Wait the Market Out
Chris and his wife have a 5/1 ARM on their house. Chris thinks he would do better to move. He’s considering a short sale. Dave thinks Chris is caught between a foreclosure and being able to make the payments.
QUESTION: Chris in Los Angeles and his wife have a 5/1 ARM on their house. Additionally, they have a rental property, $30,000 in credit card debt, and their mortgage payment is $2,800 a month. Chris thinks he would do better to move. He’s considering a short sale. Dave thinks Chris is caught between a foreclosure and being able to make the payments.
ANSWER: Your payment is approaching 40% of your take-home pay. If it goes up much more than that, you’re not going to be able to pay it even if you want to. This is unpleasant. It’s a pain in the butt. But if you can pay a bill that you promised to pay, you should pay the bill you promised to pay—even if it’s unpleasant, inconvenient, and the vacation fund doesn’t get funded. You deal with it.
If you can’t pay the bill, you can’t pay the bill. You have to sell the house on a short sale before it gets foreclosed on. I don’t do short sales as a matter of convenience—strategic foreclosure and this kind of crap. That’s really a dangerous thing from an integrity standpoint. On the other hand, I’m the guy who helps people when they’re hurting and broken and messed up, and if you can’t pay your house payment and you work a short sale to avoid a foreclosure, absolutely I’m going to do that. I kind of think you’re in the middle.
If I’m in your shoes, I’m going to sit there and try to hang on for a while. Let’s see what life brings us. If it gets to the point that we simply can’t pay the bill, then we can’t pay the bill, we put the house up for sale on a short sale, we begin to negotiate that by not paying the house payment, and start talking about making the moves that you’re going to do. I think that’s where you’re going to be led to. I’m afraid it’s probably a little ways out.
The real estate market could recover some—enough to get you out—during that time that we’re kind of holding our breath. The lesson to be learned from this is when you take on an adjustable rate mortgage, they’re going to adjust. It’s almost always up.