Knowing When Homeowners Should Abandon Ship

Published on Jul 03, 2009

by Ralph Roberts
Homeowners are beginning to wonder whether holding on to their homes is a mistake. Many have seen their property values drop 25 percent or more. Some experts claim that the housing market hasn't yet hit bottom. A few are even saying that we’re only halfway there.

Some homeowners are beginning to wonder: Why not cash out now and sit on the sidelines until the market hits bottom? If I owe more on the mortgage than the house is worth, why throw good money after bad? I usually advise homeowners to consider the reason they purchased this particular house in the first place – the schools, the neighborhood, the commute to work, and so on. I then advise them to try to stay in their homes for several additional reasons:

- Sell now, and you’re essentially selling at a loss. The loss in equity is not a real loss unless you sell; property values are likely to rebound over time.

- If you’re having trouble making payments, you may be able to use this opportunity to lower your house payment – through refinancing or a loan modification.

- Abandoning ship by vacating your home can damage your credit and make it much more difficult and costly to purchase a home when the market does recover.

- More and more lenders are seeking deficiency judgments against homeowners in states in which deficiency judgments are allowed. In other words, if homeowners abandon the property and the lender can't sell it for enough to cover the remaining balance on the loan, the lender may pursue legal action to collect the difference.

- Lenders are increasingly unwilling to accept a short sale or deed in lieu of foreclosure for borrowers who can afford to make the payments.

As borrower, you have to make a case that you can’t afford to stay in this house. If you can afford to make the payments but can't see the point of making payments on a home that's worth a fraction of what you owe on it, the lender is likely to decline your offer of a short sale or deed in lieu of foreclosure.

Sometimes, though, it makes sense for homeowners to bail out, assuming all of the following apply:

- They owe way more on the property than it’s worth.

- They cannot afford the payments no matter how much they trim their budget in other areas and even if the lender is willing to modify their mortgage.

- They're way behind on payments and will never be able to catch up.

- Trying to do the right thing is putting them deeper and deeper in debt.

- The lender rejects their request for an affordable loan modification.

- They can’t refinance into an affordable monthly payment.

- They have come to grips with the fact that they may lose this house.

- They have exhausted or dismissed all other options, including bankruptcy.

If these conditions apply to your clients' situation, they may need to abandon ship, but there are right ways and wrong ways to abandon a ship. In the case of abandoning a home, your clients may want to consider the following options from best to worst:

Short sale: List the house for sale. If they can’t sell it for at least what they owe on it, offer to negotiate short sales with the lenders who hold liens against the property. Real estate agents are often the best qualified to assist homeowners with the short sale option.

Deed in lieu of foreclosure: If short sales are not an option, your clients can offer their lender a deed in lieu of foreclosure. They sign the deed over to the lender, hand them or ship them the keys, and walk away debt free. If your clients decide to pursue this option, advise them to hire an attorney to review any documents before they sign them. Also, let your clients know they may be able to negotiate with the lender to obtain some cash from the lender for turning in the keys and leaving the premises "broom clean." Or, the lender may allow them to live in the home rent-free until it sells – a vacant home is harder to sell.

Walk out: Once homeowners have exhausted all other options and the lender is being totally uncooperative or uncommunicative, sometimes all they can do is walk away. This really is an option of last resort. A short sale or deed in lieu of foreclosure damages your credit less than a foreclosure. With your help, your clients should be able to avoid this unpleasant choice.
I believe homeowners should fight to keep their homes and real estate professionals should help them as much as possible. Keeping our clients in their homes is not only the right thing to do, but it's good for the industry that bakes and butters our bread – it helps stabilize our neighborhoods and the housing market and keeps the American Dream of Homeownership alive. When homeowners find themselves fighting a losing battle, however, they shouldn't throw good money after bad. Sometimes a graceful exit is the only choice.

Published: June 22, 2009

This article is reprinted with permission from Realty Times, www.realtytimes.com.