Why my Underwater House Worked for Me

by Sandy L on March 2, 2012

There has been a lot of buzz in the PF world about Strategic Defaulting on a Mortgage. (For you non-PF’ers that’s the term used to walk away from a mortgage even though you can afford to keep paying.)   First Financial Samurai talked about friend of his who is about to walk away from a mortgage and how his bad credit report may unjustly label him if an employer decides to run one.  Then Kris from Everyday Tips rebutted with her article on all the people that get hurt when someone strategically defaults.  So rather than leave a page long comment on each of their blogs, I thought I’d chime in with my personal experience on the subject.

In 2005, I was pregnant with my first child.  At that time, Babci was living in her apartment building 2 hours away and the sole person who used to take her grocery shopping and visit her and keep her company (my uncle) was dying of cancer.   At that time, we asked babci if she would consider moving to the town we lived in and she said yes.  The housing market was HOT and I knew it.  There was limited inventory and we finally found a dump of a house to buy at a reasonable price and closed on my baby’s due date.   We bought it for $135K and put about $20K into it so far.  The house next door which is the exact same house, sold for $99K (granted it was a father to son transaction, but it still affected my property value).  My house had the potential to be underwater. It would have been even more underwater if I bought a $200K house which is what most of the lower end homes were going for around here.

Babci’s 1890’s House

Why not defaulting worked for us

Even though the house could be called a bad investment, here are the reasons why I think it’s not:

  • Babci wanted a garden – and there are very few rental options which either have the space or landlord’s permission to allow a tenant dig up their yard.
  • We bought a cheap house – Even if it lost 1/4 of it’s value, it’s still not a ton of money relative to some other horror stories out there. It’s a much different story to say your $400K house is now worth $300K vs saying my $135K house is now worth $100K
  • Rent vs Buy still works in our favor. Remember back before the housing crash when people said renting is throwing away money? Well for us, it still was.  The mortgage  loan on this house was $635/month.  Renting a 4 bedroom house would easily have been $1000/month and even if she just lived in a 2 bedroom, those still run about $800/month.  She’s been there 7 years, so that’s $67,000 in rent that we haven’t paid out of pocket.  Even with the lost home value, we are still ahead of the game.  (Would I have bought a house in Boston or the Bay area at this time? Hell no).
  • Buying is more stable – with renting, you don’t know when your rent will be increased or by how much. You don’t know if your owner will sell and if you have to move unexpectedly.
  • Building Equity – I’m old fashioned and so is Babci and a tangible asset is something we both feel good about. This house was paid off in 2011.  Even though we will lose on paper, when we sell this property, the equity will be all upside.  Forget return on investment for a minute.  The best way to build wealth is to save money.  One of my favorite ways to save is through real estate.  Don’t forget, the stock market lost 1/3 of it’s value too at one point and the world is still evangelizing about the merits of “long term ROI.”  How come it’s okay to think long term about a stock but no longer for a house? For me, I saved at a much greater intensity when I was paying off a house vs building a stock portfolio. One excites me, the other does not.  I still do both to diversify my risk but I actually “like” investing in real estate.

Buying a house is not a short term decision. Before defaulting, do a little more math. It may not be as bad as you think.   So where are you parked on this subject?

{ 32 comments… read them below or add one }

Daisy March 2, 2012 at 9:08 AM

Beautiful house! I am personally all for buying. We rent right now and it’s torture (I may be being a little dramatic but I hate it).

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Sandy L March 3, 2012 at 5:28 AM

Daisy – I grew up in an apartment, so having a single family home was always a dream of mine.

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Nicoleandmaggie March 2, 2012 at 9:16 AM

We’re also in a pretty cheap housing market– the ding to our credit report would be too large to make up for any small amount of money we could recoup. And renting in our neighborhood is still more expensive than buying.

We probably would not strategically default ever, because housing markets tend to rebound if you just wait long enough. Sure you don’t gain that quick 100K etc. but they make it not easy to default on purpose, and I have better things to do than deal with hassle even putting moral considerations aside.

IF we were in a situation with job loss, needing to move, being unable to sell, unable to keep up with our payments without seriously dipping into our savings, then we would consider it. I don’t think we would willingly go bankrupt to keep an underwater house we couldn’t live in. If, however, we didn’t need to move, we’d just wait for markets to rebound (or something like job loss and needing to move etc. to happen).

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Sandy L March 3, 2012 at 5:31 AM

Grumpies – I wouldn’t call defaulting due to a job lose or forced move to find work as “strategic defaulting.” Those things do happen unfortunately. I think if we were in a more expensive housing market, we couldn’t have afforded a second home in the first place.

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Nicoleandmaggie March 3, 2012 at 8:08 AM

It could still be a strategic default if we had money in savings to pay down the difference. But that could also increase the chance of a bankruptcy and bankruptcy also hurts people. Probably what we would try to do in that situation would be to short-sell. (Of course, if we had a LOT of money in savings we wouldn’t do that, but if we say owed 800K on what used to be a million dollar house and is now a 600K house… paying down the difference could wipe out cash and stock savings and 401k loans are dangerous. A reason one of our friends in SF recommends only buying a house if you can put at least 40% down…)

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Paul @ Make Money Make Cents March 2, 2012 at 10:25 AM

I am currently refinancing my mortgage which is underwater. I am going through the HARP 2.0 program. Almost every person I talked to told me to walk away. I think they are crazy. Unless you truly can’t afford your payments, you are stuck with your bad investment. So for me, it’s a few more years of saving and staying put.

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Sandy L March 3, 2012 at 5:32 AM

Paul – good for you. Glad there are others that don’t walk away. If you’re there long enough, it eventually doesn’t matter (like the rent vs buy analysis above). If my mom had been renting all along, that’s more than 1/2 the equity in our house.

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Kris @ Everyday Tips March 2, 2012 at 10:42 AM

If everyone had your attitude Sandy!

It is indeed very short term thinking when people walk away from their mortgages. As you stated, we are talking about people that can afford their payments, but don’t like the loss on their investment. A house isn’t like a stock that you should be able to dump when you don’t like the negative ROI. However, our society now seems to think that they shouldn’t have to suffer losses and that they can just shut the door and walk away.

Great post, and Paul, kudos to you for refinancing instead of running!

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Sandy L March 3, 2012 at 5:35 AM

Kris – you’re right. The difference with dumping a stock is that you live with your bad choice and take a loss when you sell, but also gain when the market is up (but also only if you sell). With a house, it seems the new rule is “walk” if your down, keep if it’s flat or up. That just reminds me of how we bailed out the banks. Yeah, they were doing all kinds of risky things when the market was hot, but then needed a hand when things tanked. I know it was necessary to keep from a financial meltdown, but how’s that fair?

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Money Beagle March 2, 2012 at 12:29 PM

It’s also an impatient move for many to walk away. Prices have largely started to stabilize, so even if you’re underwater, every payment you make will bring you closer to zero and eventually over zero and that will move even faster if prices would start to increase again…which they would if people stopped walking away.

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Sandy L March 3, 2012 at 5:37 AM

MB – yes, I think you’re right. Strategically defaulting is just extending this slump in home prices. I guess it’s good if you’re a buyer now.

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Cynthia March 2, 2012 at 1:11 PM

Nice to read your story and learn more about you — I’m impressed you paid off the house in such a short time. And I understand the call of a garden and, being a cat lover, not wanting to rent. We have a very nice house, but it had been added on to several times and didn’t have central heat, a dishwasher or a dryer, and some rooms were cement floors and unfinished drywall. Our willingness to tackle that slowly (among the first was getting rid of the wood stove — kinda regret that now — with two small kids. I couldn’t handle it!) and buy a house based on a reasonable mortgage, I believe, has and will put us ahead.

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Sandy L March 3, 2012 at 5:49 AM

Cynthia – don’t be impressed. Since this is the home my mom lives in, she also kicked in some cash towards the mortgage when CD interest rates hit 1%. She was peeved at me for paying 4.75% interest when her money was sitting there making a lot less, so we finally relented and used some towards payoff. We didn’t do it single handedly. We’re a blended household. We pay for some of babci’s expenses but she also contributes in her own way. She’s very generous with what she has.

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Money Infant March 3, 2012 at 5:23 AM

Looks similar to many older houses in my old hometown, it’s lovely. I think as PF bloggers we sometimes focus too much on the financial side of home ownership. Sure it would be nice to make a profit from your home, but a home is so much more than just a store of value. As you well know, judging from this post :)

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Sandy L March 3, 2012 at 5:52 AM

Well said money infant. You start to question the whole purpose of slaving away and working long hours if you don’t use that money towards things that are important to you.

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frugalscholar March 3, 2012 at 11:07 AM

Love the pic of the classic Pittsfield (?) house.

Also love the point about how a % loss on a less expensive home translates into dollars. My mother’s condo in FL (bought 20plus years ago, way before bubble) has lost at least 40% of its value. But in dollar terms it’s not so terrible–though terrible enough!

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Sandy L March 12, 2012 at 4:35 AM

Frugal Scholar – yes, this house is in Pittsfield. There are loads like it in town. I wonder how your mom’s condo compares to renting though. I bet she’s still doing okay relatively speaking since she bought so long ago.

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Julie @ Freedom 48 March 3, 2012 at 8:53 PM

That is such a beautiful home! You have a great way of seeing the silver lining in things – and putting a positive spin on it. So many homeowners in your situation would have the “woe is me” attitude – your perspective is refreshing!

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Sandy L March 12, 2012 at 4:37 AM

Julie – Thanks. There is so much negativity around home ownership right now, I thought it was worth a mention. My perspective hasn’t changed pre or post bubble. Maybe it would have if I got laid off and had to sell but we got lucky.

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Little House March 4, 2012 at 4:46 PM

What a beautiful house. They just don’t make them like that on the West Coast. :( I think you were really smart to keep the house; it was a good price at the time and at a low interest rate. Since you had already done the math, it was still about the same or cheaper than renting. And, Babci now lives closer to you. The bottom line is Babci needed a place to live and it made sense to buy instead of rent. I think people sometimes lose sight of the big pictures and can only focus on the here and now. I like living in the present, but planning for the future!

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Sandy L March 12, 2012 at 4:41 AM

Little House – exactly. It was very much a quality of life decision too. It’s hard to put a price on having my children know and love their grandmother and I doubt anyone would have been as happy if she weren’t so close. Also, at the time (before we sold her apartment building), she would get more rent for the apartment she vacated than the mortgage on this house.

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John | Married (with Debt) March 6, 2012 at 11:42 AM

Great post because it shows that personal finance is, well….personal. What works for one won’t for another. Kudos for following your heart and doing what you feel is right.

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Sandy L March 12, 2012 at 4:41 AM

John – yes, this one was more about family than money but do not regret the decision.

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Molly (Mike and Molly's House) March 7, 2012 at 8:43 AM

We like having rentals (we have a 4-plex). The housing market in Santa Fe is not very affordable so that is what keeps us from investing further. Some years are more profitable than others on our rentals but like you said so is our portfolio investments. Years ago, just as the housing market was taking a dive, a financial investor sat us down and gave us this ‘fear monger’ lecture how we needed to dump all of our property investments and put it all in the stock market. I believe in diversity myself.
The drawback to the property is that it is not very liquid. If we want to sell it would take us years.

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Taline March 7, 2012 at 6:39 PM

I have to agree with Molly…

As an owner to several rental properties, the passive income it has built me is fantastic. Diversification is very important and it somehting all investors should practice :)

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Sandy L March 12, 2012 at 4:43 AM

Molly – rental income is how my uncle became wealthy. He hardly ever spent anything but he amassed quite a good nest egg come retirement. It takes a lot of work though.

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Chuck March 7, 2012 at 8:59 PM

Nothing beats owning a house. I can plant a tree or garden anywhere I want. All of my sweat is for the greater good and the future of my home. I could only wish I hadn’t purchased when the market was at its peak. I moved in one month before the housing crash and watched my equity go down fast. Yuck! I cant look at it that way I guess.

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jesort415 March 9, 2012 at 12:16 PM

I agree with your post!! When I am “mature” enough (Ninja over PDITF had a post about things you want but know you aren’t mature enough to have yet) to own a home I want that home to be home for years and years to come. I am not looking at my house as first an investment second a home, it will be home no matter what. If we sell at a profit great if not oh well we used it for what it was meant for to live. To provide shelter, to provide a place to have my family and friends visit, a place to house my big screen TV :-)
Now if I were to buy rental properties clearly that is an investment and I would look at it differently but not my primary residence, I will make what changes I want because that is how I like it not because it will be good for resale value.

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Sandy L March 12, 2012 at 4:44 AM

Jesort – the maturity thing is a really good point. Wanting a house is not necessarily the same thing as being ready to have one.

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Andrew @ 101 Centavos March 10, 2012 at 6:42 AM

There’s something about tangible assets, and even more about productive tangible assets. Just how much produce has Babci’s garden generated in 10 years? Not a little, I’d venture to say.

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Sandy L March 12, 2012 at 4:46 AM

101 – great point about the garden. Yet another thing a stock portfolio can’t do when prices tank. Your soil quality doesn’t go down even if your house value tanks on paper.

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Mutant Supermodel March 12, 2012 at 10:31 AM

I was a strategic default (booooo, hisssss, whatever). We spent a lot of time thinking about it. The list of cons to keeping the place was overwhelming– short term and long term and mid term. Not to mention, walking away from the house also opened the door for me to be able to get my divorce too so there you go.

There is no single right answer. There never is. That’s why those blanket type of statements– It’s Never a Good Idea to… annoy the crap out of me. Growing up I was raised to never say never because you may just get god’s attention. I know I freaking have.

Totally off-topic, my cuticles are rising against me. :(

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