Author Topic: Underwater house -- sell or rent out?  (Read 5555 times)

enginr77

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Underwater house -- sell or rent out?
« on: June 22, 2013, 01:16:19 PM »
Hi everyone,

I've been lurking on this forum for a couple months and read all the great advice you've shared.  Hopefully there's some more out there...  :-)

My partner and I are planning a cross-country move to another state next year for lifestyle reasons. Our condo is underwater, as are 75% of those in our area, and we're debating whether to rent it out or sell it at a loss.  We have a 30 yr loan at 4.125% and have $220k remaining.  A reasonable market value is $175k at most.   

We can rent it out for enough to cover the mortgage payment, taxes and association dues.  Any management costs or repairs would be a loss.  Right now, there is a very strong rental market.  Neighbors have had no problem renting out units within 15 days or less. 

Fortunately, we have about $150k outside our retirement accounts, so selling at a loss and moving on is a viable option.
 
Is it worth cutting our losses, or should we hold on to it and wait things out? 

SnackDog

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Re: Underwater house -- sell or rent out?
« Reply #1 on: June 22, 2013, 01:44:01 PM »
Rent is probably the better option. Your $50k difference, invested, could spin off $4000 per year to cover maintenance and fees. Is that enough?  Where is the condo market going - up or down? Will rental prices likely increase or decrease in your area? Can you deal with rental headaches, should there be any?

Khan

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Re: Underwater house -- sell or rent out?
« Reply #2 on: June 22, 2013, 03:02:19 PM »
Rent is probably the better option. Your $50k difference, invested, could spin off $4000 per year to cover maintenance and fees. Is that enough?  Where is the condo market going - up or down? Will rental prices likely increase or decrease in your area? Can you deal with rental headaches, should there be any?

To add onto this, is the market still deflated or has it reached a state of stability yet? Ignoring for a moment any speculation on house prices always rising, is the location and amenities of the condo still depressed by foreclosures and people still recovering from their own losses in the crash?

enginr77

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Re: Underwater house -- sell or rent out?
« Reply #3 on: June 23, 2013, 06:04:05 AM »
Thanks SnackDog and Khanjar. 

I don't see the condo market going up any in the next 3-5 years.  Our place is in a great location, but there are still a lot of foreclosures and short sales to come (imo).  Looking beyond that, I think $220k is a reasonable value in 10 years.  It's still significantly less than what we paid, but that's another story...

Rental prices are likely to go up or stay flat.  There have been many maintenance headaches with our unit, mostly related to the quality of construction.  We have worked through most and are managing the others.  We still have to make some repairs before moving and are prepared for that.  However, I have a lingering fear that something major will come up.  The idea of a long-term money pit is a concern. 

The other lingering thought is whether we should wait on the move until prices rise.  If we stay put for 10 years, we could actually reach FI and not be underwater.  You only live once, though, and that's an awfully long time to wait something out. 

atlantalee

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Re: Underwater house -- sell or rent out?
« Reply #4 on: June 23, 2013, 10:04:00 AM »
Whatever you do, don't touch your retirement accounts to come up with the difference if you sell.  My husband owns a townhouse and is in a similar situation (although we live only a few miles from the property).  He's been able to successfully rent it out for three years now and is planning to sell once he's paid the mortgage down to what he could get for it.  If you really want to get rid of it, I'd say rent it out for as long as it takes you to SAVE for the difference between what you owe and what you can sell it for.  Your retirement money is working hard for you and you'll be so happy you didn't touch it in 20 years.

Another Reader

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Re: Underwater house -- sell or rent out?
« Reply #5 on: June 23, 2013, 10:28:16 AM »
This is a tough call.  After selling expenses, you are probably looking at $60k you would have to bring to the table to make up the difference.  You are going to be cash flow negative, especially if you hire a property manager.  If you were to try to short sell it next year, you might not get the tax on the debt forgiven abated.  Qualifying for a short sale would be difficult with your assets anyway, despite the "hardship" of moving. 

What made these condos worth so much when you bought yours?  Has there been some fundamental change in the local economy that permanently reduced the number and quality of jobs in the area?  If the problem is not structural and the economy is recovering or is expected to recover, I would probably give renting a go.  Once you have been in your new location a year and you know how stable your situation is there, then I would revisit the situation.

Mint Chip

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Re: Underwater house -- sell or rent out?
« Reply #6 on: June 23, 2013, 06:59:02 PM »
Be careful.  A similar thing happened to us.  We had to relocate and tried to sell just before the market tanked.  We were never under water, but unfortunately the timing of our sale was unfortunate:  We were just a tad too late to the party (i.e., the bottom had started to fall out of the market), so our realtor recommended renting it out until the market stabilized.  This was in 2007.  Although the rent didn't cover all of the expenses, we thought it sounded like something we could swing for a few months until we sold the house (NOT a smart choice on our part), and didn't want to be like "those people" who walked away from their responsibilities... but the property kept losing value, eventually went under water, and after 5 years as reluctant landlords (the market never did recover), we sold it at a short sale.  (ouch) 

The laws are changing all the time, so the exemption that Another Reader mentioned may or may not be in effect next year, but know that, under current law, if you rent out the place for too long and eventually do decide to sell it at a loss, you will likely have to pay taxes on the amount of debt that is "forgiven" in the transaction, because the place will no longer qualify as your "primary residence" (I believe under current law, you won't be liable for the taxes on the forgiven debt if you short-sell your primary residence).

I wish that we had just brought the $40k or so to the table back then.  It would have spared us the trip down Landlord Lane and the pleasure of doing a short sale -- and the resulting hit to our credit. 

Are you trying to "buy time" by renting it out now, at a loss?  Would you ever consider living there again, or are you completely done with the place?  By renting it out now (at a loss!), you might be only postponing the inevitable, and in our case, the inevitable was waaaay more costly, in every way than what would have occurred had we gotten rid of the place, one way or another, at the outset...

enginr77

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Re: Underwater house -- sell or rent out?
« Reply #7 on: June 23, 2013, 08:14:31 PM »
I don't think we would qualify for a short sale.  We've been saving for a while to have enough liquid assets (mutual funds outside of the 401k and Roth) in case we needed cash for closing.  I'd much rather use the stash for early retirement, though.   

Yes, the only purpose of renting it out would be to buy time.  We aren't the handiest people, and being a landlord from miles away would be a challenge without a property management company.  We bought during the housing bubble and there weren't the economic fundamentals (wages, etc.) to support the prices.  There will be some recovery since there is decent economic growth here.  I just don't see prices going up any near-term. 

The idea of renting it out for a year or two and monitoring conditions has some appeal.  As ready as we are to move, I can't say for sure we won't come back.  Also, if things go badly in the new place, we'd have the extra cash on hand.  On the other hand, there are all sorts of landlord horror stories that we are aware of, so it's not pretty either way.   

Rural

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Re: Underwater house -- sell or rent out?
« Reply #8 on: June 24, 2013, 01:42:43 AM »
.  Also, if things go badly in the new place, we'd have the extra cash on hand. 

Not to be a downer, but if things go badly in the new place and you use the cash on hand, then you have no way to get out of the old place. You can't sell without the cash to bring to the table.

Having been in a similar situation, I'd first try to find a way to stay, and if that just isn't possible, or if the numbers work out better long-term if you move, I'd sell.

Mint Chip

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Re: Underwater house -- sell or rent out?
« Reply #9 on: June 24, 2013, 07:23:21 PM »
YES!  Agree 100% -- stay or sell!  Really wish we had done one or the other...

Sorry you're in such a tough spot.  Good luck.