Should I foreclose?

**damondietz** · May 22nd, 2011, 06:46 PM

I am trying to pursue my fastlane dream and the first step is to walk away from my 9-5 job. I will dedicate myself to the part time video business I have run the past few years. But with a family and numerous responsibilities, I have more bills than I'd like to try and support on my wife's salary alone, and I'm not sure I can depend on large amounts of income from my video business yet.

Here is my problem. I own a rental property that was my primary residence from 2007-2010, and when I couldn't sell it in 2010 due to buying it at the peak of the real estate bubble, I decided to rent it to relocate for my wife's job. I bought another house which we live in now. My rental property has been occupied for 18 months and while the tenants are great, I lose $700/month due to the difference in mortgage payment and rent collected. We can afford this loss fine as of now, but if I were to quit my $70,000/yr job to pursue fastlane I just couldn't swing the loss in addition to all our other bills.

My choices are this...

1. Walk away. Foreclose on the property and hope to rebuild my credit over the next few years.
2. Sell. Use my current equity on my home or 401k savings to pay the difference in negative equity (probably $40,000 after realtor fees).
3. Keep the property and continue to lose the $700 per month and just don't quit the job and keep working my part time business and job until the market turns around and then try and sell.

What should I do?????? I am so lost.

**Runum** · May 22nd, 2011, 07:16 PM

Tough subject. We have had this discussion on this forum a few times with mixed results. Basically you are talking about a strategic default. You will renege on a signed, pledged agreement.

Corporations do this all the time without any feeling of guilt at all. They claim it as part of doing business. The public seems to accept this and continues to do business with corps that default.

However, in the past, personal default has not been looked on quite so favorably. Some see it as not following through with your promises and then you will never be trustworthy. You are only as good as your word.

I, personally, rely on my tenants to keep their word that they will pay their bills each month as agreed to. I never do business again with one that doesn't honor their word.

However, I do see a lot of families upside down on their mortgages, maybe for life. They would have definitely taken the profits if the appreciation continued but don't want to take the losses.

Bottom line is, to me, it's a personal decision. I don't think it's right to come here and expect to get permission to default on an agreement. However, I do understand if you have to. But business, as we know it, is based on trust and honoring one's word.

My vote is #3 and hit your business ideas hard and heavy.

Good luck with your decision.

**damondietz** · May 22nd, 2011, 07:27 PM

I do thank you for your honest feedback. And for your opinion as well on which option you think would be best. I do want to mention/clarify that by no means am I asking for permission from anyone here to default on my agreement, rather an opinion on best way to achieve Fastlane regarding my current situation.

I'd like to hear what others have to say as well, as I just want to approach this thing after examining ALL possible angles. Its easy sometimes to look in at someone's problems and offer a good solution, but hard to assess your own. I am having a hard time assessing my own currently.

Thanks again!

**Flatlander** · May 22nd, 2011, 08:46 PM

I know someone who just sold her house for something like $30,000 less than what was owed and the bank took it as payment in full. A short sale, I guess.

http://en.wikipedia.org/wiki/Short_sale_(real_estate)

I'd look into that I suppose.

**ntapia** · May 22nd, 2011, 09:27 PM

I'm sorry about your situation - it sounds very stressful. I think the short sale idea might work or is at least worth looking into.

Is there any way you can work on your business part-time while you keep your job? Or, what about taking up a part-time job (to at least make up for the $700 that you'll need for the mortgage on the rental property) so that way you can work on your business part-time?

**murphprodigy** · May 22nd, 2011, 10:23 PM

i would look into the short sale route...smaller effect on your credit

ultimately u want to eliminate losing 700/mo. this route or foreclosure would do that.....but def look into short sale first

**hatterasguy** · May 22nd, 2011, 11:08 PM

Personally I would sell and come to the closing with a check.

I look at it this way, you messed up, cut the loses as quickly as possible so you can move on. I would never hold a property that required me to pay each month like that, I'd get out ASAP.

Sadly sometimes in RE you lose and need to come to the closing with a check, its part of the game.

**biophase** · May 22nd, 2011, 11:25 PM

My first would be question, do you own in a state where you still owe after a foreclosure?

**gofalls** · May 22nd, 2011, 11:29 PM

Originally Posted by damondietz

1. Walk away. Foreclose on the property and hope to rebuild my credit over the next few years.

People in the fastlane don't need credit.

If its a moral thing for you to foreclose then consider foreclosing now, get on the fastlane, then later on write the bank a big unexpected check to cover your karma if it makes you feel better.

**mrhahn** · May 23rd, 2011, 12:35 AM

Originally Posted by gofalls

People in the fastlane don't need credit.

Probably not, but someone looking to make transition might.

However, I may still suggest the foreclosure route. Is your wife the cosigner? Or is it only under your name?

I was in a similar situation, but fortunately the difference between mortgage and tenant rent wasn't much. And I was also being covered by the company in the new area for my housing expenses, so I was still on top. I eventually waited until it was the right time of the year (Spring for the East coast), and put it on the market. I came out with a loss, but the payoff of the remainder of the mortgage was only a few thousand, definitely different from your situation.

**Roger** · May 23rd, 2011, 02:48 AM

1. try the short sale first - and please update us with how it went for you
2. why do you "need" to kill the $70000 source first? can't you expand your video biz by working on the weekends, until it develops critical mass? maybe you could even find a partner to work for you on a shared revenue/equity basis. what type o video "service" do you offer? if it's really fastlane, it shouldn't depend on you actually filming, editing etc

**ZCP** · May 23rd, 2011, 07:13 AM

Any chance of raising the rent? Or see if they want to buy it from you?

**damondietz** · May 23rd, 2011, 08:33 AM

Originally Posted by biophase

My first would be question, do you own in a state where you still owe after a foreclosure?

My current residence in which I own now is in NJ and my property in whxh
I would walk away from if I choose to do so is located in PA. Any particular reason why you ask? Am I missing something because they are in different states?

**damondietz** · May 23rd, 2011, 08:38 AM

Originally Posted by mrhahn

Is your wife the cosigner? Or is it only under your name?

My wife is half owner an half responsible for the loan. That is my main concern is her credit not mine. If it were me alone, I would have walked away 18months ago but when you have a wife and family to consider decisions aren't that easy. I am worried te impact the foreclosure would have on her credit history and hinder her from possibly moving up in her career. I know that many employers are doing background and credit checks for possible employee candidates nowadays and don't want to ruin her chance to move up in her field (she has no desire to be fastlane, rather further her career in public health).

**damondietz** · May 23rd, 2011, 08:41 AM

Originally Posted by ZCP

Any chance of raising the rent? Or see if they want to buy it from you?

I can raise the rent a bit ($100 or $150 maybe) if I decide to keep it starting January 2012. But, I will have to find new tenants and risk vacancy and losing more money to try and get it rented again. The current tenants have no desire to buy it, and will be moving out after their lease is up December 31, 2011.

**damondietz** · May 23rd, 2011, 08:49 AM

Originally Posted by Roger

why do you "need" to kill the $70000 source first? can't you expand your video biz by working on the weekends, until it develops critical mass? maybe you could even find a partner to work for you on a shared revenue/equity basis. what type o video "service" do you offer? if it's really fastlane, it shouldn't depend on you actually filming, editing etc

I have been working both my full time $70k/yr. job and my video business for over three years now. I am gettig overwhelmed ad my video biz gets busier I have less time to spend with my family as I am essentially working two full time jobs. I have also bit had the time to dedicate to my video biz as I would need to make it as bug as it could be because of the current full time job.

To answer your last question, the video biz is not fastlane. I am new to the fastlane mindset having just read the book and joined these forums recently. When I started my video biz I imagined I would build it up to eventually leave my job and I would be an entrepreneur, bam. Now I realize inwould be trading one job for another. I only want to grow te video business to support my family while I workl on my fastlane ideas. This way, as business owner only, I have more flexibilty to work on and fund my fastlane with my video biz. I just can't seem to do it all anymore... Full time job, full time business, family time, and create fastlane success in another arena.

I am overwhelmed and was hoping leaving the day job would free up
Much needed time to get me to the next step.

**max momo** · May 23rd, 2011, 09:45 AM

Yes – the state you live in and the state where the property is ARE CRITICAL FACTORS.

Is Pa or Nj a recourse/judicial state? That means, after your default (via short or foreclosure) will the bank come after you PERSONALLY?

This is a major factor. Even if you come to the table at the short close with a check (you are underwater 40k, so you believe you will need 40k to get out of the mortgage) you will need more $ for closing. AND, depending upon Pa/Nj law, your 40k forgiveness may be seen as ‘income’ to the State and Fed IRS. This means you will also need to pay taxes on that 40k. So, you may need close to 50k to short sale.

ALSO SPECIFIC to YOUR SITUATION - The Lender.

By and large the bank looks after their own, not you.

In California, the State Legislature recently passed SB 931. Section 580(e) OUTLAWED the common practice (especially by Chase) whereby they have in the contract fine print – which you need to sign as part of the ‘short’ agreement – that YOU ARE STILL RESPONSIBLE for the 40k.

That is correct, it is illegal for the Bank to require you sign a contract that says you will pay them back the 40k even after the short sale. However, Chase still conducts the practice, other banks probably do also. You have very little leverage over the bank.

Bottom Line – Can you keep the day job (sacrifice) and build your business (sacrifice) SHORT TERM to make up that 700/month? If you go this route, and save the extra $700 you had been paying, after six years you would have saved enough to pay off the deficit.

When you have a big hill to move, find a bigger shovel – don’t wish the hill were smaller.

MORAL ISSUE:
For most people, moral issues are typically driven by the financial considerations. When you overcome this, then other windows will open for you IMO&E.

Best to you and family.

**Red** · May 23rd, 2011, 10:48 AM

Originally Posted by max momo

it is illegal for the Bank to require you sign a contract that says you will pay them back the 40k even after the short sale. However, Chase still conducts the practice, other banks probably do also. You have very little leverage over the bank.

In Arizona the bank CAN require you to sign a promissory note as a condition for approving your short sale, it's not illegal if you sign your rights away.

You need to talk to a real estate attorney in PA, end of story. Everyone on here can talk all they want, but you need to go to the source of legal advice & get some facts IN WRITING.

You can't make an educated decision utnil you have the facts. Go get the facts & then you can begin the process of weighing your pro's & con's. Yes, it will be worth the fee you have to pay. Invest in your peace of mind.