Aging mom needs to move on from underwater condo

Q: My mother is 90 and needs to move from her condo to an assisted living facility. She bought her condo at the height of the market boom for about $250,000, and it is now worth about $100,000 less than she paid for it. She has a mortgage and probably owes more on her loan than what the property is worth. Additionally, every month she must pay condo fees out of her fixed income.

My siblings and I are wondering what consequences she (or her estate) might bear if she were to simply stop paying on the mortgage and what other options she might have.

A: In many parts of the country, the Great Recession is a thing of the past. Overall, home prices have risen some 40 percent over the past six years. Zillow reports that the median home price is $226,000 and is up 6.6 percent over a year ago. But that’s not the case in every metro area. Some homeowners have discovered that their home values have not even returned to where they were before the Great Recession.

Sadly, your mom is one of these homeowners. She bought a condo at the height of the boom and now owns a home that is underwater, meaning that it’s worth less than the amount owed on the mortgage.

So what should your mom do? Well, she could continue to live in the condo and pay its expenses. She could simply walk away from the unit and suffer the consequences of her failure to pay her mortgage payments and her condominium association assessments. She could try to rent her unit and cover all of her expenses (if her building will allow rentals). Or, she can try to sell the property.

The best option is to sell. While the condominium isn’t worth what is owed on the mortgage, she can work with her lender on a short sale. For sake of discussion, let’s say she owes $150,000 on the condominium and the market for a unit like hers is around $140,000. In this situation, she might only net $120,000 after paying closing costs and real estate broker expenses. She’d be short $30,000 of the true amount that the lender would normally be due.

If she lets the lender know she’s likely going to be short, and the lender agrees to work with her, the lender might be willing to allow her to sell the condominium unit and take the $120,000 payment in full satisfaction of the $150,000 owed. This is probably the best case scenario for your mother.

Most lenders will want to see your mom’s financial picture before agreeing to let her off the hook on the loan. If she has considerable assets, and has $30,000 that can be liquidated and used to pay off the lender in full, the lender may allow her to sell the condo but require the full payment on the loan as soon as the assets can be liquidated.

Renting the property would allow your mom to walk away now, and essentially leave you and any other heirs of the estate to deal with the ramifications after her death. At that time, if there are assets, they would be sold and the proceeds would be used to settle the debts of the estate. If there are no assets, the property would be sold and the lender would accept whatever net proceeds are generated or the lender would accept the property in lieu of the debt.

We don’t usually recommend that homeowners walk away from their property. When they do, the lenders usually end up taking the home over and selling it down the line, but the losses pile up on what the borrower owes on the loan and the home frequently sells for far less than what your mom could sell it for by putting the home on the market.

Ilyce Glink is the CEO of Best Money Moves and Samuel J. Tamkin is a real estate attorney. Contact them via ThinkGlink.com.