Underwater move-up strategies

REThink Real Estate

By Inman News Feed
Add Comment Add Comment | Comments: 0 | Posted Feb. 11, 2010

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REThink Real Estate

Tara-Nicholle Nelson
Inman News

Q: My wife and I live in a great loft that is now about $100,000 upside down. We're going to have a baby, and need a house. But we're thinking we'll either have to short-sale our loft or rent it out for awhile. We can't qualify for two mortgages, and we've been told that if we do a short sale, we won't be able to buy for another two years. Other than just renting, do you have any suggestions for how we can buy another home?

A: I understand your dilemma. As a Mom, I want to assure you that babies stay small and take up little space for about a year. Their accoutrements, however, can dwarf their little bodies. I've seen friends stuff 8-seater SUVs with the "fixings" for their 7-pound babies: it's easy to go overboard, and you'll find yourself using the same few items to the exclusion of all the rest.

Be careful about how much stuff you buy for your baby's first year, and you might be able to delay your move until your place recovers some value, depending on how rapidly the market is recovering where you live.

Need-to-knows

If you do decide to rent your place out, the average lender will give you "credit" for no more than 75 percent of the rent toward your income when it comes to buying another place. But, of course, they will "charge" you with 100 percent of the mortgage, property taxes, homeowners association dues and other expenses associated with that property. You might already have done that math, to arrive at the conclusion that you can't qualify for two mortgages, but it is a fact to be considered when determining whether to rent out your loft.

Now, in terms of how soon after a short sale you can buy again, the current rule is that you cannot obtain a federally insured loan (like FHA or VA, or a conventional loan that is backed by Fannie Mae or Freddie Mac) for two years following a short sale. However, these guidelines do change, and some speculate they will change over time as the numbers of would-be American borrowers with short sales in their recent pasts increases.

Additionally, some lenders will lend to borrowers with recent short sales if they have a good downpayment, income and a willingness to pay a slightly higher interest rate.

There's really nothing wrong with renting for a two-year period, though, if that's your concern. You might even know better where you want to buy, in terms of school districts and the locations of extracurricular activities and family supports (or the need for distance from extended family members, as the case may be!) when your baby is a couple of years old, compared to right now.

If you're expecting right now, it might also be sanity-saving to short-sell your condo (if you decide to go that route) and just rent for two years while you enjoy your baby's many milestones, stockpile some cash and repair your credit.

If you're totally averse to renting, either because you need the tax deductions or you just don't like throwing your money away on rent, there are a couple of old-school real estate strategies I predict will come into vogue over the next few years. The first is called a wraparound trust deed.

In a wraparound, the seller sells you the home, but you make your payments to the seller. The seller keeps her existing mortgage(s) in place, using your payments to her to pay her mortgage payments to her lender(s) -- it's almost like assuming the loan, but your relationship is with the seller, not the lender.

Of course, this strategy assumes that you're willing to pay more than the seller owes on her home, and assumes that the seller is willing to do this (perhaps because she is looking for someone to pay a premium price and doesn't need her cash out of the home immediately).

Investor-owners are good candidates to sell a home in this way, as it helps them avoid capital gains taxes. If the seller's loans were originated anytime in the last few years, though, they likely contain a "due on sale" clause that renders this strategy difficult or impossible to pull off.

The other old-school real estate strategy that might work for you is the lease-to-own or lease-option, where you lease the property and obtain the right to purchase during or at the end of your lease term based on a prenegotiated price.

The pros and cons of a lease-option are too numerous to list here, but almost everything about them is negotiable, so if you are able to strike a deal that is in your best interests on most of the relevant points, they can offer a creative way to rehabilitate your ability to obtain traditional bank-financing while not throwing your monthly rent payments down the drain.

You'll want to verify that the seller is and remains current on her mortgage obligations, in either a wraparound or a lease-option scenario. You'll also want to record the documents evidencing your arrangement with the seller with your county recorder, so that the house cannot be sold or foreclosed out from under you.

Having the advice of both an experienced, local broker or agent and a local real estate attorney and/or title company is imperative, if you decide to go old-school with your real estate financing strategies.

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