Last week I flew out of Atlanta beside a young lady the age of my daughter. Very shortly after we sat down, she told me that she had been trying to call a real estate lawyer in South Florida for several days and had not gotten a return phone call. I assured her that I am the only real estate lawyer in Florida, and that somehow I had missed her call. With that introduction, there was no reason for her to believe anything else I was going to say, but she proceeded to tell me the problem anyway. Here is the story I heard:
She and her husband are well educated. Both have advanced degrees and both had been employed in the space industry at Cape Kennedy. When the space race wound down, they both were able to locate high paying jobs elsewhere, but they had purchased a home in Florida in 2003 for $300,000. The house is worth about $200,000 today. They now live in another state, in a rental apartment with their two young children. Their Florida home is occupied by a renter, and they lose $800 a month after making the mortgage payment. They have a perfect credit score. Their family is growing and they want to get out of the apartment.
Now the question: what should this couple do? For too many, that is the most gut-wrenching issue facing this thirty-something generation, and because they are our children, the problem is ours as well. This couple is about to start life not only with educational loans to repay, but with a $100,000 penalty caused solely by participating in the economy exactly as we encouraged them to do. Carolyn and I bought our first home in Fort Walton Beach for $25,000; we sold it 3 years later for double that. We did that 3 or 4 times over the course of 10 years or so and the real estate market treated us very well. But this couple has tried the same thing with exactly the reverse effect.
The question to parents, real estate professionals, and lawyers, is: do we have an answer? These young people are not druggies, wild-haired liberals, or angry conservatives, they are responsible parents in their own right who worked hard to get the education we espoused, and who followed our very pattern.
When I teach classes, I start by stating the problem, as here. Then I ask the answer, and I ask it again now. What do we tell them?
To begin, for a buyer, the real estate market has never been better. But if we aren’t careful, we will invite non-resident investors with cash to buy the future that otherwise belongs to our children. We know the value of this home will not come back in time to resurrect this young family during their most productive years. While some disagree, I consider the real estate market to be the foundation of the entire economy. If we have no answer to this young couple, then the economy we’ve created fails not only ourselves, but our children as well.
My answer is not a panacea, and its results won’t be fully known for several years, but it is this: find the house you want to buy and take advantage of the best buyer’s market, and the best mortgage market, you’re ever likely to know. You don’t have to steal an existing home, or a new one, you just have to make a deal at current prices. If you do, you will have done exactly that which successful stock market investors do when they have a loss. You will have purchased an almost certain gain to set off against a certain loss. You may not come out even, but you will recover a good deal of the equity you’ve lost.
Don’t judge harshly everyone who has over-mortgaged property. Some are there because they mortgaged real property to buy consumer items. Those people need discipline and they need to never again mortgage their home for consumer items. But others, such as the couple in this example, and people who have lost jobs, become ill, or signed come-on mortgage packages that never should have been marketed, aren’t guilty of anything. Mostly they aren’t even guilty of having poor judgment. In my example, I told this person that I thought she and her husband out to get back in the market, if they can. How to do that is a whole separate article, or even a book. But you’ll never get there if you don’t start.
First they will have to decide whether they qualify to finance a second home while they still own the first. If they can, they should. Their interest note will be better than it will ever be if they can finance while they have an excellent credit score.
As soon as they can, without selling for a ridiculous price, they should get rid of the first house. Its value may inch back, but the wait will be long and painful. Unfortunately, mortgage companies won’t talk to their borrowers unless they are several months in default, so be prepared to get the Company’s attention by going into default, so they should do that, if necessary. Then short-sell the first house, but deal with the unpaid balance. Sometimes you can do that with pennies on the dollar, if you’re prepared to pay cash. If not, come to a deal with the mortgage company in some way that doesn’t affect your financial future, if you can.
My bottom line of this discussion is the hope that these young people not go through life paying a penalty they did not deserve. The answers may be different for each of them, and it may be that a real estate lawyer or responsible professional will be necessary. There are good lawyers and Realtors who have a sincere desire to help. Don’t expect them to be free, or even inexpensive, but sticking your head in the sand will not make these problems go away. Deal with them actively so that they don’t hang like a sword, waiting to fall.
Get back on the horse. The ride ain’t over.