Apologies in advance for the length of this, and any advice is welcome.

My husband and I make pretty good money (about $135K/year, combined), have secure jobs, are pretty frugal, and are doing a lot of the right things: saving up a good amount for retirement, saving for a house down payment, and saving for anticipated upcoming expenses in targeted accounts. (He's 35, I'm 29). We're currently saving $2K a month for a down payment on a house for the two of us, and we have about $20K saved for that so far. We're expecting a baby in about 6 months, and our original plan was to keep saving, and by the time the baby was about 6 months old, we'd have a 10-15% down payment and closing costs saved up, at which point we'd buy a house and move. (We live in a relatively expensive area so we're looking at spending no more than $300K on a house, even though that's way less than the online calculators tell us we can "afford"). We have a $13K emergency fund (slightly less than I would like, but it could cover 6 months of bare-bones expenses in a pinch). Our only other debt is fixed-rate federal student loans of about $50K.

Here's the problem. We currently live in a townhouse that my husband bought well before he met me. In a perfect world, he never would have bought this house, but in the real world, we're here and he's on the hook for the mortgage. The mortgage is $131K and the house is worth about $100K or so, so we’re well underwater. When he bought it at $138K, the house was a foreclosure, and had originally sold, like all the other identical townhouses in our little development, for about $200K, so he felt like he was getting a great deal. This development has been a microcosm of the housing bust: inflated prices at the top of the bubble, followed by short sales and foreclosures galore. Right now, most of the units are being rented out by the owners or property management firms they hire. There are lots of eviction notices, vacant units, and turnover. We also have a next-door neighbor who is dealing drugs, bringing lots of bad people to the neighborhood, and letting homeless friends crash in his place, which we’re not even sure he pays rent on (he may be a squatter). The police, when we’ve called them, have made it clear that they’re too short-staffed to investigate this guy and arrest him. Today we witnessed a particularly unpleasant domestic violence situation where it became abundantly clear that this guy is a loose cannon who represents a threat to the peace and safety of the neighborhood.

The townhouse is in a bad neighborhood (although the development itself is pleasant enough), you can’t walk anywhere, and basically I don’t leave the house except to run errands or commute to and from work. It’s terrible. It’s also a hell of a commute for me to get to work.

Needless to say, with our neighbor and his crew of dealers, I no longer feel safe here, especially considering we’ve got the baby on the way. So the calculus has changed somewhat, and I just don’t know what to do next.

- Leave this townhouse within the next few months, rent a house or apartment closer to my job, try and find suitable tenants to rent our current place, and continue on with our original plan to save up money for our eventual home purchase in a year? Pros: Get out of this unsafe situation; cons: puts us at great financial risk if our tenants don’t pay or trash the house.

- Do a strategic default or short sale on this house, since its value is unlikely to get back above water within the next 5-10 years (in my opinion). Then rent a house/apt for a year, and continue with our plan to save and buy a house, with the caveat that now we’d be buying a house based on my credit and income alone (which should be enough for a house in a price range we want – I make $83K).

- Do neither, continue living here with the bad neighbor and the unsafe neighborhood, and continue with our plan of buying a home in a year.

- Start the process of buying a home right now, even though our down payment is far less than I’d like it to be. I don’t like the idea of rushing into such a big purchase.

If it helps, we live in Washington, which is a non-recourse state, so if we walked away, it’s unlikely we’d be sued by the bank to collect the deficiency judgment on the townhouse. I don’t like the idea of strategic default, especially since we can technically afford our payments, but I also don’t like the idea of being forced to become landlords and being on the hook for bad tenants. Realistically, in this neighborhood, we’re unlikely to be able to attract great tenants.

My husband supports my desire to get out of this neighborhood and into a safer house, but wants to make sure we think through all our options.

Sorry for the length of this, I really don’t know how to assess this decision. What price do I put on my family’s safety and well-being, versus our future financial stability?

Is your condo (and mortgage) entirely in your husband's name? How is your credit score? How much home could you qualify for entirely on your own (your credit / your income / your assets)?

I think you know why I'm getting at.

The key to a strategic default is to stop paying your mortgage and common fees (and property taxes?) as soon as possible and bank all that money for your new place. I'm not sure about common fees and taxes, skipping those payments could speed up your exit, which you don't want to do.

I am one to believe that a "strategic" default is morally wrong. Of course, morals vary from person to person. $135k/yr income and you cant handle $131k mortgage? At least move to a decent apartment where you feel safe and play the landlord game. Life comes with no guarantees, so do what you must. Know, sometimes we are lucky and sometimes we aren't.

BTW, with ~$35k in the bank cash would make bankruptcy proceedings awkward to say the least. Have you spoken with an attorney about what you propose?

Short sale the house now, use the down payment money and some e-funds to pay the difference. Move into an apartment in a nicer part of town.

At that point, start saving again for a down payment.

Its not the financially prudent thing to do, but other than killing your neighbor and dumping the body in Puget Sound(which I dont think is a good idea), I cant think of a better way out of your situation.

First welcome to the forums pfwa47! And congrats on your little one!

Being that we just had a baby I can totally relate to what you’re going through. Our family lives in a more dangerous part of the city but we pay significantly less rent. Our particular apartment complex is great for kids as it is next to a school and a police station. We have been considering the same thing. Moving and buying a home or continuing where we are. That said…



More on this on a 2nd post.



135k / year to me seems like a lot of money considering you only owe $131k. From you’re post I take it you do not have car payments? What does your budget look like? Have you trimmed it down recently?

From your original post here’s what I can gather…

Assets:
*E-fund: $13,000
*Savings for new Home: $20,000
*Other savings? (Baby? Purchases?)
*Retirement? 401k?

Liabilities:
*50K - Student Loan.
*Townhouse Mortgage: 131k

Yes, the unfortunate housing market bubble bust has made this an issue for many people. We had the opportunity to buy a house around 2006/2007 and passed up on it. Some of our close friends did purchase a home around that time and now they are upside down on a house mortgage as well. It's a difficult situation.



Sounds like moving into an inexpensive apartment for a time might be a good solution.



It is important for both of you to be on the same page with this. Are you planning on taking a few months off of work? If so the environment you raise your little one is something definitely to consider. Stressed out Mommy = stressed out Baby.

I think an apartment in a safe neighborhood might be worth it. Maybe even something closer to work to reduce stress/commute time & expenses? Then rent out your townhouse?



While this is a solution this doesn’t seem like a very good moral decision in my opinion. Of course opinion’s are like belly buttons… Pretty much everyone has one.



I agree that in my opinion as well a “strategic” default is morally wrong. A decision was made. Abandoning the townhouse seems irresponsible to me.



Yeah, 35k (or more?) in the bank… Awkward. A lawyer is a good idea.

Regarding a budget I drew up a sample budget for you. Not sure if you already have one or not... I'm sure there are areas that could be reduced. If it helps great. If not just ignore this

Gross Yearly Income Pre Tax ------- $135,000.00

Taxes (12% estimate) --------------- $16,200.00 *

Yearly Income Post Tax ------------- $118,800.00

Monthly Income --------------------- $9,900.00

*I read online that Washington is one of only 7 states that doesn't tax individual wage income… So not sure what your taxes would be.

Expense ----------------------------- Budgeted ------ Actual ---- Notes & Due Date (If Applicable)
1. Fixed Expenses
1a. Townhouse Note -------------------- $2000.00 ----------- 2BD --------
1b. School Loan -------------------------- $700.00 ------------ 2BD --------
1c. Car Insurance Vehicle 1 ------------ $100.00 ------------ 2BD -------- **
1d. Car Insurance Vehicle 2 ------------ $100.00 ------------ 2BD --------
1e. Health Insurance --------------------- $250.00 ----------- 2BD ---------
1f. House Insurance ---------------------- $500.00 ----------- 2BD --------- ***
1g. Life Insurance ------------------------- $30.00 ----------- 2BD --------- ****
1h. 401k? ---------------------------------- $900.00 ----------- 2BD --------- *****

Total Variable Expenses ---------------- $3,680.00 ------------- 2BD --------

** You can get a discount by paying this 6 months at a time.
*** Based on $6000/12 months. A house here in Texas that is worth about 250k costs about 5k a year.
**** I believe Term Insurance is the best option. Especially considering you will have a little one soon.
***** Assuming an 8% savings on gross yearly income pre tax and an additional 4% match of employers.

2. Variable Expenses
2a. Charity ----------------------------------- $50.00 ------------- 2BD ------
2b. Gifts ------------------------------------- $100.00 ----------- 2BD ------
2c. Groceries --------------------------------- $500.00 ----------- 2BD ------
2d. Eating Out ------------------------------- $250.00 ----------- 2BD -------
2e. Cell Phones ------------------------------ $100.00------------ 2BD ------
2f. Internet ----------------------------------- $40.00 ------------ 2BD -------
2g. Cable TV/Satellite ---------------------- $100.00 ------------ 2BD -------
2h. Home Maintenance/Repairs ----------- $150.00 ----------- 2BD ------
2i. Home Phone? ----------------------------- $40.00 ----------- 2BD ------
2j. Car Repairs/Maintenance ---------------- $50.00 ------------ 2BD ------ ******
2k. Gas Vehicle 1 ---------------------------- $260.00 ------------ 2BD ------
2l. Gas Vehicle 2 ---------------------------- $165.00 ------------ 2BD -------
2l. Entertainment --------------------------- $250.00 ------------ 2BD -------
2l. Savings E-Fund -------------------------- $1000.00 ------------ 2BD -------
2l. Savings New Home --------------------- $2000.00 ------------ 2BD -------
2l. Savings Baby ----------------------------- $500.00 ------------ 2BD -------
2l. Savings Other ---------------------------- $450.00 ------------- 2BD -------
2l. Miscellaneous ---------------------------- $90.00 ------------- 2BD -------

Total Variable Expenses ----------------- $6,220.00 ------ 2BD

****** 4 Oil changes a year per vehicle, State Inspections, License Tag renewals

Total Expenses ------------------------------ $9,900.00 ---------- 2BD
Total Income --------------------------------- $9,900.00 ----------2BD
Difference ----------------------------------------- $0.00


Thoughts? Have a great week!

Thanks for the responses everyone. Everyone is right, we absolutely can afford our current townhouse (which, again, my husband purchased on his own salary several years ago). We weren't considering bankruptcy, but rather strategic default. I don't like the idea of strategic default, but I also think that renting out the townhouse to tenants - especially in our lower-income, more dangerous neighborhood - puts us at a great financial risk if the patients decide to not pay rent, trash the place, etc. I do not relish the idea of being a small-time landlord, given all the horror stories I've heard.

Since the townhouse was purchased in my husband's name only, I assumed that if we did decide to do a short sale or foreclosure, that the bank would only take his current income into account, but I could be wrong on that. My credit is excellent (~775) and based on what I know, I think I alone could qualify for a future mortgage for us based on my income.

We do also have savings for the baby, car repairs, etc, and we contribute 17.5% of our combined income to 401ks and Roth IRAs, so I feel good about retirement savings. I am taking off 3 months after the baby is born but that time will be partially paid, and we've worked out a budget for that time period that seems to be realistic.

What I do know is that I don't want to continue living here, and I don't want to continue throwing good money after bad, which in our case means I don't want to spend our down payment fund to make up the difference on our townhouse if/when we sell it. That would be $20-30K down the drain, and then we'd be back at square one.

I guess I'll start looking into renting out our place. Any advice on being a small-time landlord is much appreciated.

Thanks Eagle - we actually do have a budget already and have our expenses and savings goals 100% mapped out Incidentally, after taxes and 401k contributions, our take-home is only about $7000 a month (WA has no state taxes, but I work in OR so I get dinged with a 9% income tax anyway). We do need to work term life insurance into the budget, though - that's next on my list.

You could consider looking for a tenant interested in rent-to-own - won't necessarily get you any more $, but that way the tenant acts like an owner and tends to be more reliable. Make sure to get & check references, especially work-related (get paystubs and/or W2s). If possible, visit the prospective tenant in their current digs to check on housekeeping. Write the contract so that if the tenant is late, you can (but don't have to) cancel the 'own' part of the rent-to-own option. If you are not handy, and don't want to go the rent-to-own route, you may want to consider an 'as is' rental (if allowed in your area).

Are there any near-by employers? If so, see if any of their employees are looking for housing. Same goes for houses of worship & their attendees. Colleges & their students...you get the idea.

Depending on price ranges in your area, your townhome might be appropriate for section 8 tenants (government pays part of their rent, and tenant has to stay on time with their payments or get dropped from the program) - although this does often involve detailed annual inspections.

p.s. depending on the terms of your husband's mortgage, the by-laws of the condo association, and the laws of your state - with good income & assets you could be liable for any mortgage and/or condo fee shortfalls. Sounds like it may be moot at this point, but something to keep in mind.

I dont understand. The townhome is a sunk cost. You owe that $20-$30K regardless of what you do(short of strategic default type of immoral actions). Renting your place out to tenants, many of whom will probably be of questionable financial worth and character, seems like a non-solution. You will still have to venture into this dangerous part of town, deal with the same people, and will still be on the hook financially for repairs, etc... to the townhome.

You will get rent money(probably, but not guaranteed), but it will still take years and years before you can sell.

Also, if you are renting out the home, the rules on strategic defaul/short sales change. You could be far more liable at that point.

I think this is a really bad idea.

I agree. I cringe everytime I hear the words "townhome" or "condo". We own a townhome as a rental & we experience alot of the same issues as the OP.

You think what is a really bad idea? It's not clear (to me at least) which you are referring to: Strategic default? Renting the place out? Raising their baby in a bad neighborhood next to a drug dealer? Throwing good money after bad? Or something else?

What do you propose the OP do instead?

OP here. I guess the real question is, what is the least worst option for us? If we stay put, we don't feel safe. If we rent it out, we risk having terrible tenants and losing thousands of dollars to repair their damage. If we default on the mortgage, my husband's credit is damaged in a big way. If we put all our savings into the townhouse to try and get it sold, we are basically left with nothing - no townhouse, no new house, no down payment fund.

It's a tough situation. We're going to try and work with our HOA to let them know about the neighbor violating all the community rules, but I don't have a lot of faith in them responding appropriately. The $188 monthly HOA fee we pay to them doesn't seem to get us much of anything except for when they occasionally send someone out to tow cars parked illegally.

Big lesson learned: Townhouses and condos = all the downsides to renting and all the downsides to home-ownership.

Strategic default is a very bad idea. You seem to be underestimating the damage that a default will cause, possibly because you think it is happening to your husband and not you. You mentioned damaged credit but have you actually thought about what that means?

And guess what, it will happen to you too. If he can't get a loan on a new house then his name will not be on it and you will need to qualify completely on your own. If you are in a community property state then that could mean qualifying on half your income because half belongs to him. So basically, if you default you'll be renting for the next 10 years or so. And do you actually think landlords in the good areas will rent to you? They'll check your credit and turn you down. You'll pay more for car insurance. One or both of you could have a hard time getting a job. When you do buy a house or car you'll pay a higher interest rate.

I strongly suggest you avoid any kind of default. It sounds like you need to suck it up and sell the house as quickly as you can even if you lose a little money. In the meantime you can move out and rent if you don't feel safe or you can stay put.

Be careful with that. It's called "redlining" and is illegal!