Author Topic: Underwater on my Alligator Condo  (Read 3472 times)

jetsamflotsam

  • 5 O'Clock Shadow
  • *
  • Posts: 7
Underwater on my Alligator Condo
« on: August 05, 2016, 12:32:37 PM »
Hi MMM community, I was hoping for some advice/perspective on my condo situation - bought a condo two years ago for $295k, moved out of it a year ago and put it on the market.  It didn't sell, and with the exception of the last two months where I rented it on Airbnb (temporary bandaid solution), it's been gobbling up $2100 every month.  In speaking to several realtors, the market here for condos is very slow, and it was recommended that if I was still interested in selling it, I'd have to list it at $259k, and be prepared for offers closer to $245k.  The problem is that I owe $265k on it.
Should I:
a) relist at $259k, and be prepared to lose $20k in exchange for being free of the place (note that I asked JLCollins for advice and he said to sell, even if I lost money on it.  I'm prepared to do this, but $20k is still a lot of money.);
b) I may be able to refinance to 30yrs and rent it, just breaking even.  Maybe in a year the market will be better?
c) is there another option?
Appreciate your input - as much as I want to be clear of the condo, I want to make sure I'm doing my homework before doing anything rash.  Keeping it long term isn't an option, as I want to divert the $2100/mth to Vanguard ETFs instead.
Thanks!

Cassie

  • Walrus Stache
  • *******
  • Posts: 5771
Re: Underwater on my Alligator Condo
« Reply #1 on: August 05, 2016, 12:35:44 PM »
Why not live in it until the market goes back up?

jetsamflotsam

  • 5 O'Clock Shadow
  • *
  • Posts: 7
Re: Underwater on my Alligator Condo
« Reply #2 on: August 05, 2016, 12:37:58 PM »
My girlfriend and I live at her place, since it allows us to bike/walk to work (mine's too far away), and it's a 2 bedroom (mine's only a 1 bedroom).  Her rent is only $1500/mth, so once my place either pays for itself through rent, or is sold, my housing expenses will go down drastically as we split her rent.
« Last Edit: August 05, 2016, 12:43:59 PM by jetsamflotsam »

Another Reader

  • Walrus Stache
  • *******
  • Posts: 5104
Re: Underwater on my Alligator Condo
« Reply #3 on: August 05, 2016, 12:45:44 PM »
Don't forget the selling costs.  You are probably going to have to come up with closer to $35k to get out from under this one.  You could try FSBO to save on the agent fees.

Have you tried to rent it? If it looks like the market is coming back, you could significantly reduce your carrying costs while you wait.  Or you could keep Airbinb going if that's been successful.

Can you move back in?  Are you still in the area?   If not, an out of the area property can create a lot of problems.  Property management might help if you rent it and live far away.

Cassie

  • Walrus Stache
  • *******
  • Posts: 5771
Re: Underwater on my Alligator Condo
« Reply #4 on: August 05, 2016, 12:51:25 PM »
If you are losing $ on it monthly then it makes more sense to rip off the bandage and feel the pain all at once by selling at a loss. I have personally been there so not saying this lightly.  If rent won't come close to the mortgage then it makes no sense to keep it.

sirdoug007

  • Pencil Stache
  • ****
  • Posts: 587
  • Age: 39
  • Location: Houston, TX
Re: Underwater on my Alligator Condo
« Reply #5 on: August 05, 2016, 01:48:35 PM »
JLCollins knows what he is talking about.  Sell it and stop the bleeding. 

It may take many, many years before you can sell at break even and you are dumping over $24k/year into it.

Another Reader

  • Walrus Stache
  • *******
  • Posts: 5104
Re: Underwater on my Alligator Condo
« Reply #6 on: August 05, 2016, 06:48:16 PM »
JL Collins did not live in the SF Bay Area. 

I think the OP needs to do more homework before making a decision.  How much will it cost him if he lists the property and sells it for $245k?  What is the resale market like - is it strengthening or weakening?  Are jobs being created in the area or are other positive things happening that would increase demand and prices?  What is market rent for the property?  What's the HOA condition?  Are their large assessments looming?  How much can he make on Airbnb and how much of his time has to be spent on this?

My inclination is to sell, but it's going to cost a lot of cash to do so.  $20k to pay off the mortgage plus concessions and selling expenses.  Could be as much as $40k.  If the OP can't come up with that, an alternative must be found.

jetsamflotsam

  • 5 O'Clock Shadow
  • *
  • Posts: 7
Re: Underwater on my Alligator Condo
« Reply #7 on: August 05, 2016, 11:49:52 PM »
Thanks for the great comments everyone - much appreciated!
It's a renter's market here in Edmonton, Alberta now.  Low oil prices have meant people are moving away to find work, and vacancy rates have been increasing.  Landlords are getting competitive, offering incentives such as free tvs, cable, etc. just to find tenants.  A search of the local rental sites suggests I might be able to get $1600ish for my place, and I think I could refinance my mortgage to get the carrying cost of the condo down close to this number.  Breaking even (if renting it out) could allow me to save up what I'd normally be shelling out in mortgage,  taxes, condo fees/hoa - I could then use this to help cover the shortfall when selling at the end of the hypothetical tenant's 6 or 12 month lease.  Worse case, it softens the blow when I sell and the economy's no better, or if I'm lucky, housing prices might be back up and I might not have to sell at a loss at all.
You're right, Another Reader, I have much homework left to do :)  A great learning experience, whatever the outcome.
I welcome your thoughts...

backyardfeast

  • Pencil Stache
  • ****
  • Posts: 899
  • Location: Vancouver Island, BC
    • My journal
Re: Underwater on my Alligator Condo
« Reply #8 on: August 06, 2016, 02:07:26 PM »
I think if you can refinance and rent for a while comfortably, that might be best.  But from another canuk, I don't think we're going to see oil prices go up much and save the AB economy any time soon.  If you want the freedom within the next year or two, tearing off the bandaid now might be better.  If you can wait it out 5+ years renting, then you might get the recovery you're looking for.  In the meantime, it's hard to know if things will get worse before they get better.  The job numbers that just came out suggest we may not have bottomed out yet.

Remember that the Edmonton market shot up REALLY fast between 2004-2014, with not much of a bump after the crash in 2008/9, so there was a long way to fall and there may well be a pretty long, slow climb back up...

OTOH, at least Edmonton itself is reasonably diversified and may recover a little more quickly than the rest of the province. :)

retiringearly

  • Bristles
  • ***
  • Posts: 341
Re: Underwater on my Alligator Condo
« Reply #9 on: August 14, 2016, 01:53:32 PM »
I would give some serious thought to refinancing if you can get close to a break even by renting it out.

I wish I could say I think oil prices will rebound significantly, but I can't see that happening due to fracking. 

jetsamflotsam

  • 5 O'Clock Shadow
  • *
  • Posts: 7
Re: Underwater on my Alligator Condo
« Reply #10 on: August 15, 2016, 12:51:32 PM »
Thanks for the comments!  I've attempted to put some numbers to my two options (rent vs. sell).  Renting out my place seems like it might be a little better, however there are still risks:

Option 1 - Sell condo: my estimates suggest I might be on the hook for $30,000 (total cost of selling).  I would have to put this on my LOC at 6% interest, and since it would be a Debt Emergency, I would throw everything I can at it, paying it off in 10 months.
Pros: free of condo in 10 months, don't have to become a temporary or longterm landlord.  Can move on with my life, however if my girlfriend and I want to buy a place, I'll have to save up my share of the DP, which will take another year or two (if we keep renting, I'll just invest)
Cons: big fat cost to sell, in addition to loss of initial DP and monthly mortgage payments since purchase date.  Won't be able to start saving for another 10 months. 

Option 2 - Refinance and rent out condo: allowing for 2 months of vacancy per year, I would end up subsidizing the total monthly cost of my condo by approx. $500/mth ($6000/yr)*. 
Pros: $500/mth is easier to handle than $30,000 debt all at once if I sell.  If the market goes up in a year or two, I might be able to break even on sale.  Also allows me to save $ each month for investments, or DP on a place better suited for my girlfriend and me.  As principal decreases, rent will eventually reduce subsidized amount (if I have to rent it out longterm).  Building is 6 yrs old with a decent reserve fund, so no huge special assessments looming as far as I can tell...
Cons: landlording; real estate market may be the same or worse in a year or two.  My building is part of a larger complex which may see construction of new buildings in the next couple years, including rental suites.  Risk of construction noise/dirt may scare off potential renters, and new rental suites may compete with mine for tenants. 
*I might be able to get slightly more for rent, and maybe a year long lease, or airbnb to make up shortfall, however my calculations don't include whatever income taxes I'd have to pay on the rental income, so I'll consider them to cancel each other out.

So with this in mind, is the calculated risk of renting my place out looking like the better option?

BlueHouse

  • Magnum Stache
  • ******
  • Posts: 3208
  • Location: WDC
Re: Underwater on my Alligator Condo
« Reply #11 on: August 15, 2016, 02:12:58 PM »
I'd rent it out and take the losses against your income tax.  (Not sure how this works because my income is too high for this, but at least I document all the losses and it counts against my basis for when I do finally sell).

So I'm in a similar situation and everyone on MMM yells "sell!" when I do case studies.  But everyone who lives anywhere near where my condo is says "Never sell!"  because it really is in a good location.  It's been 4.5 years since I moved out and I've never had a vacancy, but my cash flow is about -300/month.  I've also spent over $5000 on repairs during that time. 

I live in a location that is going to have a metro station within 2 years, so I just keep hoping that the $20K I've shelled out so far will come back to me.  Condo is still $50k less than what I paid, and even though I don't owe more than it's worth, I just cannot walk away while "losing" in the transaction. 


backyardfeast

  • Pencil Stache
  • ****
  • Posts: 899
  • Location: Vancouver Island, BC
    • My journal
Re: Underwater on my Alligator Condo
« Reply #12 on: August 15, 2016, 03:08:45 PM »
It might be worth doing option #2; it's possible that, as you say, over time the rent increases and other options might narrow the subsidy and eventually the appreciation allows for this to be a more positive investment.

The other thing to look at, though, is the capital gains tax issue.  I don't know how long you have after the condo ceases to be your primary residence that you have to pay capital gains tax, but having to do so in a couple of years may offset any of the market gains or the difference between the $6000/year subsidy and the $30,000 pay out now.

Add that into your calculations and have another look.  Personally, I suspect that it's time to let go of the "sunk cost" fallacy (there's lots more about this in the real estate section of this forum) and sell, but that's just a hunch. ;)

Hotstreak

  • Pencil Stache
  • ****
  • Posts: 776
Re: Underwater on my Alligator Condo
« Reply #13 on: August 15, 2016, 03:41:47 PM »


Cons: big fat cost to sell, in addition to loss of initial DP and monthly mortgage payments since purchase date.  Won't be able to start saving for another 10 months. 


You've already lost your down payment and all of the interest payments since purchase date.  Since that has already happened regardless, it shouldn't be a "pro" or "con" when deciding what's best for your financial future.

cchrissyy

  • Pencil Stache
  • ****
  • Posts: 747
  • Location: SF Bay Area
Re: Underwater on my Alligator Condo
« Reply #14 on: August 15, 2016, 03:58:15 PM »
that's tough situation  and I don't know which I'd do! but I have another pro for your list of keeping it.

since you mention possibly holding it long term, the pro list is that rent will go up gradually each year with inflation, but the mortgage payment won't. the longer you keep it, the greater that gap will be. (I am assuming a fixed rate mortgage)

also, some day your mortgage will be paid off and the rental income will continue for the rest of your life. that could be a big piece of your FI puzzle.

fishnfool

  • Bristles
  • ***
  • Posts: 337
Re: Underwater on my Alligator Condo
« Reply #15 on: August 15, 2016, 08:07:36 PM »
Another option?

I know many people in my area who were underwater after the housing bubble burst. Quite a few of them rented out their house, some as long as 2 years, but in the meantime they quit paying the mortgage while collecting their rents.

Sure this will be a bad mark on your credit for a few years. But if there is little hope of any recovery it really makes little sense to keep dumping money into this. At least that option might put some money back in your pocket that you're already out.

Good luck!

retiringearly

  • Bristles
  • ***
  • Posts: 341
Re: Underwater on my Alligator Condo
« Reply #16 on: August 16, 2016, 07:47:17 AM »
What about having your girlfriend moving in with you and giving up her apartment?  Save her rent money.  I know it is not ideal but financially it is the best set up.  That is the route I would go.

Dicey

  • Senior Mustachian
  • ********
  • Posts: 11032
  • Age: 61
  • Location: NorCal
Re: Underwater on my Alligator Condo
« Reply #17 on: August 16, 2016, 11:50:44 AM »
...I know many people in my area who were underwater after the housing bubble burst. Quite a few of them rented out their house, some as long as 2 years, but in the meantime they quit paying the mortgage while collecting their rents.

Sure this will be a bad mark on your credit for a few years. But if there is little hope of any recovery it really makes little sense to keep dumping money into this. At least that option might put some money back in your pocket that you're already out...

Only consider this if you're willing to abandon your ethics. In addition, if your tenant has a lease and you take this approach and they're evicted because of your non-payment, you could have even more legal trouble.  I know a couple who walked away from their home four years ago, not because they lost their jobs, just because they were upside down. B of A is still hounding them, but you don't hear about those folks, do you? A flipper bought their home in foreclosure for 600k. Sold it 6 weeks later with minor updates for 767k. Now, Zillow says it's worth 971k, but the smaller house next door just sold for over a million. Too bad they didn't have the foresight to just hang on.

I bought a rental that I believed would go up in value, then the market dumped. I was negative every month for years. I hung on to it, and when it finally rebounded, it did so robustly. It's healthy and half paid for now, so I am glad I hung in there. Sure, I might have done better short-term in some other type of investment, but this property is just one egg in my basket. During that time, my tenant lost a shit load of money on blue chips like AIG and GM. Sure, the overall market rebounded beautifully, but not every stock did.

This is anther vote that aligns with bluehouse's. Refi while it's "owner occupied". Get the longest, cheapest loan, and the best tenant you can and wait it out. If people start losing their houses, it could put upward pressure on rents, especially if your local economy is balanced enough that one spouse may still have good employment, but they can't afford their clown house on a single income.

Since the reason you want to sell is because you "want" to sell, not because you "have" to sell, and because your building is fairly new, I'd hang on. Be sure to keep  meticulous records. Oh, and don't worry so much about construction noise, as it tends to happen while people are at work. I always laugh when people whine about that on HGTV. It's temporary, you silly babies! Gah!

Sidebar: The people next door to us have torn down their house completely and are building a new one. I love the activity, because my house is going to go up a hundred grand in value when theirs is completed. Bring in da noise!

backyardfeast

  • Pencil Stache
  • ****
  • Posts: 899
  • Location: Vancouver Island, BC
    • My journal
Re: Underwater on my Alligator Condo
« Reply #18 on: August 16, 2016, 12:39:10 PM »
Just a caution again about capital gains taxes here in Canada.  If you know that this is not a condo that you want to hold on to forever as an investment property, and that you would just be holding on for a few years to wait out for the price to come back up, beware these amazing market rebound stories.

Capital gains taxes on homes that are not your primary residence are calculated on the difference between the value when you stopped living in the house and the value when you sold, and then this is related to your income.  If you have lost money over this period, those capital losses can be used to offset taxes that you might otherwise owe on capital gains from other investments (and I think you have a 5 year window to rationalize those gains/losses).  If you get a large market rebound 5 years from now, and your income is higher, you may be stuck with a large bill.

It's always hard to swallow sunk cost losses, but this might actually be a good time to take the hit--it's a small one early in your life/career.  (would be considered a small student loan, for eg!)  On the other hand, moving you AND your gf back into the condo to keep it your primary residence and waiting for the value to come up over a couple of years would indeed be the best choice on paper. :)

Goldielocks

  • Walrus Stache
  • *******
  • Posts: 6486
  • Location: BC
Re: Underwater on my Alligator Condo
« Reply #19 on: August 16, 2016, 04:07:39 PM »
Just a caution again about capital gains taxes here in Canada.  If you know that this is not a condo that you want to hold on to forever as an investment property, and that you would just be holding on for a few years to wait out for the price to come back up, beware these amazing market rebound stories.

Capital gains taxes on homes that are not your primary residence are calculated on the difference between the value when you stopped living in the house and the value when you sold, and then this is related to your income.  If you have lost money over this period, those capital losses can be used to offset taxes that you might otherwise owe on capital gains from other investments (and I think you have a 5 year window to rationalize those gains/losses).  If you get a large market rebound 5 years from now, and your income is higher, you may be stuck with a large bill.

It's always hard to swallow sunk cost losses, but this might actually be a good time to take the hit--it's a small one early in your life/career.  (would be considered a small student loan, for eg!)  On the other hand, moving you AND your gf back into the condo to keep it your primary residence and waiting for the value to come up over a couple of years would indeed be the best choice on paper. :)

Well,  if you are not married, common law or otherwise, and the condo is not rented out full time (as in you could call it your home for some time during the year), you are allowed to claim the condo as your primary residence, while GF claims her apartment.  But only one primary residence per married couple.

I bought a condo in 1995 in Vancouver, and moved out, rented it, and sold it at break even (including rent earned but not counting the renovations) in 2002 when I needed the money to buy a house  (in Alberta of all places).   I think it would have been nearly 10 years for it to have shown a true profit.

So watch out for that "buy and hold".... it could be "buy and hold...hold...hold...hold..."   are you willing to hold it for 10 years if needed?  Will you need the capital for something else before that?