Selling my underwater home, simple question

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Selling my underwater home, simple question

Postby marcus » Sun Jul 29, 2012 9:27 pm

Let me put my question right up front and then I will fill in the details:

To sell my house I am going to need to bring 10k-15k to the table, I don't have that right now, but I could feasibly save enough by next spring/summer. Seeing I can have trouble having large chunks of cash and not spending some of it, would it be better to pay down my mortgage every week to equal the extra 10k-15k (off principle on top of regular payments), or is the only way to show up at the table with a check for the difference?

So some more of the details. I currently owe about 117k on the house, I bought it several years ago for 132k, we had a realtor look at it and she valued it at between 110k-112k (That is what she thought we could sell it after negotiation, would probably list for 115-117).

We want to sell for several reasons:
1) We really want to move about 45 minutes from here more into the country, we have looked and found some really nice places that are more to our liking in the 40k-50k range, its further from the city than most people like so its not worth as much, but its still within 30 minutes from where I work.
2) We really REALLY want to pay off 100% of our debt, right now our only debt is our car (which will be paid off in about 18 months), and our house. Given the current amount we owe, its just too many years for my comfort level to pay it off.
3) Our neighborhood is going downhill. I have been watching the last few years all the businesses going away and being replaced by cash4gold, pawn shops, and empty buildings. As people move out it seems shadier people are moving in. My house has been losing money every day since we bought it, and I don't think it will recover here, I think it will become unsafe before the housing market tries to recover here.

I am also thinking about investing about $1k-2k in the house over this winter to prep it for sale, I used to work in construction so I can do all the work myself and I think I can raise the value more than what I put in, currently thinking of doing the following:

1) replace all the carpet on the first floor with pergo flooring
2) Put tile in the bathroom
3) Paint the garage, refinish the deck
4) Build new hardwood fronts for the kitchen cabinets
5) repaint the bathroom

Thanks for any advice

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Re: Selling my underwater home, simple question

Postby jaiko » Mon Jul 30, 2012 9:30 am

The critical thing is that you feel your neighborhood is in decline. IF that is so - and you would be wise to keep an eye on the stats of actual sales price on the houses that change title in your area, as well as checking for any increase in abandoned properties - then any money you sink into your home doubles your loss, right?

You're paying for at least some materials, you're investing a lot of time (something most people don't have enough of, yet fail to value properly), yet you will still be underwater. It may help you sell your house faster, but pricing it a little below market might well do that anyway.

So....if you sold your house for less than the mortage, how does your state handle the shortfall? Will the bank forgive it? Will the IRS consider it 'income' and tax you on it? You need to know these things in order to make an informed decision.

If homes further out are so much cheaper, they'll probably continue to be cheap for the next couple of years. Even if you don't catch the absolute bottom, you'll only be a few percentage points off that price point.

Should the numbers indicate that you should just walk away (I'm not suggesting that you do that, BTW), how would that affect the purchase of another home? Is it possible to rent in the area you're interested in? A good tenant has a leg up in offering a lease w/option to buy, down the road. It would also give you the chance to see if this new area is really what you think it will be.

So your "simple question" actually has a fair number of unanswered questions with multiple possibilities. You have options: it's merely you need to consider as many of the variables as possible, to determine what's best for you. Asking questions on an anonymous web forum will, at best, get you pointed towards the right questions to ask.

The fact that you find it hard to handle large sums of money, even when you know it's in your best interest, is a discipline/self-control issue you need to work on. The only way people eventually retire is having a "big sum of money", so you need to develop the mindset that money is NOT there to automatically be spent.

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Re: Selling my underwater home, simple question

Postby DaveInPgh » Mon Jul 30, 2012 9:44 am

My recommendation would be to put it on the market today. You estimate that you are $10 to $15k underwater now. If your neighborhood is in a decline, the amount you are underwater is likely to grow. How much depends on how fast your neighborhood declines. My parents put $30k in renovations into a house they expected to stay in. Two years later the neighorhood was in such a decline, they had to get out. It took almost two years to sell the house, mostly due to the fact my father did not want to believe his house wasn't worth the $55 to $60k he thought it was. After all, he just put $30k into it a couple of years prior! The realtors that accepted his overpriced listing didn't help either. The property ended up selling for $20k.

There might be people looking to move into your school district and are ready to by NOW. A lot of families won't move into a new school district once their kids start school. So list it today and see what you can get for it.

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Re: Selling my underwater home, simple question

Postby Eagle » Mon Jul 30, 2012 10:22 am

Welcome to the forums Marcus! The good news is you are not alone! There are many people on this site that have experienced success and have great advice to share. You are doing the right thing by asking questions and seeking advice.

I'd agree with Dave put the house up for sale now. That the neighborhood is going down hill is not a good sign. Continue with your plans to improve the home as it could potentially increase the value of the home.

Regarding debt...

Here’s a little game plan to get your started. Questions I believe would be helpful are labeled by letters A-L and are in bold.

1. Make the Resolution: Spend less than you make. This is a tough one. Spending more money than you earn is common practice in the U.S., and increasingly in other countries around the world.

Learn to just say “No.” You must learn to say no to yourself, your spouse/partner, and your children. This is called delayed gratification. It is essential to getting out of debt. A) Are you ready to make the resolution?

“Live like no one else [today] so you can live like no one else [in the future debt free].” – Dave Ramsey

2. Educate Yourself: The local library is a great resource. If you eventually want to purchase these or Half Priced Books is a good place to look. We used DR's methods and went through Financial Peace University twice (first the audio CD and then the Dvd series) and I can tell you it works. We have been debt free since the summer of 2011! B) Have you considered taking DR’s Financial Peace University course? The new FPU course is only 9 weeks (1.5 hour sessions) long now instead of 13 weeks (2 hours sessions).

I. Some good personal finance books:

• The Richest Man in Babylon By George Samuel Clason
• The Total Money Makeover By Dave Ramsey
• The Millionaire Next Door By Stanley and Danko

II. Some good Leadership Books:

• The One Minute Manager by Ken Blanchard, and Spencer Johnson, M.D.
• Who Moved My Cheese by Spencer Johnson, M.D.

3. Motivate Yourself: Getting out of debt takes commitment, energy, and intensity. This will require sacrifices. Set clear and achievable goals on one page or less. (I’d recommend the “The One Minute Manager” by Kenneth H. Blanchard and Spencer Johnson.) Put these goals on the fridge or as you walk out the door so you see them every day. Starting a financial journal on the GRS forum is a great idea. Reward yourself with little treats as you accomplish your goals. Normal = spend like there is no tomorrow. Being different or even “weird” by seeking to become debt free is a good thing. C) How are you and/or your spouse/partner motivated?

4. Organize Yourself: Create a balance sheet. This helped us a lot when looking seriously at getting out of debt. D) What is your total debt? How much is the interest rate associated with each debt? What is the total pay off? What is your total Net Worth? How are you tracking your expenses (Excel Spreadsheet?

Assets(stuff you own) – Liabilities(debts) = Net Worth

5. Choose: D) How are you going to get out of debt? – Lowest balance (Debt snowball) or highest interest.

If the debt snowball…

1. Create a list of all of your debts: credit cards, car loans, student loans, mortgages, etc…
2. Next to each one write down the total balance owed.
3. Re-order these from smallest to largest debts (use Excel to make this simpler.)
4. Pay the minimum payment on all of the debts – except the smallest one.
5. Put every extra dollar you can find towards paying off that smallest debt.
6. Celebrate like crazy when you get that first debt paid off.
7. Take the amount you were paying towards the first debt and put towards the next smallest debt. Do this until this one is paid off.
8. Celebrate again!
9. Continue this process until each one is paid off.

6. Cut Expenses: Sell something. Create a budget. Cut. Cut. Cut. F) What are some ways you can cut expenses out of your budget? See this thread. Once you’ve created your budget evaluate it periodically but most importantly - Stick to it!

Expenses > Income = Bad & Expenses < Income = Good

7. Spouses/Partners get on Same Page: While every couple is different, you could consider reading the same materials, talking openly about your feelings, and sharing like goals. When you share goals, you are usually more likely to take the necessary steps to accomplish your goals. If you or your spouse/partner are not on the same page, the process will be a lot more difficult. Communication is the key. Determine not to live life in the bondage of debt. Credit Cards are not the answer. G) Are you and your spouse/partner on the same page? What would it take to get on the same page?

8. Get an Accountability Partner/Coach: When you are getting out of debt, you want to be influenced by people who support your decision. Not everyone does. This can even include family. Hang out with friends who are frugal. Befriend people who enjoy movies at home instead of in the theater. H) Who do you know would be a good role model for you in getting out of debt and holding you accountable to your goals?

9. Save up for an Emergency Fund: $300 (if you make less than $15,000 a year), $500 (if you make more than $15,000 and less than $24,000 a year), or $1000 (if you make more than $24,001 a year) respectively. Do this quickly hopefully in less than 2-3 months. Emergencies can and always will happen – car repairs, home repairs, hospital bills, etc. It is better to be prepared for when the emergencies happen. I’d say a good goal would be an E-fund with 3-6 months of household expenses. We have 9 savings accounts we use to save for emergencies and expenses we know will happen – car repairs, new car, new computer, medical bills, baby related, purchases, vacation, etc. We don’t even touch our E-fund anymore for most emergencies. I) What system do you think would work best for you?

10. Increase Your Income: Seeking a raise is a good place to start. Getting a second job part-time is a good idea too. If a couple perhaps the spouse/partner who isn’t the main bread winner could get a part-time job making $1000-2000 per month. Or what about having a yard sale? Hopefully this extra income will lead to you paying off your debts sooner. Your income is your greatest asset. Time to stop giving other people portions of it through interest and fees! J) What ways could you earn extra income?

11. Set Financial Goals: Goals are the fuel that propel you through the slow days of debt repayment. Hey, the process will get hard and it will seem to drag on at points. You’ll want to quit and give up. You’ll start to think that your old way of living wasn’t so bad after all. These are the days you need to look at your goals and remind yourself of why you are making the decisions you are making. Make sure your goals are SMART – Specific, Measurable, Attainable, Realistic, Time specific. K) What goals do you want to establish for 2012? What are your long term goals over the next 5-10 years?

12. Stop Making Excuses: Sometimes, not always, we make excuses. I would get out of debt but …

Right now you have a perfect opportunity to change your life and create a new financial identity. Accomplishing goals always feels great. Imagine how you would feel if you paid off all your debt and didn’t owe any money to anyone! You are on the right road to change your family tree! L) Are you ready to make the changes necessary to get out of debt?

Hopefully this was helpful. ;)

Your thoughts?
~ Eagle

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Re: Selling my underwater home, simple question

Postby Bichon Frise » Mon Jul 30, 2012 10:39 am

I would not add more money to an already sinking ship. Bring the money to the table and get out ASAP.

I'll echo the opinion to list the house soon and be realistic.
Bichon Frise

"If you only have 1 year to live, move to it will seem like an eternity."

avocado wrote:Good to see you back, I was starting to miss your incisive commentary!

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Re: Selling my underwater home, simple question

Postby Tightwad » Mon Jul 30, 2012 11:10 am

So some more of the details. I currently owe about 117k on the house, I bought it several years ago for 132k, we had a realtor look at it and she valued it at between 110k-112k (That is what she thought we could sell it after negotiation, would probably list for 115-117).

I'd be careful when taking advice on value from a realtor. Realtors may have a better feel for the market than you but she's not (most likely) a R/E appraiser. If & when you sell this house, you'll be required to get an official appraisal not some realtor's opinion of value.

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Re: Selling my underwater home, simple question

Postby DoingHomework » Mon Jul 30, 2012 12:24 pm

Tightwad wrote:
So some more of the details. I currently owe about 117k on the house, I bought it several years ago for 132k, we had a realtor look at it and she valued it at between 110k-112k (That is what she thought we could sell it after negotiation, would probably list for 115-117).

I'd be careful when taking advice on value from a realtor. Realtors may have a better feel for the market than you but she's not (most likely) a R/E appraiser. If & when you sell this house, you'll be required to get an official appraisal not some realtor's opinion of value.

I agree. And the real estate agent wants to sell quickly to get a commission. There is nothing stopping you from asking for more and letting it sit for a while.

I'm also concerned you are underestimating the cost of the repairs you plan. The materials for that list will exceed $2000 unless you have a very tiny house.

I'm also a little concerned about the advice you've been given considering the numbers. If you could sell the house for $112k after negotiation and you owe $117k, you are $5k away from avoiding sale as a short sale. In many areas avoiding the hassle and delay of a short sale would by itself be enough to make a buyer offer the extra $5k. I would think your agent would be more proactive in helping you avoid a short sale as well. Have you considered talking to 2 or 3 other agents and also possibly selling the home on your own to avoid the agents fees? It sounds like you'd come out way ahead.

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Re: Selling my underwater home, simple question

Postby marcus » Mon Jul 30, 2012 12:56 pm

Ok, I will try to answer a few of the questions:

1) I do not want to pursue anything related to the short sales which includes anything that causes me to sell for less than I owe. This isn't so much a moral decision as a practical one. I talked to a couple lenders about my situation, and seeing I can make up the difference in less than a year by saving hard, its not worth the hassle and credit issues with going through the short sale process. Also I know there are a lot of fancy terms, but selling for less than you owe and not bringing the difference to the table at closing equals credit issues.

2) I don't really trust the realtor that much (And wouldn't go with the one we talked to). But based on my research and the papers the realtor brought, in the last 6 months there have been several houses in my neighborhood that have sold, they have sold between 112k-118k, the difference in price has been around how many updates they had recently done to their homes. In my neighborhood all the houses are basically identical, they were all built by the same group within a few years of each other, so they are very comparable.

3) I know my estimates are very low for the work I want to do, I have a brother in construction and my father owns a saw-mill, so many of the supplies I get for free, and I have a full woodshop with many of my own supplies to start with.

4) Our neighborhood is not going down the tube immediately, its more of a slow decline. If you travel a few miles towards the city its gets bad and I can see it creeping towards us. I can afford to wait a year or so, but as was mentioned, I am losing more value the longer I wait. I don't expect to see sharp declines though unless the market as a whole takes another one.

5) My alternative to paying ahead on the mortgage would be to open up some shorter term CD's to lock the money up so I am less tempted to use it. I know this is a self control issue, and my wife & I have gotten much better over the last few years (You can see a journal I kept here for awhile if you search). We have been able to dump a large chunk of debt and do quite a bit of very good stuff. I just know my immediate weaknesses and am trying to work around them as much as I can while I continue to work on becoming better at handling my finances.

Thank you everyone for the advice so far, as always, you guys give me plenty to think about and call me out on places where I am trying to deceive myself.

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Re: Selling my underwater home, simple question

Postby DoingHomework » Mon Jul 30, 2012 1:07 pm

After your clarification my suggestion would be to make the repairs/upgrades THEN list the house after talking to at least 3 agents. In the meantime don't prepay the mortgage. Just keep the extra money in a savings account or money market account.

I am very familiar with do-it-yourself work. I realize you will have free labor. If you are getting some materials from relatives then your estimate is probably reasonable. The Pergo for one seems like it would cost at least $3/sq ft and probably more like $5-7 including everything. I've done a lot of that. Paint is also pretty expensive...

But, it sounds like you generally have a good plan.

Also realize that the real estate market does seem to be slowly improving nationwide. Even if your local area is not doing so hot, waiting a few months could be helpful. I also think that springtime is usually a better time to sell so maybe all the stars will align for you.

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Re: Selling my underwater home, simple question

Postby marcus » Mon Jul 30, 2012 1:15 pm

That is basically what our plan was, we wanted to talk initially to a realtor just to see where we were. Now that we have done that we are in intensive saving mode and doing whatever we can to the house cheaply to increase value.

We plan to interview at least three realtors from different agencies, I found I can see what realtors are selling the most in our area and plan to start there.

For prices, I have gotten quotes locally to get my materials for the flooring for $1.50/sq foot max for the pergo, I need to see what else I will need to lay that (I have done true tung and groove flooring before, but not pergo), and our house is actually quite small, its listed at 800 sq ft.

The more comments I get here, I think I will go with the short term CD's to save rather than dumping it onto my actual mortgage, that way if something horrible happens to the housing market between now and then I "can" get to my money still.

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Re: Selling my underwater home, simple question

Postby maryalex » Mon Sep 17, 2012 2:58 am

I think you have listed some really good renovation ideas. I especially think tiles in the bathroom would be a good improvement.

I think another way to increase value is to present the house like a hotel/display home. Pack all the clutter away and only have the bare minimum out. Also if the inside of the house is painted, make sure it's more neutral colours (to suit everybody) and have some feature colour to be painted on a wall (no windows), this will help bring some colour into the house without overwhelming the buyer.

P.S. In Australia, you couldn't even buy a 1 bedroom apartment for 200,000.

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Re: Selling my underwater home, simple question

Postby p_wyt_12 » Thu Oct 18, 2012 2:06 pm

I think what you are planning to do is great to increase the value of your property. I know it is really hard to cut down costs but it is great that you are making efforts to pay those debts with all your might. Hope you'll be successful in keeping some of the money after you sold it.

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Re: Selling my underwater home, simple question

Postby babysteps » Fri Oct 19, 2012 7:11 am

We have been on both the selling and the buying side of short sales (not on the same transaction!), a few thoughts to add:

If you are actually that close in terms of value and amount owed, I would do the fix ups and list it for the payoff amount of your mortgage (plus expected commissions paid) and possibly even boast "not a short sale" in the listing. I agree, most buyers would be willing to pay a bit more to avoid the short sale process. Also, if you can't show hardship your lender may not agree to a short sale. Even with clear hardship, some lenders are easier to deal with on short sales than others.

If you decide to list the house in the near future and can get the repairs done within a few weeks, I would vote to do the repairs. Buyers in general want 'move in ready' and are not great at visualizing. With non-cash access to materials and labor *plus* the 'identical house neighborhood' dynamic, fix ups could go a long way in sale-ability (and maybe on price). Don't forget to think about curb appeal, decluttering & cleaning- any low/no incremental cost activities that can help your house look its best.

I would suggest you have a pricing & action plan *before* you list. If you are not getting offers right away (first 2 weeks after listing) at/near your asking price you will know that avoiding a short sale isn't happening right away. In that case, I would consider either
1)taking the house off the market and staying where you are until what the house is worth & what you owe on it turn right-side up OR
2)if the difference is small enough (you want to define what is a "small enough" amount before listing), consider dropping the listing price (or accepting an underwater offer) and selling other assets or possibly borrowing to make up the difference. I know, borrowing seems like a bad idea, right? BUT if you have the discipline to pay off the new borrowing and IF you can get an unsecured loan (personal loan, credit card, acquaintance, relative - in ascending order of not a great idea-ness) it MIGHT make sense. Especially if real estate prices are headed down in your area.

IF you decide to make additional principal payments and wait to list until you are right-side up, make a time line & create some accountability (announce it to a personal finance support group, make it an automatic payment, etc) so you actually DO it. In your case, if you could really get the amount owed down significantly in 6mo-1yr, this might (?) make the most sense. Or this could be an excellent plan B to use if after trying to sell today you don't get any offers that keep you away from a short sale.

FINALLY in some cases, some banks may be willing to convert a shortfall to a personal loan. It is still a short sale. The personal loan is still debt, but it gets you out of the house & away from secured debt. This is something the bank is most likely to do if you fall in the narrow range of having both current hardship and good future prospects.

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