Casey McCann (@CaseyMcCann) recently asked me a question on Twitter, which I want to answer here, because 140 characters and a short answer are just not enough.
“Do you think it works out in the long run to take a loss on one property to get a deal on another? Or should you just sit tight?”
The simple answer, is not so simple – it depends. Why it depends is a bit more difficult to answer, so based on Casey’s question I present a few options on how to deal with this sort of situation. The first question to consider in answering this, for anyone, is first do you have equity in the property, or the second do you need to pay to get out, or do a short sale. The answer varies, and then there are at least two scenarios it can apply to.
There are very specific points that a homeowner should be considering in determining if they have a loss on their property. One is NOT whether your home was worth 20% more in 2008 than it is now, that is if you purchased prior to that, if you purchased in between 2006-2009, I will get to you later. I use this example: In 1999 a home was purchased for $132,000, in 2008 that property was valued at $335,000, and now in 2010 that home is valued at $290,000. That is not a loss, that is still a gain (assuming that the owners have not eaten up all their equity by refinancing).
The person that says “Dang, I lost $45,000!” is not looking at it in the right way. There is no loss, or gain, until you actually sell a property. As often as I hear people complaining about the value they lost in the last two years, people seem to forget – real estate is NOT a short term investment, unless you like to gamble, there are no short term guarantees. Long term yes, historically real estate values ALWAYS increase.
The Reality of Determining Loss in Value
The real points to consider when determining if you have lost value:
- Is the price down from what you paid for it when you purchased?
- Have you refinanced when the value was higher than it currently is?
So it really is only two points to consider, and those are easy enough to answer for yourself, with the information available online to you via various search sites, and other resources, or by contacting a local REALTOR who can provide you with comparables. Once you know if you have a loss you can determine how to proceed forward, but you can proceed forward even with a loss if:
- You have equity in the property (you put down money to begin with)
- Can obtain a “Bridge Loan” product to carry you forward to the next property using the equity.
- Can qualify to purchase without selling the current home.
Assumption 1: Movin’ On Up
When looking at the downturn in the market, and having equity in your current property, moving up is always a great option. I tell all my clients who have owned prior to 2005 that now is the time for them to consider stealing a higher end property. With the difficulty in obtaining Jumbo loans, it has made anything outside of the FHA approved loan limits (varies by location, please check with your local REALTOR or lender for specifics) much more affordable. There is a great discrepancy in pricing right now, so you are seeing greater declines in higher priced properties as people try to purchase properties that fall into the FHA or conforming guidelines.
Points to Consider in Moving-Up
- Higher end properties are hurting more in valuation and have taken deeper hits in current market value (market value is what a buyer is willing to pay for a property, not what you list it for).
- Have you considered all the additional factors in the cost of obtaining a larger property?
a. Maintenance costs are higher.
b. Larger systems and homes consume more electricity, thereby an increase in your electric or fuel bill.
c. Budget for other expenses – furnishing, painting, etc.
Assumption 2: Let’s Make this More Economical
Whether you are considering downsizing for the actual size of the property, or for the affordability it offers, the time is right if the balance is right. Again it comes down to equity, an example recently was used of a home formerly valued at $1,000,000, which had decreased in value to $600,000. The difference here is typically people buying the properties at that price point have significant cash to put down, so they might be less likely to be holding a $1mil mortgage. In this case the owner has money down, and equity still because of their actual purchase price (see Fantasy Values above).
If you can afford to get out of the property, and buy a great deal on the downsized property, then perfect, go for it!
Days on Market: What’s Wrong with this Property
No matter the price point, the first thing most buyers ask me is “How long has this been on the market? Why hasn’t it sold? What’s wrong with it?” (that’s a whole different blog post to come), but those are the things a Seller needs to consider when listing their home for sale, especially in the high-end market. If you do not price wisely, you will be on the market a long time.
I know in my market, if you are priced well in the first-time buyers market you can sell in under 30 days (or less, I have a few at 14 days), but when you hit that “Jumbo” market, which is still privately held investor mortgages, you need to count on a lot more time. In my market, the typical $1mil+ property should expect close to 260 days on the market, at least, if not more. I have seen $3mil homes on the market for over 2 years. That is a very specialized market.
So if you want to rid yourself of the lifestyle of what you now deem to be excess, price it well, you are potentially already taking a loss, and the cost of carrying the property longer, as well as the potential to stigmatize it by not properly pricing is also a very real risk and will cost you a LOT more in the long run.
Should I Stay or Should I Go
It is a personal choice, but it all signs point to yes, then go go go! For Casey and her situation the answer is definitely yes.
For you…. Use this list to determine whether you should even consider it:
- Did you purchase prior to 2005? If your market is like most in the country the true declines happened in 2007, so you should have a safe buffer, and I am seeing values usually about where they were in 2005 currently, but that is my market, consult a REALTOR for help in your market.
- Do you have equity available to use for your next purchase? Most lenders require at least 10% down on conventional loans, and 3.5% on FHA loans. VA are 100% financed but also require funding fees. Check with a lender for a good faith estimate to see what closing costs will be in your area. Don’t forget there are real estate fees, taxes, and more that you also have to pay.
- What is your reason for moving? Make a pros/cons list and be honest with yourself.
- Do you have 6 months of living expenses socked away just in case?
- Consider the peripheral expenses: Moving, time off work, all the necessary work to prep your current home for market, and the new home to move into.
Hope that helps @CaseyMcCann. =)