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HOMEOWNERS, IF YOU CAN'T SELL, EITHER RENT OR STAY WHERE YOU ARE. You can't "just walk away".

INSPIRED BY A POST by Janet Guilbault, it appears that the consumer is capable of making one bad financial
decision after another, and then even another. It isn't going to get any better for a while and you can't "just walk away".

Janet describes her experience with a buyer who purchased with 100% financing. 100% financing is code for
no equity. Of course, in a rising market, the risk of 100% financing is manageable if a home owner plans to live in and keep their home for some years. However, many folks who purchased back in the 2005-2006 years and
used the 100% financing loans not only have no equity. they probably own a home on which they owe
more than the present market value of the property. Many used their home like a credit card and refinanced to milk the equity every time there was any gain in market value. Refinancing is cheap. They got what they paid for. They spent their equity.

"PLEASE DON'T LEAVE ME!!!"

JUST BECAUSE YOU'RE UPSIDE DOWN
Now that the owner's personal circumstances have changed and he is no longer willing or able to make the payments, his question is "Should I just LET THE HOUSE GO?" Notice to Homeowner: You can't just let the house go. You can't just walk away.

Many buyers who purchased with 100% financing believe that they don't really own anything. WRONG! The Financial Statement for any home owner and you'll see that the property, real estate, is listed on the "ASSET" side and the mortgage on the property is listed on the"LIABILITY" side.

YOU PURCHASED MORE THAN THE HOUSE.
Something that many home buyers never consider is that, when they purchase a home, they purchase more than just a piece of land and the improvements thereon. You also purchased:

The maintenance.
The tax payment.
The HOA payment, if any.
The financial gain, if any.
The financial loss, if any.
Any shortage between mortgage payment and rental income.

Included in your purchase of land, sticks and nails is the liability for repayment of the loan(s) you took to finance the purchase of this property that you own. So, you're upside down?? So what?? You still own the liability.

For home owners who want to "just walk away", it "just" isn't that simple. There are costs involved when a home owner walks away from real property. The owner also owns:

The cost of foreclosure.
The "financial asset" gained through a short sale.

Home owners need to think twice before they buy and once they have purchased real property, make every effort possible to protect their biggest asset in this present real estate market now and in the coming years.

YOUR CREDIT RATING.
A good credit rating is money in the bank by way of future savings on credit card payments, automobile financing, and most important, the next home you wish to buy.

"PLEASE BUY ME"

Courtesy, Lenn Harley, Broker, Homefinders.com, E-mail.

Posted by Lenn Harley, Broker, Maryland and Virginia on 02/22/2008 11:59 AM

Comments (55)

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Post is included in group: Realtors®
Post is included in group: SubPrime Loans and the real estate market.

55 Comments on HOMEOWNERS, IF YOU CAN'T SELL, EITHER RENT OR STAY WHERE YOU ARE. You can't "just walk away".

FEB

2008

"Walking Away" is something that will haunt you for years and years to come. Renters can "Walk away" at the end of their lease.... Owners do not have the same ability.

Hello Lenn -- I just had this happen to me with one of my sellers. They were not honest about their situation with me until the week prior to them walking away. Now they have all those costs and credit that won't be repaired for years to come.

Have a Fabulous Real Estate Day Lenn!

Anona

What do you mean by the "financial asset" gained through a short sale?

Much has bee written recently about the "walk away" buyers. Many seem to think they will not pay the long-term price, since so many will be doing it that the walk away will become the norm, hence no severe penalty.

Lenders aren't completely stupid folks, if you walk away, you will be stigmatized as a person without honor or a sense of responsibility.

Hi Harley,

Nice post. I encourage people to do what they can to stay in their homes. Particularly after a divorce. Many people feel they want to sell because they do not want to deal with memories or maintenance--it may be very difficult for those people to afford to buy a home again.

Lenn,

I firmly believe this whole attitude about "walking away" from our responsibilities come from living in a disposable society. Don't like something, throw it away....Being held accountable has slipped thru the cracks in this country today. People need to understand the after effect of their actions.

Kim, There is that big word, accountability, I don't think there is such a think anymore. It is easier to blame someone else for situations that have been created than to take responsibility for poor decisions. If you don't like something, someone, some situation, get a new one. Don't try and fix anything, just walk away from it. Very sad. When did things change that so now everything and everyone owes us what we want, owes us perfection, owes us what our buddies have, owes us what our parents have/had??? Who is to blame? Society, Advertising, Teachers, Parents, ...... all I know is I don't like living in a disposable society. How does anyone else feel about this?

James. You are absolutely right. Folks who aren't willing to make sacrifices will suffer
with poor credit for years and years.

Anona. Thanks very much. You are right. It will follow them for years and years.

David. Under certain circumstances, the difference between what the owner owe and what
they sell the house for is considered income. That is an "asset" and taxible.

Jim. Lenders aren't stupid at all. They know how to read a credit report.

Leslie. Folks need to learn to value their credit report. It's the most important financial asset they have.

Kim. Haven't you heard. The government is going to ride to the rescue and save them. Or, so they think.
,

One of my sons said it very well one time. He made a poor decision about something and his wife was complaining about "whose fault it waa". He quickly reminded her that he was an adult and made his own decisions and it was his responsibility to make the right ones.

I was very proud of him that day.

Lenn: Homeowners really have an advantage. After all, the banks don't want the homes back. If at all possible, try to hang on to the home... assistance may be just around the corner.

As far as the tax consequences of a short sale, I'm not a tax accountant, but I do know that homeowners who had to restructure, a foreclosure, or a short sale on their principal residence during 2007 may be able to claim special tax relief. The IRS just released the details on the new law this week. According to what I have read on the subject, they will need to fill out Form 982. (They should receive a 1099-C for the taxable income.)

There is a possiblity of tax relief on the short sales in some cases. However, I agree with Lenn, that one should try to hold onto the asset if possible. If one does have to "walk away" then I hope they don't trash the property - like several I have seen lately!

Lenn- Very good points. Many banks are willing to work with people. For years I have seen many neighbors and friends (mainly military with 100% VA loans) refinance to pay off the car or credit cars. I cringed when I heard them talk about it. I know that someday they will have to sell and then the bad news starts....

I have had this conversation with a couple of folks in the last few weeks.

Just walking away is a real problem. It seems like that's the only thing you can do when you're back's against the wall. I don't want to make excuses for adults who should have had their eyes wide open when purchasing their home but let's not forget the "frenzy" of the past Sellers' market.

People were seeing their neighbors, co-workers and friends make huge dollars in a relatively short period of time. Novices and investor wannabes were flipping houses with relative ease. Lenders kept coming up with more creative and exotic ways to get people into a mortgage. Realtors were busy satisfying the needs of people who were shouting " I wanna house! I wanna house!"

Aside from the mentality of just walking away the huge run up in prices have left the lingering greed with home owners that want more than their neighbors got at the peak of the frenzy. (your previous post about Seller motivation says it all!).

I guess what I'm getting at here is that people got in way over their head with 100% interest only ARMs that are re-setting. They were caught up in the madness which was fueld, at least in part, by the vast array of real estate professionals (lenders, title companies, appraisers and, yes, Realtors).

My experience has been that the house is the last thing to go. People have already stopped paying the Visa bill and may have even had the Caddy Escalade re-poed.

It's not a good excuse. People should look at themselves in the mirror and say,"I got myself into this."

I am beginning to cringe whenever I hear clients mention 100% financing. It's still out there, but I wonder for how long. I've been told if my market gets downgraded to a "declining" market then many of these programs will then require 10% downpayment. And for a Country not know to be savers, ..this doesn't bode well.

I suppose that some people feel entitled, and if they're not making money on the home, then they don't feel an obligation to keep the home. There were some people on 60 Minutes who took such a perspective. The reality is that the lenders can't pursue the homeowner for unpaid mortgages, and if there's no disincentive tax result (i.e., having the loss as paper income), then there is little economic reason for these people to stay. It will be several years before the market bounces back. If they walk now, they'll have a decent credit report within a couple of years, in all likelihood. NOW IF THE FICO SCORE PUNISHED THEM for 5 years or more for walking away, then maybe the credit standing would be a real reason, but I don't think it will affect much behavior. Much like the Savings and Loan crisis, I think the American taxpayer is going to end up holding the bag. There's a reason why 20% downpayment gets you a better rate - it's because you're a lower risk because you've got skin in the game.

FEB

2008

Unfortunately, when the lenders 'let in' the 580 credit score 100% financing wage earner STATED (because they would never really qualify) clients in with NO investment what-so-ever....

Thanks lenders, because now you have ruined it for the rest of the population that COULD afford, qualify, and pay that mortgage, with NO money down!

Now that PMI is out of the 100% game, and 80/20 combos are gone, and lenders REO departments are holding bags they can no longer hold up (BECAUSE THE ARE TOOOO HEAVY)...

SAY GOODBYE TO ZERO DOWN FOR A WHILE!

BRAVO LENN! This is a brillant post! When it comes to finances the "Live for today" way of thinking can and will come back to bite you tomorrow. LENN do you happen to know iof the Liability Law on defaults was revoked? A Deed in Lieu of foreclosure, or out right foreclosure cost unsuspecting homeowners thousands the FOLLOWING year when the Liability became "income" by IRS rules. The debt forgiveness was supposed to be one of the topics covered- do you happen to know if passed?

LENN - The people that are desperate and unable to make the payments may not have a choice. However, those that have the ability, but not the desire to make the payments are potentially making their lives very difficult for a long time. In the credit-driven world, it's very difficult to live with bad credit scores. This could even prevent them from getting a rental in some cases.

Lenn, I agree that folks need to do everything possible to honor their obligations BUT I have sellers right now who need to walk away. Their circumstances are so dire they have no chance of pulling out. The stress that is invlolved is ruining their lives. They should walk away. Life is too short to let a house bring you down. This should certainly be an extreme last resort.

It amazes me when a homeowner thinks this is the easiest thing to do is walk away from their home!!! I had a lady in my neighborhood who was being foreclosed on. I went and spoke to her about trying to sell the home. She didn't want to mess with it...So it was foreclosed on -0 went to sheriffs sale and bought back by the bank. The property was a mess and it did eventually sell for about $50,000 below market value due to the condition....Doesn't help the neighborhood at all when this happens but I believe someone said it earlier...some people just don't care! It's a shame! But I wonder if they just don't care or they just don't think!

Bryant. Of course, it's a last resort and in the case of many in Florida who, through no fault of their own, it's an alternative. Janet's article was about a different group of owners who made bad financing decisions when they bought, refinanced and blew their equity and now just want to walk away. My point is that "walking away" isn't free.

Adam. THAT is precisely the point of this article.

Allison. I believe that there is tax foregiveness for some of these cases, but, if I recall, it ends end of 2008. I wouldn't describe those benefits without getting the exact terms, but I know that there is some foregiveness involved. See Jan Wood's comment above.

Katerina. That is really the sad part of this mess. Present and future buyers will pay for the actions of the financial industry for years to come.

John. Goodness, the reason for folks to keep their home is to have a place to live. Where is it written that people can throw real estate away because it ceases to pay a profit?? I recall the S&L scandal. We paid for that, are still paying for that and we'll pay for this too.

Colleen. I agree. Saving is the secret to riding out ups and downs of any market. As of today, the malls are still packed on Saturday.

Ken. I have had home owners call me to ask how much I think they can get for their home. I would refer a good listing agent for them if they're serious. However, many of the callers are interested in selling, not out of need, but because they see the market declining and want to get out now. When they find that they are probably upside down, they often indicate that they'll "just let it go". That's the kind of thinking that doesn't make any sense.

Randy. I imagine most of us have. Thanks.

Kim. Goodness. The military are a special case. They have no choice in where and when they live. I haven't sold to a military active duty buyer for 3 years. I wouldn't today. Selling a home to an active duty military person who is likely to be transferred out in 2-3 years is a guarantee that they will not be able to sell without bringing a lot of money to the table. They call me all the time. I recommend that they rent. Our prices are, thankfully, still falling. Active duty military face financial ruin if they buy today.

Joan. My goodness yes. Actually, with the exception of HUD owned properties, foreclosures in our area are in good shape.

Lenn, Whatever happened to "personal responsibility." If you made a bad financial decision, you just live with it. Suck it up and do the right thing. These homeowners who want to walk away because they are upside down are responsible for their decision. Now, if they are facing some hardship like job loss, or health, or something else, that's a different story. But just walking away because they owe more than the home is worth is WRONG.

Kelly. I don't believe that some folks understand the dynamics of loss of credit. But, we're not their keepers.

Lenn,

This was a great post. I hope that more than the AR folks get to read it. There are a lot of homeowners out there that need to read this.

D. Bass. Hopefully some buyers will see this post on Google.

Results 1 - 10 of about 400,000 for if you can't sell or rent, walk away. (0.26 seconds)

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4 Comments on HOMEOWNERS, IF YOU CAN'T SELL, EITHER RENT OR STAY WHERE YOU ARE. You can't "just walk away". "Walking Away" is something that will haunt you ...
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Lenn....The amount of walk aways is going to get higher...what else can they do...I was working with a lady who is going thru a divorce...she ate up her savings in about 4 months making all the payments, after that there was no more money...she offered to give the house back..deed in leu of foreclosure..the bank declined because the payments were behind and she could not catch them up..60 days later she moved in with family.....There are no set answers to any of these complex questions...What we should do and what we must do become the question of the day for many who have fallen into these situations.

I have another question.. What t do here?? I have a family who have been making their payments on time, and many times making extra principle payments for over 11 years...The home is in good shape, and even in the current market, its got about 25k in equity...The husbands good job was lost and the wife was a stay at home mom for the 4 kids...now the extra money the couple put into the house is not available to them now..the husbands new job pays less than half what the old one did........You guessed it...they don't qualify for a loan, and now are 4 payments behind....

I know why people walk away from homes.... & its not always cut and dry

Mike. There will always be folks for whom the choices are few if any. I'm not making a claim that some folks have choices. I know better.

What I am saying is that many home owners don't understand the ramification of "just" walking away.

Let's face it. Many home owners made bad decisions when they purchased. We can't expect them to understand the dynamics of walking away.

Great post! It's all about responsibility! Obviously we cannot all rent homes out at $4500 a month...so there were some flaws in thinking out an exit strategy. Walking away has issues, so does renting, short sales and deficit payments to make up shortages in renting a home for less than the mortgage payment. I am betting they will walk away. They made a major wrong choice buying a home on a whim that was way over their heads financially. Unless they have had a major spiritual awakening...they will repeat the blunder on the back end.

Lenn, one of the reasons "homeowners" are walking away from their homes is because they are really "renters" and not homeowners. People that put no money down and have marginal income have neither a vested interest in the property nor equity, therefore they are not really homeowners. They don't care about their credit score because in many instances it was nothing to be proud of to begin with. Many of these people are immature and irresponsible and have a lifetime of experience of running away from or denying bad decisions they made. For these types of people running away from problems that they are mostly responsible for is the story of their life so why change now. I realize that this doesn't apply to everybody but it applies to a lot more people than some are willing to admit. Greed, entitlement, avarice, and irresponsibility are becoming traits that are all to common in our society. These types of traits tend to erode the character of society and in the end society as a whole pays.

Lenn - great post! It is amazing, how many people are doing just that, walking away because the home is upside down - I have never seen anything like it before!!!!

FEB

2008

Jim. Thanks. There are, of course, a few who have little choice. But, I fear that the ones who are walking away are the ones who didn't look forward when they purchased, which was the subject of Janet's post that insprired this post.

George. I'm laughing out loud because I had a meeting of agents a couple of weeks ago when one of our brokers was describing a buyer who had no money, average credit, and just wanted to buy a house. Another agent in the meeting said "Sounds like someone who just wants to move". They were absolutely right.

Barbara-Jo and Bill. Me too. I have had calls from home owners who want to sell only because prices were going down.

Lenn

People all over are walking away from their properties and thinking they are free from the liability of a mortgage payment but they are wrong. People always seem to forget the promissory note they signed at the closing of title.

Gary. Bingo.

FEB

2008

Lenn - Fantastic post and required reading for most buyers, or better yet most struggling homeowners, right now. Can I add one to your list?

"You also purchased:

The maintenance.
The tax payment.
The HOA payment, if any.
The financial gain, if any.
The financial loss, if any.
Any shortage between mortgage payment and rental income."

RESPONSIBILITY RESPONSIBILITY RESPONSIBILITY

FEB

2008

Lenn - here is a Blog that I commented on and linked back to this one, as I'm sure Don would be interested in reading yours, and vice versa...

Derek. Thanks. You've got some synergy going here. Yes, Don's comments are right on.

Lenn, This post just hits the spot, people just don't get it that credit is worth more than money. I wish each home owner could read this post.

Don Eichler Texas Broker

You're right Lenn. Homes don't come with a "two year risk free guarantee". But sadly that is how people are treating them. Don't like the situation? Got in over your head? Blame someone else, mail back the keys and wait for the federal government to rescue you. I am disheartened by what I am seeing in this day and age.

Lenn,

This is the kind of straight talk all home buyers need to hear. I wish every lender would explain it as clearly as you have done.

Sandy

Don. Thanks. We try. We try.

Chris. It goes back farther than today. When anything that was listed would sell in hours, folks got the idea that it was easy. It isn't and they should have been more careful about what they purchased. It doesn't end when the moving truck drives away. In fact it just begins when the moving truck moves away.

Sandy. So do I. So do I.

Lenn, This has been on my mind and I was going to write a post, but you have, as usual, thoroughly covered this topic. It is true, we just say don't like, everything is disposable. Not good. When I bought my first house in 1990, I was upside down for about 4 years. Never even occurred to me to "walk away"? I just happily stayed there and rode the storm out. I stayed there and guess what, the market came back and I made money?

Isn't signing a promissory note - a promise?

Yet another great post Lenn! I never did understand why so many common people bought houses as an investment. It's a home, so make it one and live in it 5-years or so. Not everyone was made to be an investor, and now we see why.

FEB

2008

The 100% financing never should have been approved for residential buyers. It's a sign that they are in way over their heads.

Audrey. I purchased a home in 1986 that was upside down. I purchased one in 1990 where I was upside down. But, you sit it out and the market comes back. Never thought about walking away because it was my home. Eventually I made a lot of money on those two condos that financed the purchase of a great home in Bethesda. You just hand in.

Short term occupants should rent.

Joseph. We sold a lot of homes in the boom years of the 21st Century. They were home owner residents. The one investor buyer I had has lost his shirt.

Joe. I have no problem with 100% financing. I've sold homes to folks who had the cash in investments that could have easily have paid for the house, but the financial advantages of the tax deduction and low interest rates made it sensible. 100% financing is risky for buyers in a depreciating market if they have to sell.

I liked your post! I just want to scream when I hear people are walking away. We are struggling, but what I don't hear from consumers that they are willing to change anything in thier daily lifes but would consider walking away. Get a second job, get a room-mate, rent it out, downsize everything you have to.....

Sorry, added a little rant!

Lenn, it seems like everyone here in California thought they were an investor. They'd buy a house, sell it in 1-2 years and move to another house a couple hundred thousand $$ more expensive. A lot of people got burned that way here.

Kelly. I'm surprised too at the ease with which folks walk away. I'm not speaking in general. I'm referring to folks that call me about selling their home and some of the reasons they give just don't make sense.

The one that I understand the least is that they want to sell because prices are going down. They're not relocating or anything. They just want to dump the property now before they dump it when it's worth less. It doesn't make any sense.

Joseph. A lot got turned that way here too. If I look at the MLS and see folks who purchased in 2005-2006 and even 2007, I know they're going to lose money if they can even settle.

FEB

2008

Great post- There's no doubt that there will be times when 'walking away' is the only option for many homeowners. It's what follows the borrower that really matters.

Encouraging a property owner to short sale or give up and foreclose is a bad place to be for any Real Estate professional. The only consolation I can think of is that a short sale may be a tmporarary short term (2 years?) blemish. A 'walk away' is a scar.

Bob. Very thoughtful comment. Thanks.

My fear is that, with the little knowledge that the average consumer has of real estate in general and the ramification of walking away specifically, the homeowner may not realize how foreclosure will follow them for years and years.

It isn't over when the home is foreclosed. It's going to damage their ability to own a home for a decade.

FEB

2008

Just walk away is great advice for no-recourse loans in negative equity. We qualified for a risky loan because we had exceptional credit- boy, were we wrong. A buyer across the street purchased one of the most expensive houses on our street on stated income. He was an illegal alien. Other people on our street refi'd to buy pools, cars, trucks, landscaping, custom wheels, you name it. Are they ever screwed. We had an illness in the family (stay at home wife fell ill), but we can afford the payments (barely). Now we have to move to be closer to family to help with the kids, and the house won't sell for at or more than we paid for it. If you make good money, and your house is worth less than you paid for it, and you can't refi it without plopping down more money, then JUST WALK AWAY! Pay the insurance, keep the water and electricity on, pay a landscaper, but don't pay a penny more. When the bank gets the house, the contract is fulfilled. They can't touch your personal assets (at least in California). Who cares if your credit is wrecked for a couple years? Who cares if the banks get screwed? They held ALL of the power by lending the money in the first place. They bet that prices would rise as much as you did (and more so). It's not the responsible buyer's fault that this mess occurred. The real winners were the mortgage writers and the builders (who hired 10s of thousands of illegals to build everything). Prices will continue to slide another 3-5 years until all of the interest-only, 5/1 ARMS shake out. They will stabilize at 2001 levels and hopefully resume a healthy 3% appreciation per year (just look at the median household incomes vs the median prices in 2000 and 2005).

Ken. I'm reading past the early part of your comment because most of the buyers you describe made choices, even the choice of moving because of an illness in the family. Unfortunate, but it was a choice.

You are right on the money that the folks who made the money were the mortgage writers and builders. I made money too by buying a home in 2003 and renovating it and selling it in 2005. I made money on my investment and the sweat labor that my sons and I put into the house. I made more money that I would otherwise owuld have because of the market. I also made money in real estate commissions but we worked hard for our buyers to earn that money, every dime of it. The years 2002 through 2005 were not easy years for a buyers broker. Sellers and listing agents treated us like crap. But, we survived.

I too, long for the return to reasonable home values and an appreciation related to the annual increase in the cost of living. Our homes are out of the price ranges for 60% of our home buyers. That makes no sense.

Thanks for commenting.

MAR

2008

I've actually refused to work with some people who have chosen just to walk away. They can afford it but don't want the home anymore and want the house to be a short sale, so they don't have to pay me. They say "Let the bank pay for your services, we don't want to" This is just the wrong attitude! If 5-10 years you could have just thrown away $100,000 or more if the market starts to go back up again!

Todd. It makes no sense. Their home still has to be listed. The contract is between the owner/seller and the buyer, not between the buyer and the bank.

If someone doesn't list the house for the bank and manage the short sale, the thing will just go to foreclosure.

They can't just walk away and avoid foreclosure.

What a mess.

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