Playing The Home Market: Buying A New House And Bailing On The Old

by Andrea

stocks, today's economy

some-brightly-colored-houses-by-Kikashi.jpg When you play the stock market, the key to success is to buy low and sell high. 

According to Investopedia, if you understand stock market cycles, and you time your investment accordingly, then you will earn more money than you lose. 

Smart investors who recognize the different parts of a market cycle are more able to take advantage of them to profit. They are also less likely to get fooled into buying at the worst possible time. — Investopedia

People who take a chance in the stock market are warned against panicking in times of economic downturn.

According to MSNBC, "Investment experts warn that a period of major stock market volatility is no time to make rash decisions."  In fact, they recommend that you take the time to reassess your past decisions in order to avoid market queasiness.

It seems that people now playing the house market in a way that is very similar to playing the stock market.

As more and more people are finding themselves upside-down in their home mortgages, they are deciding to bail on their overpriced current home while, at the same time, buying a brand new home at a lower price. 

They are attempting to buy low and sell high in the home market. 

There are two major problems with this approach:

1. The first is that no one is willing to purchase their own home at the elevated price. 

2. The second is that they don’t care.  After all, they have purchased and moved into a new home that they can easily afford.  Should the old house never sell or get foreclosed on, it will destroy their credit rating.  This is of no consequence however, because, since they already own their home that they will likely stay in for 10 years, they have plenty of time to rebuild their credit rating. 

This new buy and bail strategy is explained by in the following way:

These owners are using their good credit rating to buy a second home at a lower price, assuring the lender they’ll rent out the first. But what they really end up doing is walking away from the first home, leaving the lender holding the bag. In some cases, real-estate practitioners and brokers who see nothing wrong with it coach homeowners through the buy-and-bail process. Some blame the phenomenon, in part, on lenders’ unwillingness to cut deals or restructure loans made when home prices were inflated.

Punnymoney explains that people bypass the fraud part of actually lying on applications that would require them to claim the house will be a rental because "many mortgage lenders let you buy a new home before you sell the old one without a rental agreement in place".  (The cartoon on that page is hilarious.)

Whether you call it good business sense or fraud, people feel these somewhat questionable tactics are justified and that they are just reacting to the effects of the real estate market. 

Meanwhile, there are rumors that the government is making crackdowns (none of which I could find on a government website).  What is fact, however is that underwriters have wizened up to the scheme and are requiring new homebuyers to prove that they can afford both homes before moving forward with the deal.  But, if the new mortgagor suspects the home buyer is up to no good, what reason to they have to turn down a mortgage they know can and will get paid, especially if the house that will be walked away from is not their concern?



What Are Your Options?

So, what should you do when you are paying $500,000 on a home that is only valued at $250,000? 

If there is a new home around the corner that is comparable to yours and it only costs $250,000, why wouldn’t you get rid of the old one and move into the new one? 

If you have the credit rating and the cash to pull off such a deal, why would you not take advantage of the current market situation with the penalty being a hit on your credit rating?

  • You could look at your home mortgage situation like the stock market.  Prices rose before, and if you hang in there, the value of your home will rise again too. In time, your home will probably return to its former value.

  • You could ask the bank to help you sell your home in a short sale to take a lesser hit on your credit and rent until your rating improves.

  • You could accept the fact that you may have made bad decisions and overextended yourself, and simply adjust your finances by eliminating your credit cards and other bad spending habits, which will ultimately allow you to stay in your home. 

  • You could sell or default on your home and rent an apartment or a house instead.  Renting really isn’t all that bad. 

Here is one final thing to think about before you consider buying a new home and bailing out on your old home: 

Homeowners with a foreclosure will take a bit hit to their credit and won’t be able to purchase another home for 5 years under new guidelines from Fannie Mae. Also, lenders might sue for personal assets for fraud." — Wall Street Journal

For the record, short sale buy-backs are also illegal. 

A short sale buyback is where you get the bank to accept a short sale on the home and then sell it to a friend or relative, while staying in the home and eventually re-buying the home at a discount.  (Here’s why you should not do it.)