Here's the situation: Bought a co-op at the height of the market in a safe but not particularly desirable neighborhood in Jersey City. It was $400K and we put 20% down. It is now much too small for family situation and not possible to live there. Co-op has strict rules about renting - we can't do it. We've moved out, now living in a rental, and are also paying the mortgage on the Jersey City place even though it's just sitting there. The value is underwater, so if we sold, we would not only lose the down payment, but probably have to fork over another $30K to the bank.

Here's the question: We are not wealthy by NYC standards, but we can afford the payments on the Jersey City place. While I would prefer to be putting that money toward a bigger rental, or into savings (i.e., long term stocks), we are not going to starve - it's just very annoying and a weight on our shoulders. So do we sell the Jersey City place, and just eat the loss and loan re-payment? Do we consider a short sale / foreclosure despite what this will do to our credit? Or do we resign ourselves to the fact that we might have to hold onto for another 15-20 years before we can get any value out of it, and look at it like a diversified way to invest long term? If that latter, do we try to aggresively pay down the mortgage quickly so it's less of an emotional strain? Thoughts?

Ask the bank if it'll approve a short sale (in which you won't have to pay them the remaining balance after the sale).

If they won't -- tell them they can choke on it in a foreclosure sale, walk away, and don't look back.

A good credit rating is overrated anyway.

I agree with Matt, but before you do it, you should go to the coop, ask if they want a short-sale or a foreclosure on their hands and see if they will relent on the rental possibility. Use what leverage you have.

And why do you guys think it's better to take the loss instead of looking at it as a long-term investment? Because real estate values will be so slow to increase, and may not even be that much higher in 20 years, that it would be better to put the money in the stock market or something else?

Do you think banks are more likely to approve short sales when the amount of money at stake is relatively small compared to more expensive homes that are further underwater?

Think about how much this asset is going to cost you over 20 years -- mortgage, maintenance, repairs/upkeep (harder on a vacant property), etc. You are going to get absolutely nothing back on it until you sell.

I agree with others:
(1) Try for a short sale. If that doesn't work, you can either
(2a) See if the co-op will allow you to rent OR
(2b) Stop paying your mortgage and maintenance and allow the unit to go into foreclosure

It makes no sense to continue paying on a property that you can neither occupy nor rent.

I think the co-op and their rule against renting is the real problem -- if you could rent it out for the cost of your mortgage plus maintenance (could you post these figures?), your apartment would instantly become viable. You say you bought at the peak, which means it's been several years. Are you *ever* allowed to rent out your apartment in this co-op?

The other option is to re-evaluate "much too small for family situation" and grin and bear it in a small space. (My neighbors across the hall, if it makes you feel better, are raising two teenage daughters in a 400-SF apartment.)

Be respectful, approach Board members (informally or during a meeting) with a specific attitude and solution- Yes, I understand the rules; yes I am respectful of your decisions; I am in this situation through no fault of my own- a falling market and family development; I have a solution for you- allow me to rent it out while we wait for the market to recover; I propose we allow the Board full right of veto over any applicant, 15% of the rent, and right to apply specific house rules on this tenant.

And if you don't say yes, I am in the middle of taking out all the credit I will need for years, because I don't care about my credit rating - I will sock you with a foreclosure, months or years of the pain, and lawyer fees if you like.

The co-op actually does allow rentals but only for one year. Then you have to wait a period of X number of years before you can rent again. There are high applications fees associated with it too ($1-2K) which doesn't make it particularly worthwhile as a long-term solution. It's a large building and the management is apparently strict, so I am not sure if they allow special exceptions?

The mortgage plus maintenance is about $3K per month. Our household income is about $400K (we each earn about $200K). We have about $300K in savings/stocks and $200K in 401ks. Mid-30s.

The mortgage and deed are only in my husband's name, so if we did foreclose, presumably that would only affect his credit, and we could use my good credit to buy again down the road...

If you're comfortable, maybe also post something about the composition of the building -- how many units, what is the exact sublet policy, are any sublet right now, are any in foreclosure now, any sponsor involvement or fully sold? All of this will determine whether your co-op really NEEDS a no-sublet policy, or if it just prefers one.

I'm on the board of a small building with what is essentially a no-sublet policy. We say it's for financing, yada, yada, yada, but in reality, we could have two sublets and still be OK. If you came to us with your predicament, we would (gritting our teeth) allow you to sublet if a short sale was not on the table from the bank. If you stop paying your maintenance, (1) we can't pay our bills without raiding reserves or assessing, (2) we can't sell our units for market value (no one wants to buy into a small building with a defaulting unit pending foreclosure), (3) may not be able to get financing for the building or the units in the building.

Be polite, but you have the leverage here. Unless the co-op already has another unit or two with the same deal (renting to avoid short sale) or some other extenuating circumstances like a lot of sponsor involvement, it should allow you to rent.

sell the place and take the loss. i don't think you want your credit destroyed for next 10 yrs. it's not like you are making $60K per yr. you'll most likely want to buy an expensive house at some point in near future.

Another thought is that the no-sublet policy seems to be depressing sales prices in the building; it drives off people who want to live somewhere for a few years, pay it off, and then rent it out. So you may have some allies among fellow residents if you try to get the no-sublet policy overturned.

Your income is so high that you can probably buy something in the future with just one spouse's income (the one whose credit survives). You could even buy for cash a few years down the road and not worry about credit for a long time.

"sell the place and take the loss. i don't think you want your credit destroyed for next 10 yrs. it's not like you are making $60K per yr. you'll most likely want to buy an expensive house at some point in near future."

AB, shouldn't this be the opposite? When you're making $60k, your next home will almost certainly be purchased with a loan (thus good credit is essential), whereas with a $400k income you can live like monks for a few years and then buy for cash. The purchase price of this apartment *at the peak* was one year of their current income.

(Not that I have any idea what it's like to be earning $200k a year and having a spouse who earns the same amount)

Since we do have a high income, that is why I wondered whether we shouldn't just try to aggresively pay off the mortgage over the next 5 years. We can then forget about, and let it sit there until the market comes back, whether that's in 10, 15, 20 years, etc. There will be monthly maintenance fees but they're not so high, and we wouldn't have to worry about much upkeep if no one is living in it. We could do a reno before we sold down the road. But I am probably being too risk averse. The idea of a short sale or foreclosure just scares me, even if it makes sense financially. It seems like the universal consensus is we should just unload it.

The building has several hundred units with a lot on the market right now, including several sponsor units for sale. The building does allow a certain % of residents to sub-lease, but again, only for one year at a time, so not good for long term.

Doubt we'll be able to save enough for a cash purchase, at least the kind of home we'd eventually want to raise a family in... NYC is just too expensive and I want to save for retirement and college tuitions too!

I don't know if any of the units in the building have been short sales or foreclosures... not sure how to look that up.

Thanks for all of the feedback, by the way!

I'm in a similar situation where I bought a 1 bd condo that I have now outgrown. Fortunately its a condo, so I can rent it out, and its located in Dumbo so I can charge an exorbitant rent that easily covers the mortgage + maintenance.

"Since we do have a high income, that is why I wondered whether we shouldn't just try to aggresively pay off the mortgage over the next 5 years. We can then forget about, and let it sit there until the market comes back, whether that's in 10, 15, 20 years, etc. There will be monthly maintenance fees but they're not so high, and we wouldn't have to worry about much upkeep if no one is living in it."

Maintenance might not be too high, but you'd be paying it every single month for an apartment that nobody is using. Letting it sit empty would just cost you money -- unless you could use the threat of doing that as leverage to get the co-op board to let you rent it out. But consider the costs of 10-20 years of maintenance, and consider that the apartment will have to climb all the way back to $400k PLUS all that maintenance for you to break even.

Really, it seems that your problems stem from the co-op board and their terrible sublet policy. Had that been "unlimited subletting after 2 years" or even "after 10 years", you'd be in much better shape.

When you moved in, did you think you'd be living there for many years, until the time came to sell? Also -- and forgive the personal question -- but is the apartment too cramped for you because you unexpectedly had more children than you thought you would (great!) or because you thought you could live in a small space and are now finding out that you can't?

Husband bought the place before we were together and didn't exactly have the same foresight that I would have had... God knows why he bought a place that couldn't fit a future wife or children (in a non-desirable neighborhood), but no reason to play the blame game now. He's basically just not that financially saavy. The apartment was fine for us a couple, but really cannot fit any children. We would have no privacy or space. Plus, living there makes my commute 60+ minutes (versus 10 minutes now). If we absolutely had to live there with babies, we could, but not really long-term, and I just don't think it's worth the hit our quality of life would take.

OK, nothing wrong with your husband having bought a single/couple-sized apartment if it was before he met his future wife and had his future kid. (If there's something he should have foreseen, it's not that he was going to get married and have a kid, but that he would have problems renting the place out *if* he had a wife and kid.)

Could you make a go of it in your cramped apartment for just a few years, while the kid is small, and move then, when the market may have turned around or the co-op board may have changed its rules? Lots of people do it. (Full disclosure: my future wife and I live in 400 square feet now. If we get married and have a child, we would probably stay in an apartment the size of our current one when the child was small, but if we had two, or the kid reached school age, we'd want a little more space. But not too much, because we prize a good neighborhood over everything and are willing to compromise on space.)

I think you should sell.

You bought for $400K with an $80K downpayment, so I guess that means you think you'll close at $320K or so and pay $20K to the brokers and maybe another $10K in taxes, etc. The money lost is water under the bridge, but you seem to be having trouble with that.

So let's do this. Instead of choosing between "keep" and "sell", let's look at "keep" and "sell and then buy a similar condo in Jersey City that you can rent out". If you do the former, you'll get whatever the market returns (minus transaction costs) with a monthly outlay of $X depending on what you do with financing it. If you do the latter, you'll pay $30K in transaction costs today to get the same market returns (minus the same transaction costs) with the same monthly outlay of $X, but in return you'll get (say) $20K a year in rent. Effectively, you'll make that $30K back in rent after 1.5 years.

The problem you face is that rent provides a very significant annual yield (I assumed 6.25% above) that you are currently foregoing. If you want exposure to the Jersey City apt market, you are getting it in a very inefficient way. So much so that the $30K transaction costs are negligible in comparison.

Having gotten through that ("sell and then buy a condo in JC" is better than "keep"), you simply need to make a choice between "sell and do nothing" vs. "sell and then buy a condo in JC". So you definitely want to "sell", and the question of "do nothing" vs. "buy a condo in JC" becomes a separate issue. I'm guessing you don't care to do the latter.

On short-sale/foreclosure vs. taking a $30K hit, you should take a $30K hit.

First, NJ is a recourse state. That means they can come after you for the $30K deficiency, plus fees, etc., after a foreclosure. Don't know if lenders are actually doing that, but you should be a nice, fat, & juicy target. Lots of income, lots of money, etc.

Second, I am a big believer in the idea that the value of good credit is finite. However, I place it around 1 year's gross income ($400K for the two of you). If the amount is much below this ($40K), definitely not worth it. If much larger ($4M), definitely worth it. I don't know how effective the "only one of us takes a credit hit" will be. Doesn't that mean only your income can be used to qualify you for a loan? Will lenders look to your husband nevertheless -- "I'm married, but only qualify through me" is code for "my husband's got a big boo-boo"?

If you are underwater now, how much will the value have to appreciate in the next 10-15-20 years in order for you to 1) cover your down payment and outstanding mortgage balance plus another 10% above your purchase price to cover your selling expenses and 2) cover the total monthly expenses you are incurring (maintenance, upkeep, taxes, etc).

Based on the numbers you provided, you think the current value is more than 20% below the purchase price, so not only do you need to recoup that, but you also need the price to appreciate another 3% per annum to cover your monthly expenses. It would take at least 15 years of 5% annual price appreciation to cover your costs... do you really think that is worth it and/or reasonable? Each year you are doubling down and hoping you finally get blackjack. What happens if we have another crash or massive inflation in 10 years, then instead of losing $110k, you are out $300k.

I'd say cut your losses as soon as possible, whether that's negotiating with the board to rent it (whether by reasoning or threating to go into foreclosure), asking the bank for approval for a short sale or just walking away and getting foreclosed.

Quote: Our household income is about $400K (we each earn about $200K). We have about $300K in savings/stocks and $200K in 401ks. Mid-30s.

You bought it: Pay for it. Either this is a fake dialogue or you simply don't take debt seriously. Sell it at a loss. You gambled on real estate. You do not sound like a victim and you do not portray yourself as unable to make educated decisions.

This is a fake post I hope.

incheon69, thank you for pointing that out.

OP, you ARE "wealthy", even by NYC standards (incidentally, $70K is the median HHI for Manhattan ... at $400K you're making more than 99% of New Yorkers, according to both the Labor Dept. and the Census Bureau). At $400K income and half a mil in the bank, you can certainly afford to suck this one up.

> Since we do have a high income, that is why I wondered whether we shouldn't just try to aggresively pay off the mortgage over the next 5 years.

Just. Stop.

You are really considering perpetually funding a vacant property that can't even be rented?
Just to break even? Talk about sunk cost idiocy. The money is already gone. Get over it.

$30k is nothing for your situation. Get over it.
Sell the place, eat the $30k, and move the f*ck on with your life.

END THREAD.

Lessons in why never to buy in a co-op unless you are as certain as reasonably can that your situation will not change in the short-term.

I think though it is cruel to blame your husband lack of foresight and for buying a place "couldn't fit a future wife or children (in a non-desirable neighborhood)". A guy in his late twenties or whenever he bought just needs a place to live. There is no reason for him at that point to be paying for a place bigger than what he needs. His only mistake was buying in a co-op if he was thinking marriage and kids may be on horizon in short-term. Many men his age dont own property so he did well to do so. You say he is not financially saavy - if the property had appreciated 30% and you sold and made profit then all of a sudden he would be a man with foresight. And now you consider soiling his credit rating and keeping yours intact. Poor man - he better sell and cut his losses - just the price to pay for being prudent, saving a large downpayment in his 20s, buying property and getting married, while many of his peers were partying and not saving a dime.

Paying for a place you dont live in, and will never live in, simply makes no sense. If you want to invest 3K a month put it in some vehicle that is likely to yield return and not in a vacant sinking property.

But alanhart - you dont know what year he bought - maybe it was a reasonable decision at the time. At the time he bought who was to know how the property market would head? All this surely you can only know in retrospect? If we all had a crystal ball we would know when that right time to 'wait and be rewarded" is.

So you tell me when are these clear times to buy? While you have such insight into the future the vast majority don't and are not as saavy as you may be. Clearly though he did not though buy at a ridiculous bubble price - 400K hardly is - of course the OP has not told how small this place that is too small for her is so maybe you may still be right...

Alan,

You're missing Matsui's point. The guy was responsible enough to even be in the position to consider buying something. He's miles ahead of most idiot renters who never manage to save a dime. A woman is better off marrying a guy who loses his life savings investing in Sprint than to be with a guy who never has 2 nicklels to rub together and lives paycheck to paycheck. Most broke renters never see $40,000 in cash their entire lives. Over the long haul, this $30k loss will be a rounding error. Basically, it's a few months savings for a guy who's making $200k. Big fucking deal. Write the check and move on with life.

You assume though that your definition of the height of the market is the same as the OPs - I will be surprised if it is. Also the height was defined bacause of a fall that came after it. How was OPs husband to know the height had come and that the market was not still in ascendency? Even regulars on SE seem divided as to whether 2011 was a year to buy, even now we are well into 2012. Easier said than done, especially in retrospect. La critique est aisée, mais l'art est difficile....

That said I have no idea where jersey city is so excuse my ignorance if it seems so glaring that it is overpriced...but we still dont know how small this place is that is too small for the OP.

Do I need special training to be an estate agent?

"Over the long haul, this $30k loss will be a rounding error."

Perhaps it will be a rounding error. But it's currently $110K: you're forgetting $80K downpayment. Probably more if you account for the negative carry, empty months, cost of capital, etc.

Okay, I'll be the contrarian:

I am a real estate agent in NYC, so I don't know the exact ins-and-outs of the Jersey City market, but it does seem to me like expecting it to take 15-20 years before you get any value out of this apartment is rather pessimistic. Overall it looks the housing market nationally is recovering, so if that's your scenario, I would certainly play for time, renting for the year that the co-op allows you to (because if you make $400k a year, paying the building a couple of thousand to be able to rent the place shouldn't be that much of a hardship) and then, as other posters have stated, applying for a second-year rental exemption.

For those two years, can use your rental losses to tax-shelter your income; it's quite possible that market values will rise enough to more than offset your minimal losses, and finally, I would question the psychological wisdom of being so quick to mar your husband's credit over his dumb investment.

ali r.
DG Neary Realty

inonada, the $80k is gone. It's not a factor. The only real decision here is to keep or sell. If they sell, they pay $30k to do this. Otherwise, they keep the $30k and own a vacant money sucking property. The decision is obvious.

>>>front_porch says I am a real estate agent in NYC, I would certainly play for time, renting for the year that the co-op allows you to and then, as other posters have stated, applying for a second-year rental exemption.

I see - maybe I should be a real estate agent afterall. Lots of money to be made here. Rent out a place for a year, collect my commission and then a year or two later sell it and get more commission. Nice advice. Good stuff.

Ali - I think if he makes $400k per year, he is ineligible to use rental losses to shelter his income. I am not rendering a legal opinion here and cede this territory to the CPA's, but when I looked into this question for personal reasons when I started renting out my FL cottage, I found that any losses I might sustain on rental property could not be deducted from ordinary income. I believe any rental losses for someone making over a certain threshold come into play when you actually sell the property for computing any gain or loss at the end of the day (e.g., if you bought at 100K, rented out at loss of $2k per year for 10 years, then sold at$120K, you will not have any capital gain). Btw - Ordered the hard copy of your book and have found myself laughing out loud at certain portions. I am now at the part where you discuss Internet chat rooms - the water cooler analogy had occurred to me as well. Very enjoyable read.

"inonada, the $80k is gone. It's not a factor. The only real decision here is to keep or sell. If they sell, they pay $30k to do this. Otherwise, they keep the $30k and own a vacant money sucking property. The decision is obvious."

Well if you ask me, the whole $110K is already gone.

On Ali's suggestion to rent it out for a year or two, here are some thoughts.

1) It can be hard to find customers for limited-duration coop rentals.

2) Based on the $3K monthly nut and $320K mortgage from 4 years ago, I am guessing that maintenance is running $1K and mortgage is $2K with an interest rate in the 6-6.5% range. Let's say $1.7K of the mortgage is interest.

3) Let's say you could rent for $1500 a month.

4) That still leaves you with a negative carry of $1200 a month, $14.4K a year.

5) Assuming a current market value of $310K, it'd take a 4.6% annual increase in price to cover the negative carry.

RE increases with inflation long-term, which the markets currently put at 2%. You'd need this RE to outperform by 2.6% a year to just break even. If you think 4.6% RE increases are reasonable expectations, well that's the kind of logic that probably put you here in the first place. (Well, the logic was from others, not yours.)

If you do go down that route, refinancing to a current rate would help. But then again, it'd make you sink more equity into this. And you wouldn't be able to get primary residence rates any more.

As usual, Inonada's analysis is persuasive.

Matsui, I am not a Jersey City agent. Certainly if I were, and I were chumming for business, I'd say "sell now."

NYCReNov, thanks for the kind words about the book. I'm working on a second but it's going very slowly.

I admit I'm not a CPA either, mea culpa if I shot too fast on that one. Certainly worth asking an accountant about the tax implications before using tax strategy as part of one's decision-making.

Nada, your analysis is incisive as always. However, while real estate *generally* rises with inflation, we've seen that the prices of *specific* properties don't correlate 100% with inflation. Is 4.6% annually over a couple of years a reasonable expectation? In many markets nationally, certainly -- Phoenix is up double-digits over a year ago. I can't speak to the OP's property specifically, since I don't know anything about it.

I do agree it can be tough to find customers for co-op rentals, but remember, this unit is sitting empty, so presumably showings are not very disruptive as far as the owner is concerned.

ali

Are you sure that a foreclosure leaves you free? What about deficiency judgments? Are banks interested in short sales? It's not as though your property has 50% of its value. Someone will buy it. Better a big pain that's over quick than a longer-drawn-out slightly less painful hurt.

>>>front_porch says I am not a Jersey City agent. Certainly if I were, and I were chumming for business, I'd say "sell now."

That does not though remove your conflict of interest. You could be a real estate agent in Singapore for all I care, but a real estate agent would be the last person to expect a balanced unbiased opinion from in a situation like this. Of all the parties involved: the OP, his lenders, the co-op, a prospective tenant, the only one that is certain to gain from your recommendation is the real estate agent. It is like if you post a question should I renovate or should I not, all the contractors will post to renovate; doesnt mean they are looking for business, but that is what they do.

There is nothing wrong with a conflict of interest - and you obviously make your conflict clear in every commment you post, which is very good - but all advice must be interepeted in that context as our opinions are influenced by our conscious and subconscious biases and interests.

i never thought of that h'burg. I had always wondered why they gave kids lollipops at the dentist - and the cheapest and most sugary ones for that matter.

"Is 4.6% annually over a couple of years a reasonable expectation? In many markets nationally, certainly -- Phoenix is up double-digits over a year ago."

While it os a God-given right in this country to speculate, let's look at the numbers.

In Phoenix, the market hit bottom last year and has since risen 10%. Relative to the bubble peak, it had been down 55%. Now it's 25% down. Compared to a pre-bubble reference point of, say, 2000 it was 25% cheaper inflation-adjusted. You can fetch $1500 in rent from a $150K home.

Looking at the NY metro market as a proxy to Jersey City, prices are only 25% down from the peak. That's a 65% premium to where Phoenix was last year. Compared to 2000, it is 30% higher on an inflation-adjusted basis. That's a 60% premium to where Phoenix was. In order to fetch $1500 in rent, you need to spend more like $300K.

Now mind you, Phoenix's 10% rise came on the tail of a huge drop in interest rates. The drop was so dramatic that, as any bond holder would tell you, it boosted the value of long-term bonds (the year's yield aside) by 30%.

"Do you think that's a true bottom, or just some distracting oscillation in the midst of continued mortgage delinquincies, held-back foreclosures, etc.?"

Not sure, might be just oscillations. Let's put it this way, I don't expect another 10% per year for the next couple of years.

wayne, nj

Matson

You clearly don't understand the concept of conflict of interest. Ali certainly does which is why she signs her name and declares she is a RE agent in almost every post she makes. It does not mean that one is not a '100 percent class act' or honest or reputable. It just means people should see you in the context of what you are.

As you said I have my biases that creep into what I say when it comes to my profession etc. If I have stocks in Apple I will more likely advice you to get an ipad than a galaxy. If I own a unit at Azure, I will more likely advice others that it is a great building to buy into. The lawyers on this board respond more favorably about their group as do contractors and other RE agents. That is human nature. Try posting - 'do i need a broker to sell my apartment' and see if there is a single broker who will come out and advise you to go ahead without a broker. Or post - I want to renovate my apartmeent myself without a contractor, and seee if any of the contractors on the board will come out in support.

I have nothing against Ali, respecct her opinions, have followed her work off-line, and would recommend her without reservation to anyone looking for a broker. But if I were in OPs position aa broker is the last person I would take advice on on this matter.

You for one. You speak the truth, understand RE and are not in bed with any RE agent, and certainly not pimping on behalf of any. Then all the other greyed out folks come next, which make me wonder who is behind the greying and whether there is a conspiracy to mislead by blotting out some real good advice and opinions.

Well he has found you truth and once h'burg finds him then you might as well kiss this thread goodbye

thanx mj.

caonima last comment is interesting.

Would it be better financially to demote it somewhere? Could such a scenario be created where it would be better than walking away?

Just wanted to very diplomatically point out that being able to "save a dime" usually has a lot more to do with the cards you were dealt and what socioeconomic classs you were born into than personal intelligence!
Back to you , Bob...

ar, I don't just read the news, I write some of it. Here's a data point for the NYC metro area: Brooklyn condo prices up 24% y-o-y on a psf basis.

As I said above, I'm not involved in the Jersey City market, so I can't speak to that specifically. And of course no one but the man upstairs can predict with 100% reliability when the next macro crisis will hit.

But the OP shouldn't overlook that demand is tightening -- significantly -- in some parts of the NYC metro area. That's got to be an input in any "sell now, or hold and sell later?" calculation.

ali r.
DG Neary Realty

> Just wanted to very diplomatically point out that being able to "save a dime" usually has a lot more to do with the cards you were dealt and what socioeconomic classs you were born into than personal intelligence!

Wrong, idiot.