In the past week, I’ve had two different people ask me questions about walking away from their seriously underwater real estate.
Real estate started its nosedive in 2007, but as long as no one lost their job, had reduced business income or had to move, the market value could seem irrelevant. As long as you could afford the payment and were prepared to stay put until the market recovered, you could just hold on.
But then the market decline drug on and on and on. There are a lot of people who are in properties now with loans that are as much as double what the house is worth. It may take years for the value to come back to the pre-2006 year limits and equal the amount they owe.
For some people that’s too long to wait and they want to make strategic defaults. They are defaulting and walking because it just doesn’t make business sense anymore.
Still others are forced to walk away from a house they can never hope to sell because of other business or life reasons (job transfers, family changes, loss of job, loss of business income, etc).
No matter what your reason might be, there are some basic things to consider before you walk away from bad real estate.
There are a number of pieces of information you’ll need to collect first.
- What state is the property in?
- Is this your principal residence?
- Have you refinanced?
- If you have refinanced, did you use the funds for improvements?
Depending on the state, the lender may not have recourse against you for any deficit when a sale doesn’t cover the loan. This is most likely if the property was your principal residence and you have not refinanced. However, law varies from state to state.
There are a number of options at this point. You can just walkaway and let the lender foreclose. You could attempt to deal with them for a deed-in-lieu-of foreclosure. You could try a loan modification. And you could try to get a short sale approved.
Based on what I’m hearing from our USTaxAid members, it’s next to impossible to get a deed-in-lieu-of through because the banks make more money on foreclosures.
Most loan modifications never get approved these days. That leaves two options: short sale or foreclosure.
If you have a loss on your property and it’s your principal residence, there is no tax loss available. If it’s been a rental property, then you have a loss you can take against other income.
At some point, you may receive a Form 1099-A and/or a Form 1099-C on the transactions. Most lenders either don’t prepare them or prepare them wrong. Each wrong move has its own headache for the taxpayer.
Probably the biggest problem that I’ve seen is people who jump too quickly into bankruptcy, thinking this is their only solution. Do NOT file bankruptcy without consulting an attorney first. It’s tricky and can cause additional problems.
It’s not right and it’s not fair. A lot of good people are getting taken down by this economy. If you’re in that boat, the best advice I can give is to face facts as soon as possible, get good advice and keep moving. The sooner you’re through it, the better it will be.