San Francisco-Oakland-San Jose Real Estate Network

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My client bought a home in 2005 for $385,000. Current loan banlance $286,000 at 5.6 %. Current market value is $200,000. Bank just declined loan modification. what is client's best option?

Experienced Bay Area Real Estate Consultant helping clients buy, sell and manage real estate

  • Comment (3)
  • August 4, 2011
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  • Bradford M.


    Bradford M.

    Commercial Real Estate Appraiser

    This is just a personal opinion and not professional advice as to value. It is just talking through an issue that affects a huge percentage of the homes in this country. First, they need to go get legal and accounting advice. Assuming everthing else in your scenario is correct, the missing part for me is what is the market rent for the property? If the home could be rented for more that $1,600 or $1,700 per month, then here is my recommendation...give the bank one more chance not to become the proud owner of the home. Subject to legal and accounting advice, offer to not walk away if the bank will recast the note at a 2% interest rate with a 30 year amortization...oh...and is needs to be fully assumable by a qualified buyer (for at least a window of 10 years). The P&I will be about $1,060 per month. Add the real estate taxes, insurance and maintenance of say $550 per month and the total cost to carry for the current owner is about $1,600 per month. Why should the bank accept this gracious offer? The PV of the loan discounted at a current mortage rate of say 4.0% is about $220,000. If you are correct that the current market value of the house is $200,000, a guess at the banks net proceeds from the sale is what...$150,000. Maybe even not that after everything is considered. A cash-equivalent purist is going to say that the value of the real estate is still $200,000. That is fine. If all of the assumptions above are true or reasonable, my guess is that the property could be sold in the market place "as encumbered by the new 2% loan" for at least the loan balance. The property will have a positive cash flow. Is the lender likely to say "yes" to this offer even though it makes sense and avoids a $136,000 real dollar loss for them? Probably not. It is easier to just say "no".

  • Roy

    Roy B.

    Experienced Bay Area Real Estate Consultant helping clients buy, sell and manage real estate

    This property would rent for $1500/month.

  • Curt B.


    Curt B.

    Business Insurance Broker, General Liability, Workers Comp Insurance

    If you plan on renting and becoming a "landlord" hire a professional property manager or use the proper lease forms to protect yourself against unwanted legal problems with renters. In addition, you'll need to convert the homeowners policy, HO3, to a Landlord or dwelling fire policy, make sure you have enough liability at least $500,000 and loss of rent coverage as well as wrongful eviction coverage.