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?