While many "experts" talk about the foreclosurecrisis and vacant homes as the major problem facing South Florida, I believethat another phenomenon is also causing the extreme economic problems we haverelated to the failure of the real estate market to recover. That is the problem of "underwaterhomes." Underwater homes are homeswhose value is less than the debt owed to any lender who has a lien on theproperty.
For example, in the simplest case, a person who has a houseworth $260,000.00 and a mortgage to a bank in the amount of $278,000.00 isconsidered underwater. The sampleproperty has negative equity of $18,000.00, and will remain underwater untileither the value rises or the principal balance of the loan declines.
Statistics by various groups show that in Florida, of theroughly 4.5 million homes, over 2.1 million are underwater, or 47% of allowners. This is more than double thenational average of 20%. With this manyhomes underwater, only one in two owners can consider moving to a new home,whether to upsize or downsize, or to move for a better or new job. Owners are literally trapped in their homes,without the ability to move.
As stated above, the only way this issue will be resolved isif values rise or, over time, the mortgage balance goes down. However, in most cases, especially over thenext five years, neither factor will likely have an effect. Currently, values continue to fall, meaningthe home above will likely be worth even less come next year, when most expertsexpect the prices to bottom out before a slow, gradual rise over the next tenyears. If prices decline another tenpercent and then rise at three percent for five years, the example home will beworth about $275,000.00 in 2017. If theperson continues to pay their original $300,000.00 mortgage at 6% they took outin 2006 they will owe about $244,000.00. So, wait six years and you have positive equity of $31,000.00.
Unfortunately, when the experts talk about homes beingunderwater they forget one crucial issue in South Florida, the cost ofsale. For a typical seller in Palm BeachCounty, they will have to pay a myriad of closing and proration costs in orderto sell their home. These costs includea real estate commissions, documentary stamp tax, title insurance premiums,real property tax prorations, and unpaid interest (mortgages are paid inarrears, so that June 1 payment you make is for interest in May). So, given a $275,000.00 sales price, here isthe breakdown at a June 30, 2017 closing:
Sales Price: 275,000.00
Commission 16,500.00
So while our patient homeowners will get about $7,000 atclosing, they will be $33,000.00 short of the minimum twenty percent downpayment due on their next $200,000.00 home. For many people, the figures are worse, as they carry both first andsecond mortgages. With these problems,most people who use their homes as springboards to new homes are stuck, whichonly further deflates the market. With atotal cost of sale at almost 9% it becomes clear that more than half of allhomes in Florida are underwater.
For homeowners in this current situation, there are someactions that can be taken to address this dilemma. First, a program of accelerated payment ofthe mortgage debt can be made. Oneoption is a bi-weekly mortgage payment, rather than paying monthly. This will result in an annual payment of oneadditional payment per year, which could reduce the loan pay-off over fiveyears by almost $10,000.00. However,most banks charge fees and costs for these programs which eat into the savings,especially in the shortfall.
Paying additional principal each month can also act as aforced savings plan. For example, if themonthly mortgage payment is $1,700.00, paying a round $2,000.00 per month willresult in $18,000.00 in principal reduction over five years. Refinancing to a lower interest rate (anyoneover 5.75% should consider this) would accelerate principal reduction aswell. If you are underwater due to alarge second, but the first mortgage is less than 80% of your house value, youcan still refinance if the second mortgage holder cooperates.
Finally, making small changes to the home over the next fiveyears can increase value. Paint,cabinets, tile and the like increase value, plus make the house moreenjoyable. After all, with the homeunderwater, you might as well enjoy it as you will be living there a long time.
Michael Posner, Esq., is a partner in Ward Damon a mid-sizedreal estate and business oriented law firm serving all of South Florida, withoffices in Palm Beach County. Theyspecialize in real estate law, and can assist owners and lenders in all realestate matters. They can be reached at561.842.3000 or at www.warddamon.com
