6% realtor commission).

If they were living in the condo and hadn’t owned it for so long, I’d suggest they try getting into a more affordable FHA mortgage under the terms of the so-called Housing Rescue Bill. Unfortunately, Brian and his wife don’t qualify.

So, dear readers… Do you have any suggestions for Brian?

*It appears that the “Fed” rate in question is the prime rate (currently 5%).

24 Responses to “Help a Reader: Upside Down on a Condo”

  1. Anonymous

    It doesn’t really look all that bleak to me. The after tax negative monthly cash flow is only around $200.

    The bigger problem is maintaining the property.

    However, his wife should get a job (he inferred his only income was his salary) to help with the negative cash flow.

    Don’t pay too much extra on the mortgage. Be sure you have an adequate reserve to get over the rough spots. eg. in between renters and maintaince problems

    Ride it out. Vegas and the housing market will turn around, probably sooner than everyone thinks. The Fed is going to need to start printing money to pay for the war in Iraq and inflation will come to your rescue.

    Good luck!!

  2. Anonymous

    If the condo was bought for good reasons, those reasons probably still exist. And, not being able to refinance wouldn’t matter if rates were going higher.

    I would say, get over the opportunity cost of being able to refinance, and enjoy what you have purchased. You liked it when you bought it, so keep enjoying it.

  3. Anonymous

    In Las Vegas, couldn’t you rent this as a weekly or figure a way to interface with the time-share market? I suspect that a corporate lease might also be an option, since they can deduct the rent as an expense. Consider advertising weekly business/vacation rentals on Craigslist nationally or in the larger cities. With larger weekly rents, this might cover your shortfall. If you have vacant weeks, check with local media to see if you can trade these weeks for advertising, if you have a business, or run a three-way deal with a third party to get money for the advertising.

  4. Anonymous

    Brian,
    are you taking all of the deductions allowed for rented property? Specifically, are you taking off common charges and depreciation?

    Assuming you rented out the property when it was still 200K since the based value for depreciation is the smallest of the value when you rented and when you bought, you can claim arount 7K a year. This is not enough to cover the shortfall, but may help to survive. Also, if you failed to claim depreciation before, you can re-file past years return and get a windfall.

    Not much else I can add to what was said already.

  5. Anonymous

    I don’t know how attached you are to Denver but I would consider moving to Vegas. Since you are renting in Denver you’re not really forced to stay, except for your current job, kids, etc. Uprooting kids from there environment can be detrimental to their upbringing and cause unnecessary stress to them and the entire family.

    I would start looking for job prospects in Vegas to gauge the financial aspects of returning. If you signed a lease agreement in Denver just live out the lease then move to Vegas once you boot your current tenant.

    But if you really, really, really lovvvvvveeee Denver then the other comments probably have already covered other possibilities.

  6. Anonymous

    This is a really tough situation. Sorry, Brian.

    Based on the info you have givne, it sounds like you bought a place you could not afford to begin with. Hence the interest only, subprime total ripoff mortgage that you got. There is some additional info that may help make a better decision, but based on what is given above I have a few options:

    1. Keep the property as a rental. It sounds like this is not what you want to do. The property sounds like it has become a burden to you. Also, you have become a long-distance landlord by default, which is also not something I would want.

    2. Sell the property at a loss of ~$38,000. You could borrow the difference between what you owe and what the property brings at sale. This would be trading around ~$163,000 in debt for ~$38,000 in debt, plus getting rid of a really BAD mortgage. I would also calculate your “break even” point, i.e., how many months of paying this mortgage would it take you to reach $38,000. For example, if your mortgage payment is $1000 per month (minus the rental income), then it will take 38 months. In this scenario, if you think you could sell it in less than 24 months without taking a loss, then it may be worth holding onto it a bit longer (unless you really cannot afford the payments…).

    3. Negotiate a short sale with the bank. You may have to work very aggressively with the bank to do this. I would do your research (with the help of a good realtor) to show the bank what properties in this area are selling for. Keep pushing the lender to understand that this is in their best interest — one reason is because if they foreclose on the property, then they are stuck with something that they have to try to sell. Also, it is extremely important to include the language in the deal that it is a “short sale without recourse” (or similar language). This means that the bank will not sue you for the difference between what the property sells for and what you owe on it — it protects you from being chased by the bank later on. Keep in mind if you are foreclosured on, the bank will SUE you for the difference. Since the bank would be selling it, they may not care if they get $125,000 for it. They could sell it for a lot less and then chase you for the difference. Also, it would be worth finding a real estate agent that has experience with short sales.

    A short sale will ding your credit but it is not nearly as bad as a foreclosure.

    I would avoid a foreclosure at all costs.

  7. Anonymous

    Nick, your credit card deals don’t rate with me. My Penfed.org VISA card pays me 5% back on all gas purchases, and that’s on the first dollar spent (no tiered approach). Plus, Penfed automatically gives me that 5% EACH MONTH in the form of a statement credit, thus automatically reducing my monthly credit card bill (which I pay online, hence no stamps, checks, or wasted time) by the cash reward itself. I use that card ONLY for gas, so it’s a no-brainer to quickly check the math and make sure I’m getting the full benefit of the deal. For all other purchases I use Countrywidebank.com’s VISA card, which pays me 2% on EVERYTHING and again, from the first dollar spent, though not until I spend $2500 does it pay out and yes, there’s just one catch: one must set up a “Savingslink” money-market account with Countrywide (which itself has been a great deal, what with consistently high APY rates) and then direct the VISA reward payout directly into that account (a no-brainer, takes but maybe 6 mouse clicks), after which I can ACH-transfer (for free) that cash to any other account that I want. So that’s 5% on gas, 2% on everything else, using just two, no-annual-fee credit cards, and I don’t have to work my way up (spending-wise) to get those percentages. Now compare them to the deals that you keep touting, which require tiered spending, or that one limit oneself to specific spending categories (Discovercard’s scheme). If you see something better (in terms of matching the simplicity and pay-out that I reap here), please let me know, because I’m already $500 ahead this year (I use these cards for my business purchases, too), and that’s tax-free cash, too.

  8. Anonymous

    I have a friend who is in this exact situation. He moved out of state when his job relocated him and left behind a condo that he was unable to sell and now would not be able to rent for anywhere near his mortgage payment. He has almost no equity in it. My suggestion was for him to sell it at a loss a long time ago, but he refused to do that and is now back in credit card debt and being eaten alive by the mortgage payment each month on top of the rent he pays for the new place he is renting. I think you need to look at this “long term”; what would the result be if you had to stay in this exact situation for another year or more? It would be a huge loss for you, but if you try to ride it out, do you think the condo market is going to get any better?

  9. Anonymous

    Unfortunately the Las Vegas market is one of the few that has no hope of turning around anytime soon, it is just going to get worse with the huge over supply. I think you need to sell now at whatever price you can get and quit taking the market risk. You should never have bought a $200k apartment on your $2800 monthly income, it was far too expensive for you.

  10. Anonymous

    Brian – If this was your wife’s condo, are you on the promissory note and mortage? If not, you might consider letting her default on a payment and then re-negotiate or offer the condo up to Countrywide on a short sale and assign the lease to them so they have some cash flow until they sell. Let her take the credit score hit, saving yours. That may sound cruel but if one of you survives with a decent credit score, you preserve the possibility of buying another home down the road without waiting 7-10 years.

  11. Anonymous

    Unfortunately I do not live in Las Vegas. This condo was my wife’s condo before we got married and now she has moved to Denver to live with me. We are renting here (in Denver) and because of my job, we can not move out of state. I have done analysis on the situation-not sure if it was a full financial analysis, but I feel it was pretty complete. I know that if we sold at a loss, we could use the “loss carryforward” in future years but this would mean that we would have to bring quite a bit of money to the table to pay the loan off.

    I really would rather not let it go to foreclosure but I fear what is coming in the future with interest rates.

    I wish there were some way to turn our loan into a fixed rate-even though the interest rate is high, at least we would be making some head way on the principal.

    As is, I feel like we are wasting money every month. It’s frustrating.

  12. Anonymous

    Brian:

    How long have you been renting? Have you run a full financial analysis (including tax benefits) to determine just how negative the situation is? I would hate to see foreclosure in your situation? Are you already in another mortgage that you intend to keep? It could take years for you to clean up a foreclosure and if you have other assets, they could come after you on a deficiency. Do you live in Vegas so that you can live in this condo?

  13. Just to clarify, it appears that “Fed” rate that Brian is referencing is the prime rate (currently 5%, so a total of 9%). If it had been the Fed discount rate (the rate that banks charge each other), then it would’ve been 2.25% + 4% = 6.25%, which wouldn’t be too bad.

  14. Anonymous

    Hi guys- Thanks for the good feedback.

    I am going to try and address as many of the questions as possible.

    Comment 2. How much will the mortgage increase when the loan resets? It has already reset. The margin, which is 4% plus the current Fed rate puts this loan at around 10%, which is still interest only and is the reason that I am trying to refinance or explore any other options.

    Comment 3. The condo is rented right now for $930/month. The current payment (interest and prop tax) is near $1,650/month. Currently, I have no other income streams other than my salary, which is after-tax, $2,800/month.

    Comment 4. I have thought about the possibility of letting the condo foreclose…Is it 7 years that this will remain on my credit? What other repercussions might occur that I am not thinking of? Also, I have attempted for a loan modification with Countrywide, and they will not consider us for a modification because we have never been late on our payments. I feel like I am being punished for being a “good” borrower.

    Comment 5. There is no immediate need to get rid of the condo, other than it is a huge waste of money to me each month since my loan is interest only (currently close to 10%–Fed rate + 4 point margin). Also, FYI, this loan is an Interest Only so there is no need to look at what portion is going to principle-it is an Interest Only Loan.

    Comment 6. I appreciate this suggestion. I will look into any avenues possible. Is there any specifics that you would suggest starting with? I have considered possibly getting a lawyer involved. Do you think this would be wise?

    Comment 7. The ARM has already reset and that is when the loan went from 1 percent over the Fed rate to 4% over the Fed rate. I am afraid of what will happen to me when the Fed starts raising rates.

    Comment 8. Although we do not need to sell immediately, I fear what is going to happen to us when the Fed raises rates more and my interest rate on the condo sky rockets…

    Any more feedback will be much appreciated and Thanks to those who have already posted! I appreciate it.

    -Brian

  15. Anonymous

    If you can afford the payments and the bump in the interest rate still allows you to afford the payments, then simply ride it out and apply some extra towards principle each month to lower the amount due on interest. Upside down on a loan is a meaningless phrase unless you need to sell now or can’t afford the loan. If this isn’t the case, then make the payments and ride out the current downturn in the market. Eventually you will no longer be upside down, even if that takes a few years. But if everything is affordable, then really there is nothing to worry about. As others have stated, if you can make extra payments, then this is the time to do so before the ARM resets.

  16. Anonymous

    If I read the question correctly, Brian just “feels” like he’s stuck. Unless he’s trying to sell the house, what does it matter how upside-down he is? Pay extra on the loan, as much as possible, as quickly as possible. Once the interest-only honeymoon period ends, things could get ugly. Pay down the extra FAST, and no worries. Once you’re right-side up, refi into a FIXED rate conventional loan. None of that interest only ARM hocus-pocus.

  17. Anonymous

    Check to see if your local government offers housing assistance or advice, that way you can get advice from a professional who is familiar with the laws of your state. As much as we may be able to give general bits of advice, the best place to go is to a professional in your state with all your financial documents in hand.

  18. Anonymous

    I guess I don’t really get the question. Is there a particular reason Brian needs to get rid of this condo? And is there a particular reason the mortgage is now causing problems?

    Let me back up. I may be misunderstanding the phrase “a 4 point margin on top of the current Fed interest rate.” Can someone clarify what exactly that means? If I understand it correctly, then Brian’s interest rate is more favorable than mine. I also know that his remaining principal is just a bit less than mine. So if I go look up my amortization table to check how much of my mortgage payment goes to interest, I know that Brian’s payments are less than that. Unless Brian is a graduate student, he probably makes more than my wife and I do.

    So it seems to me like it should be really easy for him to throw an extra couple of hundred dollars each month at this. Again, unless there is some larger context that’s not specified in the quote above. I would recommend exactly what others have said: continue to live there, and start paying down the interest as aggressively as you can.

  19. Anonymous

    How much is your credit rating worth to you? You can go bankrupt or let the bank foreclose if you can’t make ends meet. If you can maybe just sitting tight is your best option.

  20. Anonymous

    Is this condo owner-occupied? Rented? Or sitting empty? If it can be rented to reduce negative cash flow to manageable levels until the market rebounds (maybe in 2010?), that’s what I would do. This may also allow for depreciation and other tax benefits. Does the owner have any other income streams that this negative cash could offset?

  21. Anonymous

    In order to help and give sound advice, we really need to know Brian’s annual household income and monthly mortgage payment+property tax. How much will the mortgage increase when the loan resets? The key is that we need to figure out if Brian can afford to stay in the home for the next several years and weather the downturn.

  22. Anonymous

    The only piece of advice that I can offer is to start paying off the mortgage (including principal) as aggressively as possible.

    In the next few years, provided housing prices rebound slightly (or at least stop falling precipitously) and you’ve plowed dollars into the mortgage you may be in a position to refinance (into a fixed rate) because the principal owed will be less than 80% of the value of the condo.

    Unfortunately, this scenario sucks, especially if your free cashflow is limited, but I don’t see many other good options.

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