Help This Reader: Short Sell, Rent Out, or Refinance?

I received an email recently from a reader with questions about her housing situation. She offered to lend her story to the blog in exchange for a few answers from other readers. If you have some insight on what she should do, I encourage you to leave your response in the comments below…

We bought our condo in August of 2007, when we thought the market had gone down basically as low as it was going to to. Our original limit was about 300k but after looking at a million condos 300k wasn’t going to get us what we wanted. We ended up finding our place, one of the best we had seen, and it was $360k. So, we jumped in – feet first (probably would have been better to jump in head first, might not be stuck now. 🙂 )

So, now, almost 3 years later our tax assessor has decided our property is now only worth $195k. That’s insane! There are some other condos selling in our complex for $200-$225k but still, really low compared to what we paid for ours.

We have 2 loans – a fixed at 6.5% that’s around 300k, and then the 2nd is at 10%!! and that’s a 15/1 arm.

We’ve made some improvements – painting, crown molding, recessed lighting, ceiling fans, etc, but nothing that’s going to make up the difference. It’s a 3 bedroom 2.5 bath, 1300 sq foot, 2 story condo in a complex with 3 pools, tennis courts, and a million trees (in case that’s important). On top of our mortgage we pay $240/month in association fees.

The condo is fine, for a family of 3. But we’re about to be a family of 4. Not that babies take up that much room, but baby stuff does. So, on top of the fact that we are now paying way more a month than our place is actually worth, we are cramped (or we will be in the coming months). It’s hard to swallow making the monthly payments when you know you’re basically throwing money away.

I’ve contacted our mortgage rep and he gave me three options. (Keep in mind we both have really good credit at this point so we don’t really want to take our chances of screwing that up.)

1. Refinance now that rates are lower. On the face of it, we could save ourselves $200/month if we refinanced our current mortgage. But, we would have to pay the closing costs, or roll them into the loan. If we roll them into the loan we take the savings down a little bit.

We also now, according to CA law, carry condo insurance – basically protecting the “stuff” inside since the association pays for the insurance for the building. So, that brings us down a little lower.

And finally, now because we don’t have enough equity we have to impound our taxes, which we currently don’t do because I don’t like the idea of the bank holding on to my money instead of me. So, I think refinancing to a lower mortgage rate would maybe save us $150/month, maybe.

2. Short sell and rent for the next few years. This could take any number of months, and we wouldn’t be able to buy from Wells Fargo again for 10 years or buy period for another 2-3 years. But we could rent a house, a bigger house, and not have to worry about all the home maintenance. 🙂

3. Rent our place out and rent a house for ourselves. This would give the market some time to rebound before we sell, and apparently we could buy again after having rented for a couple years, without selling this condo. So, we’d have 2 mortgages if at any point we didn’t have renters.

I’m not sure which option is best. I think I’d like to short sell but I don’t know the necessary tax or legal implications – maybe that is worse than just staying put. Problem is, I think we’d have to stay in this condo for another 3-5 years and I really just don’t see that as a comfortable situation. So, what do you think? Option 1, 2, or 3… or another option you can think of???

So what is your opinion? What should this reader do?

Last Edited: February 17, 2012 @ 6:48 pmThe content of ptmoney.com is for general information purposes only and does not constitute professional advice. Visitors to ptmoney.com should not act upon the content or information without first seeking appropriate professional advice. In accordance with the latest FTC guidelines, we declare that we have a financial relationship with every company mentioned on this site.
About Philip Taylor

Philip Taylor, aka "PT", is a CPA, financial writer, FinCon CEO, and husband and father of three. He created PT Money back in 2007 to share his thoughts on money and to meet others passionate about managing their finances. All the content on this blog is original, and created or edited by PT. Read more about Philip Taylor, and be sure to connect with him on Twitter, Facebook, or view the Philip Taylor+ Google profile.

Comments

  1. Patrick Ball says:

    If the family has no problem paying the mortgage currently, he should continue to stay in the condo, and try desperately to refinance. Options #2 & #3 could really set the family back. I think number #2 is throwing away any financial life you hope to have for years (10 years is a financial eternity). #3 just compounds the problem, and probably isn’t available without the needed equity in the first home.

  2. This says it all: “It’s a 3 bedroom 2.5 bath, 1300 sq foot, 2 story condo in a complex with 3 pools, tennis courts, and a million trees (in case that’s important).” How could a family of 4 NOT be comfortable in something this size? My suggestion would be to refinance, once you’ve run the numbers and are sure about it.

    Growing up, my 3 sisters, 2 parents, and I lived in a 1300 sq foot house. We were not cramped by any mays. So refinance, and maybe even sell some of your extra stuff. Live a more frugal lifestyle.

  3. I may not be understanding what a short sell is, but it seems like it’s not paying back the mortgage company all of the money you borrowed and promised to pay back. You sound as though this isn’t so much a financial problem for you as it is that you want something bigger. If my understanding of #2 is correct, I just have a moral issue with it. I may not understand what a short sell really is, though, so my issue may be invalid. I think the best financial advice is #1, but you’ll need to stay in it for a while. If you simply can’t stand to do that (and I hope you will think really hard about it), then you should go option 3.

  4. Is the reason you’re wanting to sell that you think the place is worth barely more than half what you paid for it, or that you genuinely think you need a lot more room?

    First, tax assessors’ valuations often don’t reflect the presumed sale price of the house. In our state, they represent some strange calculation that has little to do with the amount the house could sell for, and the figure is less than potential sale prices. Have you run comparables on condos not just in your development but similar ones in the general area?

    Assuming it’s worth $250,000 and assuming the worst of the real estate crash is over, let’s imagine it increases in value at 3% a year: it will take about 13 or 14 years for the sale price to rise into the vicinity of $360,000. If inflation stays low, it will be a long time before you can rent the place for enough to cover your mortgage payment.

    IMHO that leaves you with two, not three options: one is to settle in and live in three bedrooms. It does give you, after all, a bedroom for each child and a room for the parents, a not ungenerous arrangement, in the large scheme of things. It doesn’t leave you any home office space; but if you have a balcony or patio, possibly that could be enclosed and converted into a home office or game room? It’s unclear that a two-child family really needs a lot more square footage than you’re describing.

    The second option is to wangle a short sale or simply walk. This will leave you renting for a long time, but if renting doesn’t bother you, why not? It depends on what your plans for the future are and how a damaged credit rating will affect them.

    I don’t see this as a moral issue, given the number that banks and lenders have done on naive people who believed they were buying in a low market. My son and I copurchased a house at the same time, thinking prices had fallen as far as they were going to — in fact, several neighbors expressed their ire that the seller had “given the house away” for $235,000. It’s now worth maybe $150,000, and unlikely to regain its former “bargain” value anytime in the near future.We did everything right and we still got the shaft. Buying a house is a business deal, not a wedding vow. Banks cut their losses when deals turn sour; there’s no good reason individuals shouldn’t do the same.

    Given a pragmatic choice, I would elect to keep the house and downsize my lifestyle ambitions, at least until the children are big enough to genuinely need more space. If that ever happens. But that’s only because I personally would be averse to trashing my credit rating if I were at your point in life.

    • screaltor says:

      I agree with this take on the banks. I tell my seller clients that are contemplating short sales to look at it this way: You and the bank sort of made a mutual business decision to invest in real estate. The bank relied on what an appraiser told them and on what their business strategists told them. The mortgage backed security holders that bought the loans weighed the risk that was presented to them (not that it was always presently accurately). If the ship is going down, why give the bank the one lifeboat? I believe it is only right to try to do what you promised on that note you signed, but there is a time and place for default – or short sale (as would be authorized by the lender’s loss mitigation dept anyway). I don’t think I would take that option though unless you absolutely have to. 

  5. Just stay put and make do with the condo you have. Make it a great home for your family. We bought our first house from a family of five, and it had less square footage than yours.

    Just work at getting rid of that 10% 15/1 ARM. (It’s small, right? Your primary mortgage is $300k so hopefully you don’t have a huge ARM.) Get an emergency fund up, accelerate the payments until it’s gone, then throw extra money at your main mortgage.

    It might be making lemonade out of lemons, but hey … lemonade is a good drink in your part of the country! (Mine too in VA.)

  6. screaltor says:

    Renting it out may be a great option if the rental market is relatively strong in your area. You’ll have to continue to pay mtg, taxes, insurance (renters insurance), HOA, maintenance and upkeep, etc, but if you can rent it for a sufficient amount, the tenants will actually be building equity for you – or at least hacking away at that negative equity for you. I would build up a buffer so you can pay the mortgage if the rent isn’t paid or if it is vacant for a while. I would speak to a few property management firms in your area for some advice on this. 
     
    In regards to “waiting out the market” I fear that may be an incorrect way of looking at it. Now I think it is clear that the market is not very predictable and it could take a very long time for it to “recover”. Don’t worry about it though because it is what it is now. You can only make the most logical decision going forward at this juncture. I would say that if the estimated gross rental income will exceed all estimated expenses based on 85% per year occupancy considered, then rent it. You’ll want to check your mortgage to verify occupancy requirement and perhaps discuss with an attorney – but this is all better than dealing with a short sale.