As children, it is drilled into us that we are always supposed to honor our obligations; particularly those we’ve put into a contract. This helps to keep things running smoothly, but is not always optimal; sometimes it is logical to breach an agreement because performing on that agreement will cost you more than the penalties for not complying with your agreement. In contracts, this is known as a strategic breach. Strategic breaches happen in the housing market pretty regularly, and this article will discuss the details of a strategic breach in this context.
Strategic foreclosures are one example of a strategic breach in the context of Real Estate. These were far more common during 2008-2009 than today, but still happen infrequently enough. Ten years ago property values were in free fall, and the resale value was less than what was owed on the property itself; banks use the term strategic default to describe homeowners who were capable of paying their mortgage, but made a conscious choice not to – these people were making an economic decision to dump a bad investment and leave.
In theory, the logical time to make a strategic default is when your home value is far below your mortgage’s principle. Once you stop paying, the bank will foreclose on your home and you are out of a bad investment (the bank may come after you for the difference, but that debt can be discharged in bankruptcy if you qualify). Keep in mind that a strategic default will certainly hurt your credit and future opportunities for loans (this should be considered when calculating whether you are deep enough underwater to justify the tactic). Luckily, if you have assets and strategically chose to default, you will be able to repair your credit far more quickly than others.
While we are certainly not advocating strategic defaults, it is important to understand that it is an option. Particularly where there are some indicators that a market crash may be coming within the next 3 years.
At the Chernov Team we understand that knowledge is power, and knowledge of how to make strategic choices involving large capital obligations is powerful knowledge indeed. At the Chernov Team we know that whoever comes to the table most prepared leaves with the most, and the Chernov Team always leaves the table with the most.