Housing Advice

[MusicMom]

Sorry for the length...

I need advice from a group of people I trust more than well-meaning real estate agents and in-laws.  For 5 years, DH has been doing the very un-mustachian thing of driving to his teaching job 35 minutes down the highway.  We desperately want to move to the community that DH works in (where we also have family.)  His job is very secure.

We bought this house in 2008 for 120K.  Mortgage is at 108K, just refinanced to 3.75%.  Payments are $900/month.  We've had the house on the market for 11 months, first with an incompetent agent, and now FSBO.  We've been operating on the belief that, with market conditions, we'll probably just break even if we sell.  Now, we've been advised by several top-notch realtors that we'll probably have to bring a good amount of our own money to the table in order to sell the house.  We only have 20K in savings, but we'd be willing to sell at a loss in order to get to a better place going forward.

We are looking to buy a fixer-upper in the neighborhood of $50-80K.  In theory, we could use our savings to put down a substantial down-payment and have a new mortgage around $300-400.  The question is what to do with the old house.  Do we empty out our savings in order to cover the difference in selling at a loss, then rent while we save a new down-payment?  Do we try a rent-to-own situation, which several potential lessees have asked us about?  Do we rent out the house and take the risks inherent in that situation? 

We have no CC debt or car payments, and $375/month in student loans.  We bring in about $3000/month.  We couldn't afford to cover two mortgages for very long, especially if we tap out our savings getting settled in a new house.

What would you do, oh distinguished mustachians?

[Another Reader]

What is the realistic market rent for this property?

What do comparable sales in the neighborhood indicate the house is worth?  How much money do the agents say you will have to bring to the table?

In your shoes, I would not do a rent to own.  It's too risky.  What if the tenant/optionee lost their job and you had to evict?  I would consider both renting and selling, depending on the realistic numbers.  If neither made sense, I would suck it up and stay where I am for now.

[MusicMom]

What do comparable sales in the neighborhood indicate the house is worth?  How much money do the agents say you will have to bring to the table?

Part of our problem is we haven't been able to get any comps for this property due to the neighborhood.  The consensus is we would have sold quickly if we were in a "traditional" subdivision where the houses are all the same style.  But our neighborhood is mixed and on the "wrong side of the river," though it is quiet and very safe.

We've been tempted by rent to own because it might give someone the chance to fall in love with the area over time, as we have, instead of dismissing it off the bat.  But the risk you mentioned is the exact one that would keep me awake at night.

[Another Reader]

What is the basis of the "top notch" agents' opinions of value?  Do they look at the same comparable sales?  Are their opinions consistent?  What about market rent?  Are there similar rentals in your neighborhood? 

One thing that often happens is people list their properties for sale with an agent that tells them the price they want to hear.  When the house does not sell, they blame the agent.  A true "top notch" agent is not going to waste a lot of time with an unrealistic seller.  If the seller wants a lot more than the house is worth, they won't even take the listing.  The fact the house has been on the market for 11 months means it is overpriced.

Why don't you make a realistic appraisal of your house, based on the information the agents have given you?  Look at rentals in your area to get an idea of what you would get if you rented the place out.  Once you have the accurate numbers, then you can make a well-reasoned decision about what to do.

[totoro]

Does the market show signs of recovery in your area?  Is it in good condition? 

I once chose to suite a home and rent it out for a small overall profit rather than sell at a loss.  Long-term your tenants will pay off your mortgage and the home will likely appreciate.  I was okay with waiting it out.  This only works for me if I am net cash flow positive which is why the suite was required.

As far as lease to own goes, I think this is worth investigating. I'm in Canada so things may not be the same but you can evict a tenant here, although it takes some time.  Lease to own requires a down payment of 1-5% of the purchase price and larger monthly payments than rent alone.  That provides you with some security if you need to go through an eviction process as you get to keep these additional fees. 

[MusicMom]

Thanks for the advice, Another Reader.  We may go ahead with a professional appraisal and will investigate what the market rate for rent would be.  We had honestly dismissed that option from the beginning and are only now considering it.

What are the general feelings about taking a big hit, financially, in order to get yourself in a place where you will get ahead in the long run?  (And by long run, we calculate it will only take us a few years to save up again even if we end up having to completely eliminate our life savings {sob} to get out of this mess).  This could apply to other situations, too, like starting up a new business.  How do you gauge your sense of your own risk tolerance?

[Another Reader]

I'm sorry, I guess I was not clear about making an appraisal.  What I meant to say is that you should look at the comparable information and analysis supplied by the agents that are known for getting the job done.  Did they use sales from your area and adjust for condition and size?  Did they use sales from other areas and adjust for location?  Did they consider the same sales or did they look at different sales?  These folks have all told you your house is worth less than what it was listed for.  After you look at the sales they supplied, do you agree with their estimated selling prices? 

The same thing is true for market rent.  You have to investigate what other homes in your neighborhood rent for.  You want to call on for rent signs, look on-line, and call a couple of property management companies for their opinions.

At the end of your research and analysis, you should have a good idea what the house would bring in a sale and what it would bring in rent.  With that information, you can make a better decision.  For example, if the house would only sell for $90,000, but it would rent for $1,200, it might make sense to rent it out and move.  You could come reasonably close to break even if you are willing to be a landlord.  However, if it would only rent for $700, then you might want to tough it out until the market recovers.  You will lose several hundred dollars a month on that deal.

The problem with lease-to-own, especially in a marginal neighborhood, is the quality of the people that want to do this.  These deals work well in desirable neighborhoods with folks that would be well qualified except for a recent short sale or bankruptcy from medical bills or other unavoidable circumstances.  These people have stable jobs and a desire to own again.  You don't get many of these people in marginal areas. 

I don't think it is necessarily wrong to take a hit to sell the house and move on, but I would want to know all my options and the likely outcomes before I made that decision.

[chucklesmcgee]

With the amount of risk you'd be taking on I couldn't see it as a reasonable gamble. There's so much to deal with in terms of unexpected cost and repairs that I think you could probably get a much better return investing it in the stock market.

[Steve Ainslie]

We bought in 2008 and took a 50k loss to sell when we relocated for my job. What helped me deal with it was that I had already accepted the "loss" of 50k in equity because of the housing market collapse in Florida. It was just a question of whether I wanted to take the hit now and move on or try to manage 2 mortgages and deal with being an out of state landlord until the home value appreciated. Reading about MMMs big mistake with his investment home helped me. He recovered and so can we. Six months later I have no regrets. We priced our house according to the market. It sold in 6 weeks and we have moved on. I told our selling agent to give me a price that would sell the house quickly and not to worry about what I needed to make on the sale.