How To Decide What To Do With Your Upside Down Home

I have been receiving the same question from a lot of people lately .... "What do I do with my upside down home?"

Having purchased a home when the market was booming in 2004 through 2006, many homeowners find themselves "Upside Down," meaning they owe more money on the home than they can net from its sale.

How to decide what to do with an upside down house

So I decided to commit a blog post to this very hot and important topic. While many people write blogs on short sales, foreclosures, loan modifications and forbearance, I have yet to come across a model that will allow people in this situation to execute an analysis with the sole function of determining their best solution to an unfavorable situation.

What Options Does A Homeowner Have

We have given the same advice to homeowners in the Tallahassee real estate market for the past 17 years. Everybody who wants to get rid of a home has four options:

  1. Sell the home
  2. Stay in the home
  3. Lease the home
  4. Abandon the home (give the home to the bank)

While this seems to be pretty simple, we often find that some homeowners have not considered that they might not be able to sell their home without bringing money to the closing table (after all, don't we buy real estate because it is a "great investment?").

How To Decide What To Do With An Upside Down Home

If somebody finds that they owe more on the home than it is worth, and they have to move for any reason, than it appears that they really are limited in the options that they have. Unfortunately, many people when faced with such a large decision simply say "Well, I'll just rent it out until the market returns." With this in mind, I decided to build a financial model in order to determine what this "wait time" will really be and when the homeowner will finally be out of this investment.

For this model to be realistic, we have to make some assumptions. If you are using this model to help you make the same sort of decision, you would need to replace my assumptions with your real world specifics. For the purpose of this model, my assumptions will be kept very simple, yet in-line with what we are seeing with clients.

Real Estate Model Assumptions

"Jim" has owned his home three years. He has it on the market for $158,000 (down from $168,000) and currently owes $140,000 on the home. We have told him the value is dropping daily, and currently he can sell it in the $130Ks and should lower his price accordingly. Here are his specifics:

If he sells it today, he can expect to bring $17,150 to closing. This is a tough pill to swallow considering he was expecting to sell the home and collect that amount at the closing table. So Jim is considering "Leasing it out" until the market turns.

The property management company has told him he can lease it out for $1,050 per month and Jim knows that his mortgage payment is $1,239 per month (PITI). He's thinking that is less than $200 per month difference, which is a whole lot easier to stomach than $17,150 at once, at closing.

Unfortunately for Jim, there are other expenses associated with leasing a property. When added to the formula, we get the following information:

Calculate a short sale decision

What our model shows is that during the first few years, he can expect to invest nearly $500 (before taxes) into keeping his property, which is just less than $400 per month after taxes.

Now that we have this, we make a few more assumptions:

  • The Net Operating Income (NOI) will rise 4% per year over the long run
  • The property will depreciate 10% in 2009
  • The property will depreciate 5% in 2010
  • The property will depreciate 0% in 2011
  • The property will resume appreciating indefinitely at the 50 year average of 4% in 2012.

These assumptions allow us to build a table to determine how long Jim has to invest in the property before he can afford to either sell it for no cash out of pocket or sell it and recoup his investment. But we also have one other option for Jim to consider:

Lenders Are Taking Notes For The Deficiency

It is most likely that we can negotiate with the lender to work out a note for Jim for the $17,150 difference (short sale) in selling the property. This would mean Jim would not have to bring the money to closing, rather he could "owe" it to the lender. We will assume that we can work out a 30 year repayment plan, at 0% interest for Jim. That would equate to $47.64 per month for the next 30 years.

Real Estate Model Graph

We can now graph or chart out all of Jim's options to help him make an informed decision. While none of his decisions result in him getting money now for selling or leasing his home, at least the model provides for an accurate portrayal of what Jim should expect over the next 30 years:

How to decide what to do with an upside down house

From the real estate model graph, we have discovered the following:

  • A) Jim's initial plan of "I'll just lease it out until the market turns will be a longer commitment than Jim expects. If Jim has deep enough pockets, he can lease the property out for thirty years (or more) and then sell it for a handsome profit. Unfortunately, to do so would require Jim to commit a negative cash flow through the year 2028 (this is a VERY conservative analysis) and have invested roughly $56,127 out of pocket before the cash flows begin to go positive. But Jim can expect to walk away with over $248,000 at closing in the year 2037.
  • B) If Jim chooses to have us work a short sale with the lender, most likely we can negotiate a deal where he pays his negative balance ($17,150) over the next 30 years. The green line on the graph shows that he will have paid back the entire $17,150 by the year 2037. This is a safe decision and only requires him to pay $48 per month.
  • C) The final point on the chart "C" shows that Jim's first "walk away" point, where he won't have to pay money at closing is in the year 2019. By then, he will have invested nearly $45,000 in negative cash flows. It is important for Jim to understand how long of a commitment he will have to make if he is going to just "lease it out until the market turns." I have often found that the people who choose this decision are really choosing to not make a decision!

How To Decide To Lease Or To Sell A Home

Ultimately, the decision seems to be based upon how much hassle Jim is willing to endure and how deep his pockets are. If he will commit to more money and a long-term, he can turn this into a positive investment. If he simple wants it to "go away," he should do the short sale and expect to make a small payment each month for the next thirty years. Regardless of the route that Jim takes, he will remember 2008 as a very tough time to need to sell a home with no equity.

The Model Numbers Which Support The Graph

Net From Sale Net From Leasing Cumulative Sale Cumulative Lease Short Sale Payment
2008 ($17,150) ($4,590) ($17,150) ($4,590) ($572)
2009 ($25,080) ($4,590) ($29,670) ($9,180) ($1,143)
2010 ($28,299) ($4,425) ($37,479) ($13,605) ($1,715)
2011 ($25,836) ($4,254) ($39,441) ($17,859) ($2,287)
2012 ($19,006) ($4,076) ($36,865) ($21,935) ($2,858)
2013 ($11,832) ($3,891) ($33,767) ($25,825) ($3,430)
2014 ($4,296) ($3,698) ($30,121) ($29,523) ($4,002)
2015 $3,623 ($3,497) ($25,900) ($33,021) ($4,573)
2016 $11,944 ($3,289) ($21,076) ($36,310) ($5,145)
2017 $20,691 ($3,072) ($15,619) ($39,382) ($5,717)
2018 $29,885 ($2,847) ($9,497) ($42,229) ($6,288)
2019 $39,551 ($2,613) ($2,677) ($44,841) ($6,860)
2020 $49,716 ($2,369) $4,875 ($47,210) ($7,432)
2021 $60,407 ($2,115) $13,197 ($49,325) ($8,003)
2022 $71,652 ($1,851) $22,327 ($51,177) ($8,575)
2023 $83,482 ($1,577) $32,306 ($52,754) ($9,147)
2024 $95,931 ($1,292) $43,177 ($54,046) ($9,718)
2025 $109,031 ($995) $54,985 ($55,041) ($10,290)
2026 $122,821 ($687) $67,779 ($55,728) ($10,862)
2027 $137,337 ($366) $81,609 ($56,095) ($11,433)
2028 $152,622 ($32) $96,527 ($56,127) ($12,005)
2029 $168,718 $315 $112,591 ($55,813) ($12,577)
2030 $185,671 $675 $129,859 ($55,137) ($13,148)
2031 $203,530 $1,051 $148,393 ($54,086) ($13,720)
2032 $222,347 $1,441 $168,260 ($52,645) ($14,292)
2033 $242,175 $1,847 $189,530 ($50,799) ($14,863)
2034 $258,886 $2,269 $208,087 ($48,529) ($15,435)
2035 $269,241 $2,708 $220,712 ($45,821) ($16,007)
2036 $280,011 $3,165 $234,190 ($42,656) ($16,578)
2037 $291,211 $3,640 $248,555 ($39,017) ($17,150)

*Joe Manausa Real Estate is a brokerage company headquartered in Tallahassee, Florida. Its unique business model provides specialists to both home sellers and home buyers, and the results speak for themselves. JMRE has significantly more 5-star reviews on google than any other local competitor. Joe Manausa Real Estate is a leader in internet marketing and utilizes search engine optimization, email marketing, social media and data analytics to get their clients’ home sold faster and for more money than any other Tallahassee brokerage firm. For more information, visit or call us at (850) 366-8917.

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#1 By Joe Manausa at 7/11/2017 3:48 AM

Mathew makes a point about repaying the loan on a faster basis, certainly an option. But his option requires even more of an investment than the model already suggests. Most of our clients would have a difficulty paying the extra $486 per month, let alone money on top of that to reduce principal balance. In essence, that is what the deal with the lender would be. Sell the house now and "reduce principal" through taking a note at zero interest.

#2 By Mathew at 7/11/2017 3:48 AM

Perhaps an accelerated equity building program would be a good choice. . .

Working off of the principle of interest cancellation, most programs offer the homeowner the ability to build equity twice as fast or better. If a homeowner is able to stick it out for a couple of years, they would easily be able to outpace the rate of equity loss - even in this market.

#3 By Goonstar at 7/11/2017 3:48 AM

Here we have a post about the factors that got us into the sub-prime mortgage crisis. "Abandoning the home" is also known as foreclosure and is the reason the government is bailing out our financial industry.

While it is the option it bares to be said that giving your home to the bank, in this day and age, is akin to making the rest or your countrymen pay for it through taxes. I am genuinely sorry for those that find themselves in situations of not being able to pay, but find it incredibly irresponsible to abandon obligations because of neglected due diligence before signing on the dotted line.

#4 By Dave at 7/11/2017 3:48 AM

I have 4 upside down investment properties, I am struggling to keep things afloat. 3 properties have a variable rate which begins next year. I cant refinance do to loan to value. Any suggestions. I dont' want to do short sales as I have excellent credit. Thanks

#5 By G. F. at 7/11/2017 3:48 AM

Thank you for at least exercising on paper the idea of why leasing for most people is not a good idea and for helping us with the idea that we can try to do a short sale before foreclosure happens to our house and stick the difference in payments for a 30 loan as an alternative to bankrupsy. We both are without jobs and only need 1,200 a month to get back on our feet to keep our house, although right now enough employment is not likely. We have retirement income but would rather purchase a less expensive home and live within our means. The 47. a month added for the next 30 years sounds better than walking away and having to foreclose. But perhaps if our parents buy a house for us in their name and we pay them rent for the mortgage to the tune of only 450. a month may make forclosure a better idea. Then we could go ahead and walk away and file for bankrupsy and start making rent payments for the house our parents purchase. The new house we get through our parents could then be turned over to us in a couple of years after we've gone through bankrupsy with a 2 year record of paying rent and then we can continue to live within our means on our retirement money. Since we are only in our fifties and we have a chance to go back to school, then we can maybe have a little extra income in addition to our retirement. WE, (my husband and I) were wondering what to do about our upsidedown situation because we don't want to be stranded with bad credit for 2 years, live on vouchers in an apartment and be on public assistance just because our credit is trashed and have no jobs. In trying to convey our story in a nutshell, my question is: Would asking our parents to purchase an 80,000 cabin for us a bad idea to the alternative of us facing vouchers and public assistance? At least we'd have a place to live and retire and pay rent and live within our means? Thanks for helping. I look forward to hearing your answer. ( Our house was purchased for 270,00 in 2006 and is now assessed for 233,000) We are 20,000 in debt with no assests.) (I heard that if your realtor assesses it for less than 210,000 there might be an advantage)

#6 By Joe Manausa, MBA at 7/11/2017 3:48 AM

Hey Grace ... wow, that's a lot of information. I would recommend you meet with a short sale expert in your area (let me know where you are and I will recommend somebody). Somebody needs to sit and discuss your options with you, it might not be nearly as bleak as you think. Most likely a short sale will be better for you (and for the bank) and you might not end up having to sign a note at closing. As far as your parents buying a place for you to rent...why not just rent from somebody else?

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