How to dump a time share

Dear Liz: We bought a time share in Orlando, Fla. We tried to sell it through someone who turned out to be a con artist and lost $2,600 to him. Please help us unload this curse.

Answer: Your first stop should be EBay. Look on the auction site for completed sales of time shares in your development, using the exact name of the property and clicking on the “completed sales” option on the left side of the page. If there have been any sales, you may be able to sell yours on the site, although you’re likely to get at best only a fraction of what you’ve paid. You also could try listing it on sites such as the Timeshare Users Group at tug2.net, Bidshares.com or RedWeek.com.

If you don’t find any completed sales on EBay, however, your time share may have little or no value. You can try contacting the project’s developer to see if you can transfer the time share back. You’re unlikely to get any money from the developer, but you could at least get out from under maintenance and other fees. If you borrowed money to buy this time share, you’ll have to figure out a way to pay off the loan or risk a default that could trash your credit.

What you don’t want to do is pay anyone another big upfront fee. Con artists may insist that fat fees are necessary to “list” your property, or they may even promise that they have a buyer, but they’re only taking advantage of people who are desperate to get rid of money-sucking time shares.

A short sale isn’t a bailout

Dear Liz: It is appalling that the owner of the investment property discussed in your recent column is considering not taking responsibility for the debt that is owed. We shouldn’t be bailing out the people who chose to buy homes without considering that their income could change — and that property values could go down as well as up. Where is the bailout for the people who chose to make their investment in the stock market, on margin, and now have investments worth a lot less? You can choose to sell the stock at the loss, but you still owe what you borrowed.

Answer: You’re suggesting that everyone should have been able to predict today’s financial, real estate and unemployment situations. If that’s the case, your crystal ball is a lot better than anyone’s.

The first wave of foreclosures primarily affected people who never should have been approved for the mortgages they accepted, if sane lending standards were in place. If they should have known better, so too should their lenders. These days, however, many otherwise prudent people are getting caught in financial crunches because of high unemployment and the extraordinarily long duration of joblessness many face (the median duration of unemployment is currently over 20 weeks). And few of these homeowners are getting “bailed out.” Fewer than half a million homeowners have received permanent loan modifications through the government’s Home Affordable Modification Program.

The investor in question is considering trying to arrange a short sale of a rental property, in which the lender would accept the proceeds from the town home as settlement of the greater amount the investor owed. That’s not a bailout — there’s no government assistance involved. It’s a private contract renegotiation between two parties.

As for buying stocks on margin, remember that the investments in your brokerage account are collateral for any loan you get from a brokerage. If your account plunges in value, brokerages can and will sell equities in your account. “Bailouts” for investors buying on margin typically aren’t needed, because the brokerage usually makes sure it gets paid.

Short sales can trash your scores

Dear Liz: In 2005, I purchased a town home for my children, and they have since vacated the property. The town house is now worth 60% of what I owe, and I am considering a short sale. All my other obligations are current with no late payments in years. My credit scores are over 800 and my only other debt is a car payment. After a short sale, what kind of hit can I expect on my credit score, and about what would be the recovery time for my credit score?

Answer: The creators of the leading FICO score haven’t revealed enough about how the formula works to predict precisely how a short sale would affect your scores. But the company has said the affects of a short sale are similar to that of a foreclosure, which would cause someone with a 780 score on the 300-to-850 FICO scale to lose 140 to 160 points. People with higher scores tend to lose more points to a black mark than people with lower scores, so you can pretty much assume that your scores will drop from excellent to near-subprime territory for a while.

Exactly how long your score will take to recover is another mystery, although you’ll start to see gradual improvements if you handle your other credit accounts responsibly. Your scores could climb back into “good” territory (over 700) within a couple of years, but you may not regain your lofty peak until the short sale falls off your credit reports in seven years.

You also should be cautious about any agreement you sign with your lender. Some short sale agreements don’t address what happens to the unpaid debt, while others specifically keep you on the hook for any deficiency balance (the difference between what you owe and the price the home fetches). Ideally, you would want this debt to be forgiven (although you may owe taxes on the forgiven debt). Otherwise, the lender could sue you and cause further financial and credit score problems.

If a short sale is indeed your best option — you can’t rent the place for what it costs you to own it, and simply wait for prices to rebound — you’d be smart to get experienced legal help.

Retirement savings should take priority over paying down mortgage

Dear Liz: This is regarding the couple in good financial shape who asked if they should save more for retirement or focus on paying down their mortgage. I suggest you recommend that 60-year-olds pay off their mortgage under any circumstances. They can afford to miss out on investment income. They can’t afford to be stuck with a mortgage. I’ve read some sad testaments to this. To those telling you how many more years they plan to continue working, they should take into consideration that they may not be allowed to continue working.

Answer: It’s true that many people are forced to retire earlier than planned, but that in itself isn’t a reason to prioritize paying down a low-rate, potentially tax-deductible mortgage over saving more for retirement.

The two people in question were 50 and planning to retire in 10 years when they turned 60. They had no credit card debt or other loans except for a 15-year mortgage at 4.5%. If they’re in the 25% federal tax bracket and itemize their deductions, that would be an effective rate of just 3.4%. In any case, it’s a pretty cheap loan and one that would be paid off within a few years of their retirement. They almost certainly would be far better off taking advantage of opportunities to put more money into 401(k) accounts and Roth IRAs.

Focusing on paying down a mortgage may seem like the smart choice because it saves on interest, but it can leave people poorer in the long run if they’re ignoring opportunities to get retirement account matches, tax breaks and better returns on their money.

Since everyone’s situation is different, though, they’d be smart to find a fee-only financial planner to offer personalized advice.

Save for retirement before you pay down a mortgage

Dear Liz: My husband and I are fortunate to be in relatively good financial shape. We both plan to retire in 10 years when we turn 60. We have zero credit card debt and no loans except our mortgage, which is at 4.5% for 15 years. With any additional funds should we max out our 401(k) contributions, contribute to Roth IRAs or pay down the mortgage?

Answer: Generally, you’ll want to make sure you’re on track for retirement before paying down a mortgage. Your priority usually should be contributing at least enough to your 401(k)s to get the full company match, and then contributing the maximum to Roth IRAs. This puts money in retirement “buckets” that get different tax treatment — withdrawals from 401(k)s are typically taxable as income, while Roth IRA withdrawals typically are tax free — and that allows you to have more control over your tax bill in retirement.

If you have additional money to contribute to your goals, you’ll have to decide whether to pay down your mortgage, put more into your 401(k) or contribute to a taxable account earmarked for retirement. (This latter option would give you yet another tax bucket — one where you can qualify for capital gains tax rates.)

It’s good to be mortgage-free when you stop work, but if your retirement savings aren’t adequate, you should be bolstering them now. Ten years from retirement is a good time to consult with a fee-only financial planner to discuss your individual situation, reality-test your retirement plans and fine-tune your investments.