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We Need Some Objective Advice and Creative Thinking. – Tom and Ann

“Dear Steve,

We need some objective advice and creative thinking, and we appreciate that you make your time and knowledge available to people.

We are a married couple both 56 years old. Pam is not working full time outside the home, but just finished five weeks of working part time for the Census.

Tom is an executive with a huge international corporation. In the fall of 2009, Tom was asked to relocate from Rhode Island to Atlanta to take a job in another division of the corporation.

As Tom was driving to Atlanta for his move (Ann came two months later), he received a phone call from his new CEO informing him that the company he was relocating for was just put up for sale. Thus begins our tale of “living in limbo”.

A generous relocation package is in place until September 2010. It pays for our temporary living expenses in Atlanta while waiting for our Rhode Island house to sell. They have extended the payments twice to help us out in the slow real estate market, but they say they will not pay our rent or utilities here after August 2010.

Tom is just one pay grade below the level where the company would buy our Rhode Island house outright. We have a guaranteed sale so that, as soon as we accept an offer on the house, the relocation consulting company will take over the sale. Closing costs on the sale of the Rhode Island house and a new Atlanta house will be covered by the relocation program, until it ends in September.

We built the Rhode Island home six years ago. We owe $375k on two mortgages with Bank of America. The first mortgage is $307k at 5.75%. The HELOC is $68k at 6.375%. We listed the home for sale at $389k and had no interest. We have lowered the price to $365k and still have no action. Tom’s employer has agreed to make up $25,000 toward paying off the mortgages. That means we would have to sell the home for $350k to come out even.

The realtor tells us that there is a 16 to 18 month inventory of houses on the market in our price range. The only comparable houses that have recently sold in the area were under $340k for a final sale price. Those few homes have amenities that ours does not, making ours less valuable.

We have been preapproved for a mortgage to buy a home in Atlanta. We have not acted on this, however, due to the great unknowns about whether Tom will have a job with the new owners of the company.

Here is where we need some advice.

Tom thinks we should try to find a renter for the Rhode Island house, even if we have to make up $1200 to $1500 a month to pay the mortgages. He thinks we should possibly refinance at a lower interest rate and continue paying the mortgage until the real estate market recovers and we can sell at a better price. Tom thinks Pam should try to find a full time job that will pay the Rhode Island mortgage short fall until we can sell the house at a price that will pay off the mortgage. He thinks we should continue renting in Atlanta.

Pam thinks we should drop the price to $325k for a quick sale, making up the $25k difference with a loan from our 401k, taking advantage of the $25k sale price assistance from Tom’s employer and the closing cost relo benefit which will amount to $20k. She also thinks they should buy a house in Atlanta, using the second closing cost benefit, before it all ends in September.

Obviously, we do not qualify for a hardship modification. For tax deductions, we really do need a mortgage. Tom does not want to dip into the 401k. Pam does not think it makes sense to walk away from the relocation benefits, because we will have to make up that $65k ourselves at some later date.

Tom’s old job in Rhode Island is gone and there does not appear to be anything for him back there at his old division. The job market in the northeast is not as good as in Atlanta. Not to mention the weather . . . we would like to stay here. What advice can you give us to help us make a decision on how to stop “living in limbo.”

With much gratitude,

Tom and Ann”

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The Answer

Dear Tom and Ann,

Thank you for such a detailed question.

Ultimately the best answer is the one that allows you to achieve your ultimate goal. In this case the goal appears to be to move and stay in Atlanta.

You both raise some very valid points and that’s what makes this situation difficult. However it might make sense for you to consider a modified approach.

If you lowered the house in Rhode Island to a fire sale price, probably around the $335 level then you could dump that house before the generous employer relocation benefit is gone.

You could make up the difference, if you had to above $25,000 with a 401(k) loan but to minimize any withdrawal on the 401(k) you could take out an unsecured fixed rate loan for $25,000 from LendingClub.com. LendingClub is a peer-to-peer lending network with better than bank rates. If you act quickly, you could get that loan funded within a week or so and if you can post a comment below with the URL for your open loan request, I’ll help to fund it.

If a 401(k) loan was needed then Ann can go to work in Atlanta and repay the amount out of the 401(k) loan quickly.

Buying a house in Atlanta right now could make good sense. It appears that Atlanta is not sagging as much and the outlook is good for a better future as far as property values. This interactive map shows recent sales in the Atlanta area.

We Need Some Objective Advice and Creative Thinking.   Tom and Ann
Photo Credit: Kevin Mosley

Holding on to the Rhode Island house does not seem like an optimum solution. It may take a decade or more for prices to rebound and the entire time you will be pouring money down the drain just holding on trying to break even. But the biggest drawback, for me, to holding onto the Rhode Island house is that you will be distant landlord and that is not only a pain but without being able to keep a close eye on your valuable investment, in can easily need additional care and attention as tenants come and go.

The hard hurdle for Tom to overcome is the lost equity in the Rhode Island house with a fire sale price. But in reality, any equity is imaginary value. It does not matter what you paid for a home, that does not establish its value. A fair price is one where the buyer and the seller have a meeting of the minds and agree on a price.

Please update me on your progress by posting updates here in the comments section of your question. I’m very interested in how this works out for you.

Big Hug!

We Need Some Objective Advice and Creative Thinking.   Tom and Ann
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About Steve Rhode

Steve Rhode
Steve Rhode is the Get Out of Debt Guy and has been helping good people with bad debt problems since 1994. You can learn more about Steve, here.

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