Choose the form of the (real estate / finance) Destructor!
April 12, 2010 10:35 AM Subscribe
Our house in the Chicago suburbs has been on the market for a year, and isn't selling. Should we drop the price till it hurts even more, or try to rent it out and hope the housing market doesn't fall even more?
Last year, we bought a house on the east coast after I got what sounded like a great new job. Overly optimistic, my family bought a new house before we sold our old house, which we now realize was a huge mistake. Our Chicago suburb house has been on the market for over a year. We have it staged and have received comments that it "shows well" but that our price is too high.
Unfortunately for us, we purchased near the height of the market. Our current listing price is $90,000 under our own purchase price, so we are looking at having to bring significant amounts of cash to the closing table if the house sells. We have enough savings that this won't totally wipe us out, but it comes uncomfortably close.
For the past year, we've been able to pay both mortgages without cutting into our savings, but my "new great job" is not that stable any more. My salary was just cut and I may be laid off soon. Further cuts to our listing price would likely require us to have almost no cushion left on our savings. We aren't in financial distress -- yet. But I am really reluctant to drop the price on our house so far that our savings would be totally wiped out.
I think our alternative is to try to find a renter which would slow down the bleeding a little bit. (Looking at Craigslist, comparable houses are renting out at around $1,500 per month below our costs.) It seems by renting the house out, the benefits are better short-term liquidity and postponing a painful cash outlay, versus bearing the risk that the suburban Chicago housing market will drop further.
(I have prior experience with being a residential landlord.)
Is the greater liquidity / postponing the inevitable worth it? Or are there any other options available to us?
Last year, we bought a house on the east coast after I got what sounded like a great new job. Overly optimistic, my family bought a new house before we sold our old house, which we now realize was a huge mistake. Our Chicago suburb house has been on the market for over a year. We have it staged and have received comments that it "shows well" but that our price is too high.
Unfortunately for us, we purchased near the height of the market. Our current listing price is $90,000 under our own purchase price, so we are looking at having to bring significant amounts of cash to the closing table if the house sells. We have enough savings that this won't totally wipe us out, but it comes uncomfortably close.
For the past year, we've been able to pay both mortgages without cutting into our savings, but my "new great job" is not that stable any more. My salary was just cut and I may be laid off soon. Further cuts to our listing price would likely require us to have almost no cushion left on our savings. We aren't in financial distress -- yet. But I am really reluctant to drop the price on our house so far that our savings would be totally wiped out.
I think our alternative is to try to find a renter which would slow down the bleeding a little bit. (Looking at Craigslist, comparable houses are renting out at around $1,500 per month below our costs.) It seems by renting the house out, the benefits are better short-term liquidity and postponing a painful cash outlay, versus bearing the risk that the suburban Chicago housing market will drop further.
(I have prior experience with being a residential landlord.)
Is the greater liquidity / postponing the inevitable worth it? Or are there any other options available to us?
Is doing a short sale viable? That way, perhaps your savings wouldn't be wiped out.
posted by Happydaz at 10:47 AM on April 12, 2010
posted by Happydaz at 10:47 AM on April 12, 2010
Some friends of mine in a similar situation (had bought new house, old house not selling) had good luck last year forcing a short sale of their old house by not making mortgage payments; the bank quickly decided a short sale was a better choice than foreclosure, and they were able to unload the old house quite fast once they were able to price it lower.
They had some specific circumstances that might make this less appealing to you, for instance they are a lesbian couple, and the new house was in one partner's name and the old house in the other's, so the credit-rating hit was limited to just one of them, and they felt OK about that. But if you already own a home, and don't anticipate other major credit purchases in the next few years (like new cars), it might be better to ride out the hit to your credit than keep paying two mortgages, or risk your entire savings.
I have just shared absolutely everything I know on this topic, just so you know how little my ideas are worth.
posted by not that girl at 10:54 AM on April 12, 2010
They had some specific circumstances that might make this less appealing to you, for instance they are a lesbian couple, and the new house was in one partner's name and the old house in the other's, so the credit-rating hit was limited to just one of them, and they felt OK about that. But if you already own a home, and don't anticipate other major credit purchases in the next few years (like new cars), it might be better to ride out the hit to your credit than keep paying two mortgages, or risk your entire savings.
I have just shared absolutely everything I know on this topic, just so you know how little my ideas are worth.
posted by not that girl at 10:54 AM on April 12, 2010
Short sale? On a house? Who would finance the locate... let alone handle the future delivery. I'd be curious if this is possible as well.
You'll waste more money trying to figure out the best way to get out of your old house. You can try to time the market all day along, good luck.
IMHO it was a bad trade, you took a loss, move on. The environment's probably not going to get a whole lot better for a long time. And if it does get worse, it's likely to get a whole lot worse than in a positive environment. If we assign a 50/50 chance to each scenario, the expected value is still negative. That's how I'd think about it.
posted by teabag at 11:07 AM on April 12, 2010
You'll waste more money trying to figure out the best way to get out of your old house. You can try to time the market all day along, good luck.
IMHO it was a bad trade, you took a loss, move on. The environment's probably not going to get a whole lot better for a long time. And if it does get worse, it's likely to get a whole lot worse than in a positive environment. If we assign a 50/50 chance to each scenario, the expected value is still negative. That's how I'd think about it.
posted by teabag at 11:07 AM on April 12, 2010
Short sale? On a house? Who would finance the locate... let alone handle the future delivery.
The term "short sale" has a meaning in real estate that is distinct from its meaning in finance.
IMHO it was a bad trade, you took a loss, move on.
In finance terms, it was a "trade" made almost entirely on margin. The lender expects to be paid back, unless they will agree to what real estate experts refer to as a "short sale". It's not so easy to just take your losses when there's another interested party who fronted all of the money for the "investment". Real estate is not equity investing.
posted by mr_roboto at 11:30 AM on April 12, 2010 [1 favorite]
The term "short sale" has a meaning in real estate that is distinct from its meaning in finance.
IMHO it was a bad trade, you took a loss, move on.
In finance terms, it was a "trade" made almost entirely on margin. The lender expects to be paid back, unless they will agree to what real estate experts refer to as a "short sale". It's not so easy to just take your losses when there's another interested party who fronted all of the money for the "investment". Real estate is not equity investing.
posted by mr_roboto at 11:30 AM on April 12, 2010 [1 favorite]
Long shot and not particularly inspiring, but if you're about to lose your not-so-great job, and your current house would easier to sell than your old one, would it make sense to start your next job search in Chicago instead of your current local area?
posted by jon1270 at 11:46 AM on April 12, 2010 [1 favorite]
posted by jon1270 at 11:46 AM on April 12, 2010 [1 favorite]
Perhaps research Deed In Lieu . If your contract with the bank allows for it, you essentially give them the house (and thus the downpayment and payments since evaporate), but you don't need to bring money to the table, and you're no longer on the hook for it. If you've refinanced or have multiple loans this likely won't be an option.
If you're facing bringing 90K to the table (excluding sunk funds such as downpayment and previous payments) to sell your house, you might want to seriously consider how badly it will effect your credit to just stop paying and tell the banks to forclose assuming they won't do deed in lieu.
If you plan to go the renter route, you'll likely need to get a management company/service involved because of the distance, which will mean less funds go to you. What's the vacancy rate for rentals in your area? It might be 5-10 years until inflation adjusted prices are similar to when you bought; will the slower bleeding from renting allow you to go 10 years? How about 15? Have prices in Japan made it worth having bought and held near the top over 20 years?
Consider how much interest/principal will be paid during that time (I.E. the selling price isn't the same, but you walk away from the table with money). Consider what else you could do with the income stream for the 2nd mortgage. Know that no one can know; you could walk away from the mortgage, get forclosed, and magically next year, comps could be 90K over what you originally bought for. It's unlikely, but possible. Accept that you're making a decision based upon large unknowns.
posted by nobeagle at 12:16 PM on April 12, 2010
If you're facing bringing 90K to the table (excluding sunk funds such as downpayment and previous payments) to sell your house, you might want to seriously consider how badly it will effect your credit to just stop paying and tell the banks to forclose assuming they won't do deed in lieu.
If you plan to go the renter route, you'll likely need to get a management company/service involved because of the distance, which will mean less funds go to you. What's the vacancy rate for rentals in your area? It might be 5-10 years until inflation adjusted prices are similar to when you bought; will the slower bleeding from renting allow you to go 10 years? How about 15? Have prices in Japan made it worth having bought and held near the top over 20 years?
Consider how much interest/principal will be paid during that time (I.E. the selling price isn't the same, but you walk away from the table with money). Consider what else you could do with the income stream for the 2nd mortgage. Know that no one can know; you could walk away from the mortgage, get forclosed, and magically next year, comps could be 90K over what you originally bought for. It's unlikely, but possible. Accept that you're making a decision based upon large unknowns.
posted by nobeagle at 12:16 PM on April 12, 2010
Once there is a renter in there, it will no longer show well. Part of what makes it a good listing is that it's staged yet empty and clean. If you go with renting, there will have to be some point in the future at which you will have to stop renting and re-stage the house for sale. Your only task is to predict whether the market will recover, on average, faster or slower than (your monthly loss to expenses-rental income). Also, although you have experience as a landlord, being a long-distance landlord is something else entirely.
A situation that's not what you were actually asking about: if you lost your east-coast job, might the east-coast house sell more easily (and closer to cost), allowing you to cut expenses by moving back to the Chicago house?
posted by aimedwander at 1:06 PM on April 12, 2010
A situation that's not what you were actually asking about: if you lost your east-coast job, might the east-coast house sell more easily (and closer to cost), allowing you to cut expenses by moving back to the Chicago house?
posted by aimedwander at 1:06 PM on April 12, 2010
What I have seen work in our area is a price dropping plan that drops a set amount every 30 days. Start at X. 30 days later X - $ repeat -$ each month until it sells. It seems to get people's attention.
posted by R. Mutt at 1:26 PM on April 12, 2010
posted by R. Mutt at 1:26 PM on April 12, 2010
Can't offer much advice other than trying to set the price right.
I can't speak for the Chicago suburbs, but single family homes in Chicago, in my experience, are selling well below most recent comps. For many houses I am interested in, that is around 2003 prices, which, for places that sell, is usually 7-10% off of the listing price.
posted by iknowizbirfmark at 1:53 PM on April 12, 2010
I can't speak for the Chicago suburbs, but single family homes in Chicago, in my experience, are selling well below most recent comps. For many houses I am interested in, that is around 2003 prices, which, for places that sell, is usually 7-10% off of the listing price.
posted by iknowizbirfmark at 1:53 PM on April 12, 2010
Consult a lawyer regarding your options on short sale, deed-in-lieu, or simply stopping payments.
I don't know if Chicago/Illinois is a recourse or non-recourse state, or if you have refinanced/taken a HELOC on the property. If the mortgage is now considered recourse, then the lender can pursue claims against you beyond taking back the property itself.
You need a lawyer to give you an informed decision on these aspects and also possible tax consequences.
If it helps at all, even if you just stop paying you're going to have a lot of company - there's a lot of people defaulting on mortgages currently and more to come.
posted by de void at 2:14 PM on April 12, 2010
I don't know if Chicago/Illinois is a recourse or non-recourse state, or if you have refinanced/taken a HELOC on the property. If the mortgage is now considered recourse, then the lender can pursue claims against you beyond taking back the property itself.
You need a lawyer to give you an informed decision on these aspects and also possible tax consequences.
If it helps at all, even if you just stop paying you're going to have a lot of company - there's a lot of people defaulting on mortgages currently and more to come.
posted by de void at 2:14 PM on April 12, 2010
Mod note: From the OP:
Hi, I'm the anon OP. Thank you very much for everyone's comments.posted by jessamyn (staff) at 10:12 AM on April 13, 2010
I am not in financial distress (yet), and any disclosures would show that I have a good-paying job (for now) and over $100k in the bank. My current income allows me to cover both mortgages plus our living expenses, with some left over for savings. So short sales or a deed-in-lieu is not really an option, because those require proof of financial distress (or at least, that was my impression after researching them previously). (Illinois is a recourse state.)
My financial future is uncertain, but not uncertain enough that I can prove actual distress (yet)
All that being said then, it sounds like you're main concern is near term financial security. That can be better addressed by getting a renter in your place than by selling and being even less financially secure.
posted by garlic at 10:16 AM on April 14, 2010
posted by garlic at 10:16 AM on April 14, 2010
I'm not a lawyer, particularly not an IL lawyer, but http://www.foreclosure.com/statelaw_IL.html and a few other links I noticed seem to say that deed in lieu, if accepted, doesn't result in recourse.
That said, it looks like banks have the option to not accept the offer, and it seems like the envirnonment is such that banks would rather have a performing loan instead of looking at writing down the assets. But it might be worth more investigation to see if there's any harm in asking.
And looking back; if you've got about 100k in savings, really the thing to do is consult an expert in IL real estate for the best way to not lose your shirts over this. And hopefully followup with your choices and how it worked.
posted by nobeagle at 11:26 AM on April 15, 2010
That said, it looks like banks have the option to not accept the offer, and it seems like the envirnonment is such that banks would rather have a performing loan instead of looking at writing down the assets. But it might be worth more investigation to see if there's any harm in asking.
And looking back; if you've got about 100k in savings, really the thing to do is consult an expert in IL real estate for the best way to not lose your shirts over this. And hopefully followup with your choices and how it worked.
posted by nobeagle at 11:26 AM on April 15, 2010
This thread is closed to new comments.
posted by dfriedman at 10:40 AM on April 12, 2010