Editor’s note: This is the first of a two-part series. Read Part 2: "3 considerations before abandoning underwater home."
Q: At the top of the market, I owned three properties: my first home (in a marginal neighborhood, now about 100 percent upside down), my own residence (a big fixer in a great neighborhood), and a triplex I bought as an investment (an OK neighborhood, needed some work, fully rented, but now upside-down by about 30 percent).
When the market turned, I had a couple of bad tenants in my first home and the triplex that set me way back financially, and I was unable to borrow the money I needed to fix the house I lived in. I did a short sale on the fixer, got temporary loan mods on the other two, and moved back into my first home.
Problem is, they’re both so upside-down and don’t seem likely to come back up anything soon. I’m 45 years old and have a great job, but I don’t like the neighborhood I live in now and I can barely ever save anything because these properties — which I thought would help fund my retirement — eat me alive.
Also, I just got word that my loan mod on the triplex is going to expire in January. Should I just sell everything and start over?
A: First, know this: You are not alone. More than 25 percent of home mortgages nationwide are upside-down.
While the majority of Americans have held onto homes with declining and stagnant values in the hopes that the market will recover to avoid locking in their losses, the data is clear on the fact that those who own homes worth less than they owe are the borrowers most likely to fold, short-selling, strategically defaulting or negotiating a "deed in lieu of foreclosure" with the bank.
I don’t think data exists on this point, but I suspect these are the borrowers most prone to give up on the excruciating and prolonged path of home retention efforts the most easily. "Why throw good money, time, energy and emotions after bad?" they wonder.
A few years ago, I would probably have fallen into the cheerleader camp, exhorting "Hang on! Hang in there!" Now, though, going into the fifth or sixth year of this real estate recession, depending on whom you talk to, I’m more jaded and realistic.
As I see it, you have two different scenarios that make up your dilemma, and there are a couple of different ways to think about them. First, let’s limit the scope of our conversation to the situation on the home you actually live in. Next week, we’ll look at the broader constellation of issues you have, including both your residence and the investment property.
My advice to people in your situation is to always go through the preliminary step of getting clear on whether their personal residence still works for their lives as a personal residence.
If you own a home that works well for your life, is affordable and seems like it will continue to be a good fit for your life and your finances in the foreseeable future, I’m generally inclined to advise homeowners to avoid making market-based decisions about whether to continue to hold on to it, whether or not it happens to be upside down.
On the flip side, I’ve seen numerous situations in which families have expanded or shrunk or need to relocate, rendering the upside-down home a serious mismatch. In these cases, it makes sense to more seriously consider whether to divest.
I’d encourage you to ask yourself that question — "Does this home ‘fit’?" — regarding your personal residence. You mention the neighborhood weighs against that finding of fit; you might also be thinking that the neighborhood could prolong the "value recovery" timeline.
Take a more holistic viewpoint and make a decision about whether the home overall still works for your life or not — outside of the context of it being underwater. Whether it does or does not, this knowledge will get you started down the path of cultivating the clarity you’ll need to put a full action plan and decision-making process in place. We’ll discuss what the rest of that plan looks like next week.