Letter Re: Strategies for Saving a House in a Foreclosure Situation?

Hi Jim,
Are there any strategies, (i.e.- negotiations, dickering, etc…) that you can recommend for a after a TSHTF situation in which the government has raised taxes so much that you are hinging on hanging on to your retreat? Any examples that worked back in the 1930s? I know you can relate due to your family’s history that you have spoken of. What could we do as a plan to save our properties?
Who can we expect to knock on the door, (i.e.- what entities)?
Do you think there will be more motivation to seize productive ground?
Do you think there will be more motivation to seize ground that has equity in it?
Do you think there will be more of a chance of the Government or the Lender coming to knock on the door if you fall behind on your mortgage payments or property tax installment?
Do you think legal representation will actually prove beneficial under such implied circumstances?
Would you recommend being overly helpful to them at that hypothetical point, or would you recommend dragging your feet hoping that maybe they go on to a quicker seizure of someone else’s property?
These are questions that I hasten to type, but, maybe someone has thought of the aftermath and can offer some good sound advice since we will unlikely be able to communicate or have access to the Internet under such circumstances, nor afford an expensive Attorney. – The Wanderer

JWR Replies: I’d like to address this from two distinct angles: tax delinquency and mortgage delinquency. I’ll address mortgage delinquency first, since it is far more likely.

Mortgage Delinquency:

It may sound like an elementary precept, but when you buy any property using a mortgage, you don’t really own that property until the mortgage is paid in full. It is the banker’s house, not yours, until it is entirely paid off. In essence, in the eyes of the law the lender is still the owner. If you get delinquent in your payments for long enough (it varies depending on the state where you live), then you can count on foreclosure and if need be, being forcibly evicted. Currently the county sheriff’s deputies in California’s post-bubble Central Valley are presently busy with a lot of evictions.

Before talking about delinquency and foreclosure, I should mention one protective measure. State laws vary, but a Declaration of Homestead can help protect your house (and typically just the one acre that it sits on) from creditors in some circumstances. Be sure to research your state’s declaration of homestead law thoroughly. In many states, a homestead exemption is automatic–you aren’t required to file a homestead declaration in order to claim the homestead exempt status. Again, these laws can vary widely, so do your homework.

Here are some of my thoughts on the four most-often suggested solutions for preventing foreclosure:

Borrow money from friends or family members: This might be an option, but unless you know for certain that you can meet the new payment schedule, then don’t do it. It will only cause familial strife that could last for decades.

Borrow from a different bank to get back up to date on past-due payments: This can be accomplished by means of a second mortgage, but I must warn readers that is having trouble paying a first mortgage, then taking out a second mortgage is most likely just a stop-gap measure.

File in Bankruptcy Court (Chapter 7 or 13): Generally not recommended, since it could take decades to recover. You could conceivably keep a mortgaged house when going through either Chapter 7 or Chapter 13.

Sell the property: Most people consider this a last resort, but my personal opinion is that it should be the first option that you consider. Typically, if you find new financing then you will most likely fall behind again on your payments and the end result will be the same: foreclosure. So it is usually best to cut your losses and sell the house. If you are in a situation where you “upside down” in the mortgage (where the value of the property has declined to below what you still owe on the property), then it is probably best to just pack up and move, and mail you banker the keys. (This has recently been dubbed “jingle mail.”) With continuing sharp declines in house prices expected in the next few years in the over-bought coastal markets, I predict that the “Midnight Flit” will become a commonplace occurrence.


Tax Delinquency:
This was the situation that my great grandparents were in, back in the 1930s. They owned a large sheep ranch in northern California. At the beginning of the Great Depression they were land rich but cash poor. By the end of the Depression, that had neither much money or land. By 1942, the county had taken most of the ranch for back taxes.

The only safe and sure prevention for such situations is to have cash in the bank, or highly liquid tangibles (such as precious metals). With cash in the bank you can sleep well, knowing that you’ll always be able to pay your property taxes. The property tax rates vary tremendously from state to state. The tax rates tend to be the highest in the northeastern US, and lowest in the south and the west. Needless to say, I recommend relocation to states with low property tax rates.

If and when you can’t pay your taxes, you can try some legal maneuvers, but once the deputies arrive, don’t try anything melodramatic. They are just the instrument of the courts, and it is in the courts that you must find your remedy and recourse. When it comes to foreclosures, unless you live in a county with a particularly corrupt government, I don’t thing that it will make much difference how much equity you hold, and or whether or not the land is productive. If you get in arrears on your taxes, they will be “equal opportunity destroyers.” The tax sales may get delayed in some cases, but inevitably if you don’t pay the taxes, then the land will be seized.

OBTW, speaking of forfeiture for back taxes, if you are looking for bargain retreat properties in rural regions, you can occasionally find small parcels that are available for just the price of catching up on their back taxes. (Again, state laws vary widely.) Typically these are undeveloped parcels that were bought decades before. The owners, often out of state, changed mailing addresses, and somewhere along the line–often because of a death in the family–the property was forgotten, the taxes lapsed, and with no mail forwarding address, the property was eventually seized by the county for back taxes. You can find some such properties through services like Foreclosure.com. But in some cases you have to visit the County Recorder/Assessor’s Office to find out about such parcels. You should get to know the people at your Recorder’s office anyway, so if nothing else this is a good excuse to go and visit.