Is Your Property Over-Leveraged?

Is your property over-leveraged?  Are you underwater?  Do you understand what these terms mean?  The intent of this post is to help you understand your most basic financial realities.  Want to sell your house?  Well it will be pretty hard if you owe more than its worth.

AppleTree Group LLC buys houses and we buy them all the time.  But every so often we come on a situation where we can’t help.  Our only advice maybe to: 1) stop paying on the mortgage, 2) start talking to the bank, and 3) seek a short sale, or if necessary, walk away.

Carrie’s Story

Last month I met Carrie (not her real name) at her house.  It was a lot older than I liked but looked kind of cute on Google Street View.  She’d told me the house was built in the late 1800s,  and so old that it had a carriage house used as an accessory dwelling unit.  But my research showed it dated to the early 1900s.  She’d admitted that it wasn’t in very good condition.  Her husband was sick and she needed to move to a smaller, more affordable house.  I wanted to help her if I could.

When I pulled up I could see the house was in bad shape.  On closer look I found it was in really bad shape.  There was rotten wood everywhere you looked, obvious patches on the roof, siding that didn’t match front to back, un-permitted and obviously substandard structures in the back…really rough looking.  Built on the old post-and-beam style foundation, it was clearly too close to the dirt below.  I suspected dry rot on the beams, and she admitted that they’d replaced one beam years ago, but that the floors still sloped badly.

She didn’t want to take me inside and I didn’t need to see it.  Her husband was ill.  So we walked around the outside.  I began to consider demolishing the structure to rebuild on the lot.  There was no way it was going to be cost effective to rehab…the bones just weren’t good enough to save.  But there were several houses within two blocks that had been remodeled.  The neighborhood looked good.

The neighborhood also had a historic designation, so I called the city to see how a demo job would be viewed.  The city planner knew the place and told me that the neighbors would cheer.  This house had obviously been an issue for a very long time.

So I asked Carrie what she owed on the house.  In my mind I thought I probably couldn’t pay more than $65,000 for the lot.  She couldn’t remember so I asked if she had a recent bill from the mortgage company.  She brought the bill and when I saw it my jaw almost hit the floor.  She owed over $200,000!  I had never seen a situation so upside down.

Financial Realities

For most people the house is their most important asset.  For this reason it requires your highest level of attention and objective judgement.  In 2007 banks and appraisers did some ridiculous things.  And this was one.  At the height of the market she asked to refinance her house to get at the equity needed to pay for her husband’s medical bills.

What I can say from experience is “don’t trust a banker to have your best interests at heart.”  Even in 2007 this house displayed obvious major problems.  Be realistic about the value of your property and what it will take to fix it.  Leveraging your property to over 100% of its value is a dangerous financial strategy.  In some cases moving is a better option than staying.

If you are underwater, that is you owe more than the property is worth, and looking at significant rehab costs with little or no way to pay for it, get real.  Its time to talk to the bank about your options, none of which are good.  After all, its the bank’s problem too.  Continuing for years on the same path is not a solution.

At AppleTree Group LLC we buy houses…when we can.  But you need to have a realistic understanding of what your house is worth and enough equity to pay for the repairs.  If your house is over leveraged then its likely not worth anything to anyone.  Check out my April 4th, 2017 post to get a good idea of how to value your property.  Invite a few contractors to give bids to learn how much repairs will cost.  Then make an objective decision based on the facts of your situation.

If you are over-leveraged or underwater, get real!  If you can’t afford to take care of it now, what’s going to change in the future?  Hoping things will change is not enough.  You have to make them change.  Maybe your money is better spent on finding a different place to live.  AppleTree Group LLC wants to help you, but sometimes medicine is hard to take.  The medicine will make you better.  Look forward to it.

Fruit from the AppleTree.

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