So, you need to sell your house? Okay, maybe you don't NEED to sell, but maybe you want to sell. For whatever reason, you're selling - because of a job opportunity resulting in relocation, a divorce, a lifestyle change, your retiring or perhaps getting remarried. But, wait. What happens if you owe the bank more than what a buyer is willing to pay? Do you wait to sell? Why put your life on hold and be miserable?
To sell, do you NEED to get X number of dollars just to break even on what you owe the lender?
Of course if you sell below the loan amount, you'll have to pay your lender out of pocket at closing. It's called negative equity. Even if you aren't in a negative equity situation, you still need to pay the fees and expenses associated with selling your house. So, you're crunching the numbers and things just aren't adding up. It looks like you will not have proceeds left from the sale to pay the expenses associated with selling (transfer tax, broker & attorney fees). You might not even break even. Now what?
Go ahead, apply pressure. Just tell your Realtor you NEED X number of dollars - and, to work his or her magic. But, your Realtor is telling you that a buyer does not want to pay X number of dollars in this market. Don't shoot the messenger. Your Realtor will probably not be able to pull a rabbit out of a hat. It's the market, not your agent. You need to give consideration to what other homes are selling for, how many other properties you are competing with ...and, you have to understand that in order to sell - what you REALLY NEED is to price your house competitively.
What you NEED - might not be what a buyer is willing to pay.
This might seem a little insensitive, but a buyer really does not care what you OWE. So, now what do you do? Put your plans on hold? Postpone your life as you want it to be? Perhaps there is a solution. But, you have to WANT or NEED to sell bad enough. Just how motivated are you? Are you motivated enough to take a loss? What - you don't think you are in a position to do so? Think again.
Can you be creative?
Do you have other investments? Do you have money set aside in a savings account? Is there a retirement account you might be able to tap into early? Do you own stock? As a Realtor, I once had to be creative and daring enough to tell my unemployed single homeowner that he should probably sell the Mercedes that was sitting under cover in his carport because it was January and he only drove his winter rat during the snowy months to keep his trophy car in mint condition.
A few months ago, another seller who had his house on the market way too long, came to me and told me his strategy for dealing with his negative equity situation. There were no assets but he had great credit. He was financially strapped. The only way out of the mess was to sell at a loss and use his good credit to apply for a loan which would pay off the negative credit at closing. The monthly payment on a $25,000 loan was a small fraction of what he continued to pay each month for this vacant house. Don't have good credit to be able to implement this strategy? How about borrowing from a family member?
Can you borrow from Peter, to pay Paul?
Let's face it - by now, everybody has lost money in every market. Real estate was just the first market to be hit in this national economic disaster. But, those caught with negative equity who placed all their eggs in one basket (their personal residence) are feeling it the hardest. It's like being placed under house arrest as one blogger describes it. Judy Chapman, REALTOR® ~ Short Sales / Luxury & Lake Properties (Coldwell Banker Residential Real Estate) summed it up so eloquently when she wrote a post titled Homeowners Under House Arrest - it's a sad but true dilemma.
In Judy's post, broker Bryant Tutas Broker/REALTOR(R) Tutas Towne Realty, Inc explains from personal experience how sometimes there is money that can be paid at closing when one has to take a loss on sale. Yes, sometimes we have to cut our losses to be able to move on. Sometimes we even have to be creative. Unfortunately, not everybody is positioned financially to do this because the one and only investment is - THEIR HOUSE. No money in the bank, poor credit, no rich uncle.
Can you rent that property? Perhaps you might need to become a landlord to be able to move on.
When, there are no options the homeowner and the home are like a ball and chain. There's resentment and the house becomes an unhappy place.
While more and more people are finding that putting their eggs all in one basket is a very poor investment strategy, others are realizing that there are options. They've found solutions. And, those buying homes today are hopefully learning that it's okay to live modestly to be able to save wisely for the future. Perhaps it's a lesson learned too late for many. But, I sure hope most of us can learn from mistakes made in the past.
Nobody should feel like a prisoner in their own home?
Good informative post. Negative equity is going to cause the failure of every economic forcast coming from the "experts".
They just don't have a clue.
Are we spoiled? Why is it that we use a car for a year or more, take a loss and think nothing of it, but we use a house for 5 years or more and cry like babies if we have to take even a small percentage of the value as a loss?
This is a good post. More and more often there are stories about home owners being upside down in their mortgage. Sometimes the best option is to cut your loses and move on. Its hard for a lot of owners to think about, but at times it is the best option.
Thanks Lenn. Inventory will not move until more sellers start getting over psychological hurdles that are preventing them from reducing their prices. People need to tap into other financial resources when they can. The first thing people think is short sale. Not everybody qualifies because they have money in the bank, which is also dwindeling away.
Ron - Great analogy. I will use that one often.
Negative equity is causing a lot of home owners to sit tight when they normally would be taking advantage of some great bargains in the real estate market. These home owners would have been trading up in previous markets. My heart goes out to them. Each time I encounter a negative am situation it punches me in the gut.
Laurie - You should read Judy's post too. I intend on sharing that with clients and other agents from my office. We also have to understand that some people are not in a position to consider writing a check at closing. That's when I say RENT.
Hi Carol~ Fot those that have lived in their house for a few years and now need to sell, they need to consider what they would have had to pay had they rented and just move forward and get going with their plans.....we have had to sell a home for a lot less than we had in it, but we had to move forward and get on with our lives.
Great post. Way to stand up to your seller and tell them what they don't want to hear but need to hear.
Sally - Those that can't get over the psychological hurdle and don't really NEED to sell should wait if they can't lower their price to compete. Our market is saturated with homes that will never sell but yet sellers still want to showcase the properties in hopes that somebody foolish will come along.
Vickie - Good point, one seller explained that to me once. It came down to converting his mortgage to rent money and realized that he still would have had nothing had he not purchased and rented instead.
Leslie - The truth is, I actually offered to buy that car from him. With the way the market has spiraled out of control I am glad I didn't.
It's nice that you write about other options aside from the short sale. Right now the short sale seems to be the main game in town . . . at least in our town.
I read Judy Chapman post and was anxious to read your reply. You are both great! These were wonderful and informative posts. I started my real estate career in the 70's and interest rates were 21 %. I remember agents stating that we'd never see single digit again. Well, never say never! Here we are in a bad housing market and I believe we will have a recovery faster than they say. If the banks start to lend you will see homes fly off the shelf. The federal government should be seeing to it that the banks are lending the money they received. Right now buyers with good credit and steady jobs can't get a loan.
Melissa - It's important that we as Realtors do our pert to discourage the short sale route. I always highlight the pitfalls. Sellers need to be given options.
Sharon - I bought my first home around that time. I remember how things rebounded a few years later and I made money when I sold - after prices climbed. There's a silver lining for those who are buying.
Good post. Thanks for sharing and I hope you have a wonderful week ahead!
I don't believe that negative equity in a vehicle is in any way comparable to negative equity in real estate.
No more than real estate licensees are comparable to automobile sales persons.
One is quite related to mileage. The negative equity we're experiencing in real estate is related to the perfidy of the Wall Street gangs.
Carol, Folks these days automatically assume negative equity means they have to do a short sale. That's just not true. Agents need to understand this too. Always ask if they can bring money to closing first.
Thanks for the link love!!!
Carol,
I have a listing with a national relo company whose client purchased a home from the transferred owner. The appraisal was done over a year ago and then it was over priced. Steadily we have gotten then to reduce the price - sadly is is still woefully over priced.
I have brought them 3 qualified strong buyers in the last month. All the initial offers were 60K or more under asking. Two were countered to within 30K of asking. That is right about what it will appraise for in todays market and should have been accepted.
The client of the Relo company rejected the negotiated offers. The reason? We are taking too much of a loss we want to continue to market.
Unrealistic expectations surround us everywhere.
I have turned many clients into landlords. This waythey get a temporary short term fix while the market will hopefully get a little better and then we will end up with the listing and look like the hero (again, hopefully)!
Hi Carol -- Thoughtful post and very informative. I too think the experts are mostly clueless due to the decentralization of the industry.
Prisoner in the house? Welcome to Texas. We have had many prisoners here for years. Negative equity is a way of life for many when cycles go the other way. Options? Rent, take a loss, stick it out. It is never pretty but cash at closing however you can find it is a way out. I love these stories Carol, because it seems so new in other areas of the country but commonplace here.
This was a good post, great way to present to clients. Thanks.
Bonnie - I do a lot of relo and never had a relo company let a buyer walk away for over 30k. I once worked for a relo company where this would never have happened. Oh goodness, you have your work cut out for youb between the relo updates, and the hard to deal with client - and, the referral fee to boot!
Russell - I have been trying to convert some sellers to landlord. They have to see that I don't get paid nearly as much but I hope to at least earn their loyalty by acting in their best interest. Many don't look at it this way. many people are worried to convert their properties to rentals. I will usually tell them to check with an accountant and realize the tax shelter. It's not a bad option, especially for a seller who might be moving out of the are but still has roots and ties here.
Gary - Yes, I am well aware of the Texas history of being the upside down state - from my time working for a relo company and from stpries told to me by my Houston friends. I not only heard from them how bad people were upside down and of the job losses, I understood it was a great place to pick up jewelery at a pawn shop and get a good deal when the oil companies were all the news.
Thanks, Carol, for getting it. And for the links. And the kudos. You're great!
Plus, you got a Feature, too!
Carol, you brought up some great points. A buyer has never said, "How much does the seller need." And borrowing to pay off the negative is good advice. It would be something like having a loan after going to college. You definitely learned something.
Nice discussion on the issues and options of those with negative home equity. Our market will be in much better shape if people consider all of the possibilities rather than just walking away.
A great informative post to get people thinking creatively about what they might be able to do to sell a home with negative equity.
It's tough and getting tougher for some. There's really positive news in our area. The news headlines for tonight are about what I already know...homes are receiving multiple offers and prices are moving up locally.
I'm with Lenn in Comment #1 on this. The banks who hold the paper are going to have to figure out what they're going to do to keep this landslide of negative equity from toppling them.
Mike in Tucson
Mike & Lenn;
Great comments about what could happen here.
I see it all the time. . . people are waking up slowly to the fact that their home is no longer an investment but a liability. . can't enjoy a home like that..
Another option for sellers - is to get someone to assume their loan. I found out that my loan is assumable and that there are very little costs to assume -- a buyer would only have to come up with about $700 to assume it VS the thousands they would have to come up with in order to buy the home outright - which in my opinion makes it much more desireable!
As a short sale specialist in a market that has not lost value, than seems like a contradiction, but it isn't. East 100% financing, the American tendency to want everything immediately even if it means you are living to make interest payments, and not putting money back in a rainy day fund will keep us busy ion Oklahoma for the next three years. it isn't just the bubble to curse anymore. Your point about what is owed not meaning anything is huge. I believe that the greater fool theory has lost all its power. Why should my buyer bail you out of bad decisions.
What an idea - I've been involved in many short sales, and only once has a seller brought money to the table to get his house sold. It was a shock -
Barb Mihalik Coldwell Banker Sea Coast Realty, Wilmington, NC
This post and yesterday's about being imprisoned in your own home have been very timely and informative.
I just made a landlord out of a young investor who was looking to sell, too. He would have lost tens of thousands and was unable to bring a large sum to the closing table. Some sellers can't swallow a whale whole, they just need it cut up in small bites. It's our duty as professionals to tell the truth, not what people want to hear.
Great post Carol. Sellers need a reality check; "their house is not their piggy bank". They bought it, lived in it and enjoyed it and if they can't realize a profit in dollars from their home, they should recognize that they've been pulling equity out of their house in pleasure if not dollars and in savings of rent not paid. You've outlined some great options.
Renting your house out is a great option to keep from being "trapped" as long as you do not need to secure another mortgage. Most lenders, here anyway, will not give you another mortgage on a principal residence unless you have a boat load of equity in it.
This is a great post and good response to Judy's post. Thanks
Agreeing here with Edward Bachman relative to obtaining a mortgage on another residence. And, adding that if one is able to obtain a mortgage on their new principle residence it's fairly likely the interest rate will be higher. Another consideration is that insurance on the rental property will be higher. Plus, in Homestead states (like Florida) one would lose that status resulting in increased property taxes. I advise my clients to speak to their financial advisor to run the numbers when considering this option.
That is a positively good post! There are ways out although it does take some creativity.
Joan & Edward - Yes, I always recommend speaking to the other professionals in the process of making such a decision. I am currently working with one seller who is actually relocating and intends on only renting at the destination. In this case, i suggested she speak to an accountant and although an attorney is not required, I did suggest that she talk to one about drawing up a lease. Good point...wWe have to be careful to not overstep our boundaries.
Something to consider: in the case of a RELOCATING Seller- they MAY be eligible for an additional FHA loan...my understanding is that you CAN get a second FHA mortgage IF you being transferred for work (obviously out of state OR a substantial distance.)
Jeff Burnham-The WIZARD (Rosen & CO., Las Vegas, NV)
The steps being taken by the government to solve the problems is not really doing anything but making the banks richer and more powerful.
Can I just respond to Ron Tiller? How on earth can you compare a home to a car? First of all - automobile depreciation is normal and expected. It's a machine and machines like that have a life expectancy that a homes do not. Further, if you lose 40% in a $30,000 vehicle its not the same as losing 40% in a $500,000 home. There is one heck of a difference between $12,000 and $200,000.
I agree with the basic premise that sellers have to be more realistic and that they can't force buyers to purchase their home where they "need it" to be. But at the same time - comparing the loss in a home to the loss in a vehicle is really trivializing the seriousness of the wealth erosion that has occurred. Further, many REALTORS were touting homes as "investments" in the past - we can't turn around and say "Opps - sorry - you shouldn't have put so many eggs in one basket."
Disagree with this comment:
if one is able to obtain a mortgage on their new principle residence it's fairly likely the interest rate will be higher
Most likely rate will be lower, not higher.
Regarding Lenn's comment about the comparison of negative equity in a car with negative equity in a home:
When someone buys a car, they do not expect it to go up in value. They KNOW it is going to depreciate like mad, they accept that fact, and often the loan can not be paid down fast enough to ever have "equity" when you buy a car...especially a new car.
A very important difference is that for years, auto dealers have had the ability to "roll the negative" into the new loan, thus delaying the liability of paying that negative in cash.
The mortgage world has no escape route when the old house sells for $250,000 and the homeowner owes $300,000. So the homeowner has made his own escape clause:
He walks away. That's when every other house on the block goes down another $20k because some bank had to "dump" it.
As soon as everyone buying a house gets a grip on the fact they have exposure for negative equity (yep, just like when you buy a car) slowly......we will rearrange our finances, our economy, and our lives to accept this fact.
Because it is a fact.
Carol, So much good advice here. I like your take.
Many homeowners don't want to hear that they can't get always get what they want for their house, and that a buyer won't purchase a house for more than market value.
This is a great marketing in for us as real estate agents who want to do short sales. Thank you!!
Carol, you bring up some good points about looking at other available options such as renting out the property or coming up with cash to close.
However, I feel that you and most of the other commentators here are being much too simplistic.
In my market it is quite common for the negative equity gap to be over $100,000; sometimes much more than that! If an owner's credit or job situation is not good enough to qualify for a loan modification, there are not many options available.
Don't tell me that someone could rent out their property easily...a house worth $500k a couple of years ago will (probably) have a large enough loan on it to make it financially improbable for an owner to absorb so much negative cash flow. In addition, rent prices are softening; not increasing.
Creative Financing roared to life in the early 80's because there were so few financing options. These days, even creative financing may not work because of little-to-no-equity and the inability to take mortgages "subject to". I would love to help facilitate people's dreams of moving on or moving up...I just don't know if there are any more rabbits to pull out of my hat...
Hard times call for creative, yet responsible, measures. Even if you will pay a little more each month just to rent it out, it may be better in the long run.
This is a well written post. I think you packed a great deal of information into a realatively short article. The larger issue for me though is that the consumer, after treating their home like an ATM for a decade is now perplexed that the bill has arrived. If people have skewed their thinking along the lines of their home as a purely investment vehicle then they are missing a key point of home ownership; that is, having a place to live. If they have made risky investments in stocks, they can sell and take the loss; same with their home. If they don't want the loss, remain in the home and let the equity replenish, which we historically believe will be the case....Borrowing to pay off one bad investment is a risky investment in and of itself.
I have to agree with Sinone #48. I do a lot of property management as well as Short Sales. If the homeowner has not recieved a loan modification prior to renting it out, chances are the difference on what they will pay on their mortgage vs rental income is still far to great for most to bear. If your mortgage is $2000 a month, typically you wont be able to get more than $1400 that leaves a difference of $600 you still have to pay in addition to wherever you are living now. It would still make sense to just stay where you're at or do a Short Sale versus renting it out. I usually wont take on rentals in this case,because eventually the homeowner stops paying the mortgage all together and this leads to a foreclosure and angry tenants. This is a Major problem in my area!
I am a home owner who's husband has taken a job 400 miles away and we are trying to sell our home. He comes home every other weekend and it's really starting to get old. Our place is country property and small acreage and I'm killing myself keeping it up so it looks it's best. Prices in our area are still falling fast, we aren't upside down but at this rate it won't be long. As Judy pointed out in her blog I am truly feeling like I'm under house arrest at a hard labor camp. Is it worth it, I cry uncle!
NegEq is surely the other shoe yet to drop and will nip us in the no no before parting the dust on the road.
Simone & Diane - As one recent seller of mine pointed out, she would be in a better financial situation by carrying the difference on the rent vs, mortgage rather than having two full house payments. Also, there are some definate tax benefits to rental conversion and I think the difference between the rent vs. mortgage payment might even be considered a "passive loss" if the landlord can show that expenses exceed the rental income. I THINK. Perhaps somebody here might be able to clarify.
Carol,
I own a duplex and three houses and I am very pleased that I am not in the market to sell any right now. They are all renting fine and I live in one.
Hello Carol,
Really good post. From my perspective a lot of people (including Realtors) have a misunderstanding of what an investment entails. First and foremost and investment of any kind has risk. Secondly an investment is usually, but not always, made into an asset. An asset is something that generates wealth after accounting for all overhead and operating expenses, e.g. net profit from rental income after maintenance, debt service, taxes, etc. This is versus a liability which is something that not only does not generate wealth but actually incurs costs such as loan (hence it is a liabilty). Most people would say their home is an asset, but I disagree. Yes in quite a few cases real property does appreciate, but overall it costs the home owner in loan costs, maintenance, taxes, and more. The typical home owner does not generate wealth off their principle residence; it is not paying them to live at the location. Does this mean people should not buy a home? No it does not. A lot of people forget that buying a home is a responsibilty and yes it can produce a return through appreciation, but that does not make it an asset and there is always risk.
Carol I do take issue with your statement, "Is there a retirement account you might be able to tap into early?" I would personally never recommend anyone touch a retirement account regardless of how serious their situation. Retirement funds are for retirement.
Good post.
In Toronto, the market has fully recovered so this is not a problem.
There are still some outlyng areas which are problematic.
Brian
This is quite interesting. I recall a incident where my friend was selling his brand new home because he badly needed money for some family reasons. He had purchased this home, which was under litigation for some time, and he had taken home loan at a higher rate. At the time he was selling it, the potential buyer was ready to pay almost 300,000 rupees less than what my friend has actually invested! Forget the market appreciation!! This had happened only because of the litigation thing and my friend has suffered from "negative home equity." Now I understand this whole concept, so thanks for sharing it.
I love this post on selling short (not short sale!), Carol....I wish it was available as a re-blog! VERY well written!
Good point Sagar. This can even happen in India, or anywhere in the world. As the world becomes more connected, the property market has truly become global. What will happen when all those vacation homes in Dalmatia become a burden just like this post mentions? We need to let people know that real estate is not just a one way bet. You can loose money, we just need to do a better job of informing the public of this. I still have clients say they want to buy a home as an investment to live in. They are contradicting themselves right there. So hard to educate people that have been brainwashed by the media, advertising, and I hate to say it, by other Realtors to believe they can't loose money when buying a house.
Carol - This is the situation many have found themselves in. When this is the case, all option should be considered while keeping the emotions in check.
I suspect the option of bringing money to the closing must be rather painful.