Today many successful people with great credit and steady incomes find themselves owing more on a house or investment property than it is worth on the market.
If this is your primary residence and you can make the payments, your best bet is usually to stay put for a few years until values come back up again. Get the best long term fixed interest rate loan you can find and sit tight. In the meantime, you get depreciation credit and an interest deductionÂ on your taxes while you pay down your mortgage(s) and enjoy the use of the house.
However, if you find yourself having difficulty making the payments or need to get out from under the property for another reason, there are alternatives to a short sale or a foreclosure. Below are two other possible ways to make it through the down market.
1. Lease your property.
If you want to preserve your credit score and avoid short sale and foreclosure you can lease your property. Imagine you oweÂ $300,000Â for aÂ house that is only worth $275,000. YouÂ would have to pay $25,000 to make up the difference, or hurt your credit with a short sale or foreclosure.
However, it is possible that if you lease your property today, your negative cash flow would be less, say $200 - $300 a month. It would take 8.3 years of $-250 negative cash flow to add up to the 25K you currently owe on the sale of your home. Is it possible in 8 years rents could be a bit higher, or values could improve a bit? At least by holding onto the property you retain the right to benefit if conditions do improve.
2. Sell Your Property "Rent to Own"
A lease option, or "rent to own" contract is different from a regular lease in several ways including:
a.Â A Lease OptionÂ contract isÂ usually from 2 - 5 years, where the Tenant/BuyerÂ can choose to buy before or on the final date of
Â the contract.
b. Tenant pays for basic repairs and upkeep. Owner/Seller only comes in for major repairs, or where an insurance claim may be
c. Instead of first month, last month and deposit collected on a lease, the Owner/Seller collects a non-refundable Option Fee.
d. A portion (from 10 - 30%) of the rent payment is credited towards the down payment on the purchase of the property. If the
Â Tenant/Buyers purchase the property, they have already paid a chunk of the down payment. If they do not purchase the
Â house this rent credit is non-refundable.
It is possible that you can get a higher monthly payment on a lease option than a regular lease, because the Tenant/Buyer is receiving credit towards his down payment. This option should also reduce your maintenance expense and management duties.Leasing your property and selling Rent to Own are two alternatives to short sale.