Several homeowners underwater with mortgage debt are becoming landlords accidentally

Maria Wells never planned on becoming a landlord. Her profession is that of a real estate seller. She never planned investing in real estate. However, suddenly this Florida resident has two properties now. One of the properties belonged to her son, who had to shift base to join a new office.

She owned the other one, but she married and decided to stay with her husband. Maria cannot sell the houses because of the over-surpassing mortgage debt, so she lets them out on rent. Maria represents a growing group of people the realtors call ‘landlords by accident.’

“I will definitely put it up for sale, when I find sufficient equity,” confirms Wells, who has successfully managed both her properties in a good rental market. The rent income covers the taxes and mortgage bills. She never employs property managers. She makes sure herself that the properties retain their values through maintenance. She had many good tenants and a few nightmares as well.

“One of these certainly caught me in surprise. They actually decided on changing a filter of water before leaving town. I received the call when water, 500 gallons of it and fifty thousand dollars had been spent.”

Despite escalating real estate prices, about 13 million homeowners, or about 25.4 % of mortgage borrowers, owe more money on their outstanding mortgage debt than the market worth of their homes, according to a recent Zillow report. These borrowers must now pay their loans to be free to own their homes. Another 9 million people, who are not underwater entirely, do not have sufficient equity in the properties to be able to move.

“As the market plummeted, many had to deal with a life event compelling them to move,” confirmed Todd Allen, a realtor from Northern Virginia with experience of working with many such homeowners.

“Luckily, many high income D.C Metro individuals and families qualified as a owner to purchase their second homes owing much to softer lending procedure from banks. However, their new status as landlords did not guarantee profits—instead, they had to incur losses. Furthermore, many homeowners had to cope with other perils of the situation.”

Arati Patel owned a property in Greenville, S.C., six years ago in 2007, but when she had to move to D.C. with a new responsibility, she could not find a good buyer, so she had to put up the property for rent. For the last six years, she faced all types of tenant problems and was even compelled to evict one of them.

“It was a nightmare to an extent because I so not stay in Greenville any more…neither do I have any desire to return because here my life centers around D.C.,” explains Patel. Much coordination was needed and I still wait for about $2000 as rent.

Finally, Patel had to sell the home at a huge loss. She did not want short sale selling—i.e. selling the property despite the gap between its value and the mortgage debt (which is higher)—because the procedure was risky and long, and she did not want any damage in her credit report either.

Although there is no specific data on how many of such “landlords by accident” inhabit the property market now, but realtors identify them as one more reason of the present issue of insufficient inventory. Usually buyers are also sellers, making the transactions profitable in inventory terms, but when the buyer does not sell, the inventory undertakes a decline.

The prices are on a constant rise, increasing by more than 10 percent from last year, according to recent data from CoreLogic. The prices are however still much less than that of the housing boom, encouraging so many new buyers to enter the real estate market.

Although many millions recovered from mortgage debt, millions still remain underwater. 48 percent of Atlanta buyers are underwater, 54 percent of Las Vegas buyers, 37 percent or buyers in Miami and Sacramento each.

Going by the present situation, it would take several quarters of price rises for such homeowners to find the benefits of equity.