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Foreclosure Ethical Dillema

 
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john p



Joined: 10 Mar 2006
Posts: 1820

PostPosted: Mon Jul 07, 2008 7:09 pm GMT    Post subject: Foreclosure Ethical Dillema Reply with quote

A young married couple own two properties in an area of the country that is experiencing significant price corrections in real estate. When they were single, the guy bought a single family in 01 and the woman bought a condo in 05 for $365k, putting a down payment of $100k. This condo has a condo fee of $400 per month. Now that they are merged they need to unload one property. The $365k condo isn't selling and it is priced now at $280, and the couple stands to lose the woman's $100k. The condo can rent for about $1,000 which doesn't cover the mortgage and condo fee. The guy can make money on the sale of his place and has an offer to rent it. Space is tight for both of them in the condo. Further, the condo was on the outskirts of a nice and not so nice area and the tide is shifting towards not so nice.

Combined, they do very well for salary, approx. $200k, but want to avoid the monthly drain and of course would like to keep as much of the down payment that was put down. Unlike many of the deadbeats and speculators that got in over their heads, this is a hard working couple that got caught in an abrupt market correction. I doubt any legislation will bail them out, and these are the real folks that will absorb the worst of the negative impact in this correction.

If you were them, would you let the property go into foreclosure? What criteria would serve as the basis for your decision? Thank you...
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Boston ITer
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PostPosted: Mon Jul 07, 2008 9:46 pm GMT    Post subject: Reply with quote

This couple's in real trouble cause effectively, a short sale will result in the bank/govt coming after them for the $100K (or taxes on it) because it won't be their primary residence and hence, aren't protected under the non-recourse laws.

The only hope here is to rent out one of the places until father time helps 'em break even or take the bite by selling the house at a profit to offset the condo losses in valuation. Personally, I wouldn't have gotten into a marriage w/o selling one of the places but that's just me. All and all, the most they can do is break even here. I suspect that the more the guy waits, the more difficult it'll be to sell that '01 house to offset the losses on the condo at the price needed. Realize, this is a full blown housing deflation, not the '89 condo crash.

The only thing the politicians can do is to rescue municipalities (and related banks) thats which have overleaned on the housing boom to finance their expansions. Right now, the stability of the markets is more important to the functioning of the system than the average citizen.
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admin
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Joined: 14 Jul 2005
Posts: 1826
Location: Greater Boston

PostPosted: Mon Jul 07, 2008 10:14 pm GMT    Post subject: Reply with quote

My only piece of advice right now (maybe I'll think of something more later) would be to ignore the $100K down payment and view the proceeds from a sale without regard to the original purchase price (except to the extent that it affects taxes). That $100K was already spent. Indeed, $365K was already spent. Selling the condo brings in new money, it doesn't recover old money. Trying to sell it for the best price should be the goal of the sale. "Breaking even" doesn't serve a purpose other than emotional and is frequently referred to as the sunk cost fallacy. I'd run the numbers without thinking about what was originally paid.

- admin
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PostPosted: Tue Jul 08, 2008 12:31 am GMT    Post subject: Sell that Condo Reply with quote

This couple has great income - they should unload the Condo - any loss they incurr can be used against future Capital Gains - to minimize taxes - they could even take $3000 (check with your tax professional first) off their adjusted gross income every year until they use up the $100,000 loss.

Its better to cut your losses than be stuck paying taxes and up keep on a diminishing asset.

I hope they are able to deal with the emotions of cutting their losses.
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john p



Joined: 10 Mar 2006
Posts: 1820

PostPosted: Tue Jul 08, 2008 1:38 am GMT    Post subject: Reply with quote

Thank you, great input. I'm thinking about realized gains and realized losses. You have to actually make a transaction in order to make something happen. I think now, they have to model out the bleeding rate and see if he can survive. It seems like you guys are saying that he needs to eat his arm off to get out of this coyote trap. You guys are most likely right. It is hard for me to offer that sort of advice to a loved one without running it by some smart folks... so thanks again... If you were to model out the slow bleed versus the chewing off your arm scenario what inputs would someone overlook? The writing off your capital gains point was new to me.
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balor123



Joined: 08 Mar 2008
Posts: 1204

PostPosted: Thu Jul 10, 2008 12:30 am GMT    Post subject: Reply with quote

They should stop viewing the property as an investment with a buy point and a sell point. They got utility out of it - rent and tax deductions - which brings their effective cost down. Given their high income, these benefits were likely significant.

I don't view them as caught in the middle because they chose to buy and didn't consider whether the price made sense (price/rent ratio, price/income ratio, etc), which is equivalent to casting their vote into the bubble/pyramid scheme. They probably just assumed that housing prices would continue to increase at rapid rates. What really makes their purchase not a cost in the middle, was buying the condo in 05 without knowing the timeframe to hold it. Would you buy a stock and hold it for an unknown amount of time? And if you suddenly needed the money 3 months later, would you ask your broker to cover your loss?
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