The lender has filed a Notice of Default on my condo. I knew this was coming. Ever since I sold the condo in summer 2005 at the peak to an investor who rented it back to me, I suspected I’d be able to buy it back for less than what I paid for it. I found out when the mortgage company sent a letter that said “You Will Lose This House If You Do Not Take Part In the Mortgage Reinstatment Program” which was delivered to me instead of the new owner.

The investor paid $352,000 for the 920 sq ft condo or $382/sqft, (and I paid 3.25% buyers agent commission to her niece – I sold it FSBO or For-Sale-By-Owner, so there was no sellers agent commission). The first lender filed an NOD for $283,000. The seller has been pocking my rent and not paying the mortgage since March 2008. Not applying the rents to the mortgages is called rent skimming, and is only illegal in California during the first year of acquiring a property. Unless the sellers cures the default, the house will be foreclosed upon and the second mortgage of about $35,000 will be wiped out.

Current comparable sales are about $225,000, which represent a 36% drop in prices. I wouldn’t mind buying it myself, but for a few issues.

1. I’m moving to Los Angeles and will be busy with my MBA. Do I want to get involved with yet another investment property.

2. I wouldn’t feel comfortable paying more than $150,000 for it. I think prices may drop another 30% from here, maybe more – who knows.

3. Its taking lenders up to a year to list REO properties that didn’t sell at the auctions. So working with the lender can be painful while I’m in LA.

I called up the mortgage servicing company that sent the letter and the guy on the line said I should stop paying my rent and save my money instead. This is blatantly wrong information. A rental contract is completely separate from a mortgage and there is no correlation between the two. I really doubt my landlord would take me the court, but he has the legal right to do so and an eviction/judgment on my credit history would make it a lot more difficult to find a rental in the future.

So what would you do?

1. Stop paying the rent and continue to live there.

2. Stop paying the rent and move out.

3. Continue to keep paying the rent as if nothing happened.