Sep012016

Liquidity risk: what happens when home sellers can’t get their asking price?

When sellers can’t get their asking price, their alternatives are not great, but if they bought below rental parity, at least they have an option that isn’t financially devastating.

greedy_sellersMy first job out of school was with a retirement community developer in Leesburg, Florida. Since I had the expertise, and since it was cheaper than renting, in 1997 I built my own house at 2 Weston Road. Even though I could have built it cheaper, since I was going to live there myself, I put in nicer finishes and landscaping than a builder ordinarily would have provided.

The added cost wasn’t a problem until about a year after I moved in when I took a job 80 miles away, and I wanted to move.

Like anyone else in my position, I put the house on the market at a price that gave me some room to negotiate and the final sale would at least cover my closing costs, commissions, and most importantly, pay off my loans.

I quickly discovered that I built more house than the market would pay for. I couldn’t sell it for enough to accomplish what I needed to financially.

I was trapped.

For about six months, I commuted 80 miles each way each day. Fortunately, it was almost all freeway driving, but spending over two hours per day commuting really sucks. I decided to rent a cheap apartment next to my work, but I didn’t have a clear plan on what to do about my house. I considered all my options, and none of them were very good.

What to Do When You Can’t Sell Your House

Your options, from bad to worse.

By Geoff Williams Aug. 30, 2016slashing

Your house is cursed. Not really, but you may think that if you have a home that’s been on the market for a year or two – or more. …

If your house isn’t selling at all, and you’re losing hope that it ever will, these are your most probable options.

Keep improving your home. It isn’t what you want to hear, but maybe people aren’t buying because they don’t like what you’re selling. So make your home better.

Most often this is a bad idea. On rare occasions, a cosmetic refresh of the kitchen may attract a buyer and recoup the cost and close the gap to get out without losing money, but for this to work, the house needs to have some obvious defect that needs to be corrected. Despite the shows on HGTV that say otherwise, adding value with renovations isn’t easy. Most items don’t add value in excess of their cost.

I my case, the house was only 2 years old, so replacing a new kitchen with another new kitchen wasn’t going to add any value.

Slash the price. If your home is really the pits and you almost don’t care what you get for it, as long as it’s something, you may want to do that and see what happens.

If a seller has the ability to lower price to meet the market, then it’s foolish not to do so. The only reason any listing should ever stay on the market over 90 days is if the seller is unable to lower their price. If they aren’t willing to lower their price to sell, then they really don’t want to sell the house.

The main reason more houses aren’t on the market today is because people can’t get enough to cover their mortgage, and the few that try can’t lower their prices to close the deal.rental_parity

Rent your home. It may be the best of your options if you desperately want to move, or, say, need to move due to a job offer.

And renting out the space a good option, according to Bill Golden, an Atlanta-based real estate agent with RE/Max Metro Atlanta Countryside. But he warns: “Renting is the first option, though it’s one with which you should proceed with caution.”

For starters, ask yourself how badly you really want to be a landlord. But even if that doesn’t bother you, Golden points out that if you think your house is hard to sell now, it could be even more difficult after your tenants leave.

“No matter how well you screen tenants, they are never going to maintain it the way you did, so you have to be prepared, both emotionally and financially, to deal with that once they move out,” he says.

One of the biggest mistakes speculators from the housing bubble made was not considering this possibility. Many assumed they could rent it out to cover their costs without bothering to investigate the truth. Many speculators were shocked to discover they could only cover about half their costs with market rent.

Correcting this mistake is one of the main reasons I write so much about rental parity. Renting is always viable plan B if the buyer’s total monthly costs are less than the cost of ownership.

This was the most difficult decision I faced. I didn’t want to rent my new house and have someone trash it. The extra income would have been nice, but I wanted to sell. At the time, I didn’t want to be a landlord.

Walk away. You may be tempted to move, anyway, and keep trying to sell the home. That’s probably your least desirable option, though it may work out well enough if you have someone mowing the lawn and looking after the place while a real estate agent brings in prospective buyers whenever. But if you plan on leaving without a process in place to get your house sold, you will likely regret putting your house out of your mind for any period of time, Golden cautions.

“Just letting it sit there empty is very rarely a good idea. There are always carrying costs [like property taxes and homeowners insurance], even if you have no mortgage, and it’s much harder to keep it properly maintained without someone living there on a daily basis keeping an eye on things,” he says. “If it didn’t sell before, giving it even less TLC is not going to help matters.”

The section above doesn’t state it explicitly, but truly walking away and leaving the problem for the bank was very common during the housing bust, particularly since so many were so far underwater that the situation was hopeless. Strategic default rarely makes sense today.

Writing a check to cover the shortfall

One option not listed above is the option I finally selected: paying my way out. Back in 1999, we didn’t have short sales. If the proceeds from the sale didn’t cover the loan, you wrote a check at the closing. That’s what I did. Though it was painful, it was less painful than continuing to pay the mortgage each month.

Of course, if I had known lenders were about to inflate a massive housing bubble, I would have rented the house out until 2006 and sold to make a fortune. The property sold four times since 2008, and the last two sales prices were below what I sold it for in 1999.

Perhaps selling and moving on was the best move after all.

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