If your mortgage was too far "underwater", would you ever consider a "strategic default"? (to rent, credit card)

[EscapeCalifornia]

Oh yes, the Great Savior is going to restore everyone's home values to the levels that the B@astard Bush's recklessness single-handedly pushed them to in the first place. No, none of the democrats in congress had anything to do with lending policies leading to the biggest real estate bubble in American history. The Great Savior will spend us into prosperity with entitlements for all!

[NewToCA]

Originally Posted by Alexus

If you can convert it to a business (property that you are renting out, not your primary residence), you can write off the losses as business expenses. Presumably, with someone else paying a portion of the mortgage each month, you should be able to make up the difference to preserve your credit and meet the monthly obligation. Find a cheap place to rent, then reevaluate in a year. If the situation hasn't improved, sell it through a short sell. The bank has two options: It can write off its loss (diff between what it received from the sale of the place and what is owed) and add it to your income for the year or it can forgive this difference. If they add as income, you can offset this with claims for business expenses. If they forgive, you still claim the business expenses.

There is also no guarantee that the property will remain "hopelessly underwater" during this post-Bush recovery, even with Republican obstructionists doing their best to stall progress. This is Republican anti-Obama think and it has no basis in reality.

When converting to a business, I believe you cannot establish the value as the original price you paid.

The depreciation can only be on the Fair Market Value of the structure at the time of conversion, and land is excluded from depreciation. Depreciation has to be stretched out over a 27.5 year period.

So, you have some advantage in writing off a small portion of the property value, and any current year operations loss (rent - expenses). However, should the home ultimately appreciate in value and then be sold, you will need to recapture all of the depreciated value and pay tax on the gain as ordinary income.

When you convert from a residential to rental property, you give up the $250 K (single filers) or $500 K (joint filers) exemption from income taxes on real estate gains.

[EscapeCalifornia]

Originally Posted by NewToCA

The depreciation can only be on the Fair Market Value of the structure, land is excluded from depreciation. Depreciation has to be stretched out over a 27.5 year period

Good point, especially in coastal California where a small percentage of the total value is in the structure.

[NewToCA]

Originally Posted by EscapeCalifornia

Oh yes, the Great Savior is going to restore everyone's home values to the levels that the B@astard Bush's recklessness single-handedly pushed them to in the first place. No, none of the democrats in congress had anything to do with lending policies leading to the biggest real estate bubble in American history. The Great Savior will spend us into prosperity with entitlements for all!

Although we shouldn't turn this into a political discussion, since the topic was brought up (and slanted) by another poster, your perception is pretty accurate.

Actually, much of the problem started well before Bush even took office, and even the very liberal New York Village Voice agrees with this sentiment:

Andrew Cuomo and Fannie and Freddie - Page 1 - News - New York - Village Voice

[esmith143]

It does not matter much to me whether I am underwater. For sure, it might be depressing to know that I owe more than the house is worth, but that by itself would not make me want to walk away. I still have to live somewhere. What's the point of walking away if you end up renting someone else's house for the same amount as your former mortgage payment?

[EscapeCalifornia]

Originally Posted by esmith143

It does not matter much to me whether I am underwater. For sure, it might be depressing to know that I owe more than the house is worth, but that by itself would not make me want to walk away. I still have to live somewhere. What's the point of walking away if you end up renting someone else's house for the same amount as your former mortgage payment?

Most of the people under water bought near the peak and are paying far more in mortgage, interest, taxes, maintenance, etc than they'd be paying to rent the same place, especially since rents have been coming down since the peak of the bubble.

[jbunniii]

Originally Posted by EscapeCalifornia

Most of the people under water bought near the peak and are paying far more in mortgage, interest, taxes, maintenance, etc than they'd be paying to rent the same place, especially since rents have been coming down since the peak of the bubble.

But that was true when they bought, too. Both at the peak of the bubble and today, it has been far, far cheaper to rent than to own a comparable property. They deliberately CHOSE to take on a much higher monthly cost versus renting. Presumably it was worth it to them at the time. What changed?

In any case, if they want to sell now, they can do the same thing they would do if they had an "underwater" car loan: write a check to the bank for the difference between what is owed and what the house is now worth. If they can't afford to do that then they probably couldn't afford the house in the first place (either they made no downpayment or have no savings in the bank). This is no excuse to essentially rob the bank via short sale or foreclosure, though as a potential future house buyer I welcome more distressed inventory on the market.

[EscapeCalifornia]

The difference between and underwater car and home is the scale of it. If your car loses half its value (and it will) you're out a few grand. If your house loses half its value, you're talking hundreds of thousands of dollars.

[mateo45]

Originally Posted by jbunniii

But that was true when they bought, too. Both at the peak of the bubble and today, it has been far, far cheaper to rent than to own a comparable property. They deliberately CHOSE to take on a much higher monthly cost versus renting. Presumably it was worth it to them at the time. What changed?

In any case, if they want to sell now, they can do the same thing they would do if they had an "underwater" car loan: write a check to the bank for the difference between what is owed and what the house is now worth. If they can't afford to do that then they probably couldn't afford the house in the first place (either they made no downpayment or have no savings in the bank). This is no excuse to essentially rob the bank via short sale or foreclosure, though as a potential future house buyer I welcome more distressed inventory on the market.

As someone who has also profited from "distressed inventory" (aka "repos"), as well as being a landlord, where I'm coming from is noticing the steady growth of a number of interesting "phenomenon". This includes the increasing availability of so-called "hard money" mortgages (aka private lenders) to the normally "unlendable", along with the frequency I'm seeing of bankruptcies among my rental applicants, plus the surprising amount of credit they're able to obtain within a year of filing. In other words, there seems to be a substantial (and growing) "alternative economy", existing outside "FICO Scores".

Geographically this is an area with a large concentration of two kinds of extremes, mainly young (college kids) and old (retired), so it might not be representative of the larger population. But oftentimes "trends" will begin at the margins.

[smokingGun]

Originally Posted by mateo45

As someone who has also profited from "distressed inventory" (aka "repos"), as well as being a landlord, where I'm coming from is noticing the steady growth of a number of interesting "phenomenon". This includes the increasing availability of so-called "hard money" mortgages (aka private lenders) to the normally "unlendable", along with the frequency I'm seeing of bankruptcies among my rental applicants, plus the surprising amount of credit they're able to obtain within a year of filing. In other words, there seems to be a substantial (and growing) "alternative economy", existing outside "FICO Scores".

You're obviously a shrewd real estate investor who's got his/her ear on the ground and these are interesting remarks. When you say hard money, do you mean asset-based lenders? And what are they demanding as collateral?

And when you say that within a yr many in post-bankruptcies are acquiring new sources of credit, is that credit cards? and does that subsequently reflect in a higher FICO score?