What Would You Do? #4

Jan 30, 2013 by

dice with question marksEach What Would You Do? article outlines a scenario with a dilemma and choice to be made by a person I’ve made up, either Dave or Diane (any resemblance to you or me is purely coincidental!). Most of the time, money won’t be the only factor involved in the choice, but money will play a meaningful part in Dave’s or Diane’s options. Also, most of the time, there won’t be a “right” answer (this is NOT a test!). I’m hoping to get at what should Dave or Diane consider in making the choice? What’s a good way to go about making the choice? Of course the best way for you to explain your ideas may be to outline what you would do in the same scenario and, most importantly, why.

Diane Gets a Job Great Offer

Diane just got some excellent and long sought news: An offer of a new position with a big pay increase. The job is exactly the sort that Diane had been seeking for some time and is with a first class company with lots of opportunity for challenge and advancement. There’s just one catch: The new job is in Denver, and Diane lives in Phoenix.

Burned by the 2008 Financial Meltdown Aftermath

Let’s back up a bit. Like millions of Americans, Diane took a beating when U.S. financial markets crashed in 2008 and the housing market collapsed. Her employer laid off 30% of its workforce, including Diane. The house in Phoenix she and her husband bought in 2006 lost half its value—about $150,000. While Diane looked for work, the family borrowed money—$15,000 in the end—from Diane’s sister to stay afloat. Diane eventually found work, but at a bit more than half her previous salary. Still, with cutbacks in their lifestyle, Diane and her husband were able to make ends meet, barely.

Underwater Mortgage

With the drop in the value of their home, Diane and her husband find themselves $100,000 underwater: Their outstanding mortgage balance is $250,000 and their home’s estimated value is $150,000. The hardships of Diane’s unemployment and then underemployment drained their savings. Any extra cash Diane can squeeze out of the household budget goes toward repaying the loan from Diane’s sister. Diane and her husband have been saving nothing for their retirement and nothing for their two young kids’ post-secondary education since the meltdown.

How to Accept the Dream Job Offer?

The position just offered to Diane comes with a salary 50% higher than even her pre-meltdown pay. Diane’s husband works in technology and has contacts in Denver who say he should be able to find solid work quickly. Diane and her husband figure that, with their likely combined earnings in Denver, they could repay Diane’s sister and rebuild an emergency fund within 18 months of relocating. But that’s the challenge: How does one relocate from a house with an underwater mortgage?

Getting Out From Under an Underwater Mortgage

Diane sees no way the move could be made unless they sell their house in Phoenix. But to pay off the mortgage, Diane needs another $100,000 in cash to add to the estimated $150,000 proceeds from the house sale.

Diane believes her house could be rented for about $850 per month (after a property manager takes its cut). The mortgage payment is about $1400 per month. And of course she’d still be responsible for property taxes, insurance, and maintenance. She and her husband have no desire to be landlords.

What Would You Do?

Diane and her husband have a tremendous opportunity to get back on track and possibly change their—and their kids’—lives dramatically for the better. But their deeply underwater mortgage stands in the way. They’re especially frustrated, like many of their fellow Americans, because they feel they did nothing wrong, yet find themselves trapped—likely for many years—by a mortgage they can’t pay off.

What options does Diane have? What would you do?

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  • Brick By Brick Investing

    This is an unfortunate situation that plagues so many. In this instance I would advise that Diane and her husband should default on the home. Yes I know their credit will take a severe hit, but letting the house go into foreclosure is their only true financial strategy if they want any chance of taking this job. It makese absolutely no sense to pay $100k for a house you’re not even going to live in anymore.
    Contrary to popular belief, everyone doesn’t have to be a homeowner and quite frankly this belief is why so many people are in trouble now. The couple can rent for the next couple years as they get their finances under control. They can apply for credit cards and pay them off in full every month in order to rebuild their credit.

    • http://twitter.com/LiveWellOnLess Matt Withers

      In the UK that would be credit suicide. You’d never get another mortgage to buy a house again, never mind a credit card, as one of the underwriting questions ALL mortgage lenders ask, is have you ever defaulted on a mortgage or had your house repossessed. If it were me, and Denver was in the UK (!), I’d rent the place and then look at my options later on from a better financial position.

  • FrugalPortland

    First, I’d like to thank you for reinforcing my “don’t buy now” mentality. Second, I’d leave. 50% more salary, even with the costs associated with renting out her current house, is a trajectory in the right direction. Plus if she doesn’t leave, then she’s going to have the “stuck” mentality and will likely have a really hard time recovering. Onward, upward! Dream job!

  • http://www.debtroundup.com/ Grayson @ Debt Roundup

    I agree with Brick. They should let the home go into foreclosure and move on. They should rent and then rebuild their credit to purchase a home later down the road when their finances are better.

  • William_Drop_Dead_Money

    If you don’t want to walk away from the underwater house, there is a perfectly logical out: rent out the Phoenix house and rent a place in Denver. The revenue and expense should (more or less) cancel each other out. If saving money is a goal, you can rent a fairly cheap apartment and end up spending less than you make. It won’t be forever.

    It’s not a perfect solution, but the facts as they stand don’t seem to offer room for a perfect solution. This at least allows the benefit of a raise and (bias alert as I live in Denver) a lifestyle upgrade my moving to Colorado :)

  • http://twitter.com/retirebyforty retirebyforty

    Diane can move first and see if the job will suit her. Once she is more established, then Dave can see if he can find a new job at her location. She can rent a small apartment and Dave can rent out the rooms in the house to offset the cost at the beginning.

  • http://mymoneycounselor.com/ Kurt @ Money Counselor

    For the foreclosure option, one idea I’d throw in the mix: Check out the Home Affordable Foreclosure Alternatives (HAFA) program. It’s intended to facilitate short sales. If Diane’s not eligible for HAFA, she could still propose a short sale to her lender. If she’s turned down (likely), if it were me I’d feel less complaint from my conscience about turning the house keys in to the bank and packing the truck for Denver.

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  • Rich Uncle EL

    I would not do a forclosure or short sale, I would rent it out just like William said, the new income will cover the short fall from the house in phoenix, if they maintain the level of expenses they had when Diane got laid off. Rent a small place in Denver until you sell or are positive on the old house.Then after a year or two hopefully the market will recover then review your options.

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