What is strategic default? Simply put: when you stop making payments despite having the ability to continue making the payments. As a borrower on a loan you have two choices (given by the bank), either make your payments or don’t. Your note provides you in detail what will happen in either scenario.
Why do people “Strategically Default?”
There are a number of reasons, in a lot of cases investors will default on properties that are so far upside down it would take years to recoup their losses let alone a profit, they opt to walk away and free up the cash they are putting into the property on a monthly basis. For example, if a person owes $190,000 on a property that is now worth $135,000 and has a $1700/month payment; using the average Spokane County appreciation since 1990 (5.94%), it would take 5 years and 11 months to recoup the lost equity.
This scenario assumes that the market improves tomorrow, and continues to improve at 5.94% for the next 5 years 11 months. If you find yourself saying, “I’ll wait for the market to come back.” You will wait 5 years and 11 months assuming the numbers above.
Lets go back to that 1700 a month payment. Over 5 years and 11 months that totals $120,700 in mortgage payments to recoup $55,000 in lost equity. In this scenario, strategic default could save this investor $65,700 over the next 5 years. Find out what your home is worth.
Strategic default is a business decision that investors make to cut their losses and preserve cashflow. Most times we can short sale these properties, short pay the loans and get the investor on their way to make money elsewhere. In all cases, an investor will be 1099’d for the difference, and in some cases asked to pay a note for all or a portion of the deficiency these terms can be negotiated in during the short payoff process.
CYA Note: I’m not a real estate attorney, simply a Short Sale Realtor in Spokane who specializes in marketing short sale properties. If you’d like more in depth legal advice, please seek Legal Counsel, I have some highly recommended Attorneys in town who will give you the help you need.
Photo Credit: Waponi