Strategic Default Not So Easy in Miami and Coral Gables Real Estate

posted on March 11th, 2010 filed under: Financial Responsibility, Real Estate News

Strategic default is a fancy term for a property owner’s refusal to pay a loan that far exceeds the value of the property.

Whether that’s an option depends on what state you’re in.  Some states are non-recourse, meaning the mortgage holder cannot pursue the borrower personally for the difference between the loan amount and the property value.  Florida, however, is a recourse state.  Borrowers are personally liable for the difference (generally speaking).

A borrower in Miami or Coral Gables therefore cannot so easily walk away from a home loan.

That would be good to remember before you “lever up” and buy real estate.  For no other asset would you dream of paying a price that is a function of maximizing the amount you can borrow against the next 30 years of your income.  But that is exactly what you’re asked to do when buying real estate.

The result, if you’re not careful, can effectively be debtor’s prison.  You can owe a distant mortgage holder money for a property that you no longer own because the mortgage holder took it away from you in partial satisfaction of your bad debt.  The rest you can pay off with your future wages — like a subtle form of slavery.  Or you can declare personal bankruptcy.  (If you’re actually in such a situation, please consult an attorney licensed in your state, don’t draw specific conclusions from a real estate blog.)

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Update 03/14/10:  Right after this post, Moody’s reported that lenders were being more aggressive in seeking deficiency judgments against borrowers who walk away.  It’s in the latter half of the following CNBC clip:

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posted by // This entry was posted on Thursday, March 11th, 2010 at 11:10 am and is filed under Financial Responsibility, Real Estate News. You can follow any responses to this entry through the RSS 2.0 feed.

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