How to escape from a double mortgage situation

Question

I recently introduced myself and this is my first real post.  Hopefully I'm posting this in the right place!

My wife and I are currently looking to begin our real estate investment adventure but have a bit of an anchor that is blocking the path a little.  We recently moved into a smaller home and are having trouble selling our former (and much larger) home.  The home has been listed on the MLS with a couple different agents for over 2 years now.  I started to think that we should use this very unfortunate situation as a learning tool for us by looking at it as an "investment deal gone bad" and doing what we have to do to get out of it.  Here are some details:

The home is brick on 1 acre of land in a golf course community.  It is on a cul-de-sac with great curb appeal.  We initially listed it for 535,000 a couple years ago and it is currently listed at 459k.  We refinanced it about a year ago and it was appraised at 485k at that time.  (We had it listed for 479k during the appraisal process).  The home is a 5/4 with 4700 sq ft of finished space and an unfinished 1400 sq ft walkout basement.  I don't really want to post what we owe on it but with the closing costs, 6% agent commission and a small buffer for requested repairs, we will pretty much break even at the current listing price.

We have also had the house listed for rent for about 5 months now.  We've gotten very little response from that and I don't honestly feel comfortable renting it as it would be a negative cashflow deal.  We are desperate though and are looking for a way to eliminate the mortgage payment along with the other expenses of heating/cooling and maintaining the house while it is listed.

Do you have any ideas on how to get out of a property like this?  Is there more information you need?  (I'm sure there is)  Please help us move past this roadblock so we can move on with our future investments!

Thank you!

Rick

Jon Holdman · Answer

Days on market (DOM) does affect the perception.  If its been on the market a long time potential buyers may think something's wrong with it.  Unfortunately there's nothing you can do about that now.  Even if you pull it off the market and put it back on the old listing history is still available.

Price per square foot is a tricky metric.  It does have some meaning.  However, if your house is on the larger side for your neighborhood it will sell for less per square foot than a smaller house.  Conversely, the smaller houses will typically sell for more on a per square foot basis.  When an appraiser makes a size adjustment, he or she will look at a neighborhood average, then reduce that by 50-70% and use that reduced number to make the adjustment.  For example, if a comp is 2000 sq.ft., houses in your neighborhood sell for $100 psf and yours is 2250 sq.ft, an appraiser might use $40/sq.ft. as an adjustment factor.  So, he would add 250*$40=$10,000 to the price on that comp.  The exact number are going to vary, but its never going to be average psf price in your area times the difference in size.  If you think about it, the cost to bump out a wall on a 40x50 house to 45x50 when building is only a small increment.

Further, you have to compare floor by floor.  Its best if comps are the same style (e.g., ranch w/ basement, ranch w/o basement, two story, trilevel).  When you start comparing a ranch to a two story, for example, it gets really tricky. Second floor footage is worth perhaps half what ground floor footage is worth.  Basement maybe 10-20% of ground floor.  A two story house with the same foot print is not going to be worth double the value of a ranch.

Lot size generally has little effect on price, in my experience.

Condition and finishes make a big difference, too.  A house with top end (for the area) finishes in pristine condition is going to sell quicker and at a higher price than a house with lesser finishes and that is rough around the edges.  But you can also go overboard.  Every neighborhood has some set of finishes that are typical for the area.  If yours exceeds that, you won't get much value for the excess.  OTOH, if your is below that you will get dinged by more than the difference.

Have you looked at other houses in the area?  If you've not done this recently, you should.  Get your agent to schedule showings of your competition and go have a look.  Don't feel bad about doing this - they looked at yours.  Set aside your feelings for your "home" and try to objectively compare yours to the competition.

If you do go with a new agent, interview at least three.  Tell them you want to price it to get a contract within 90 days.  Look at their analysis carefully.  Go drive by the other properties.  Look at how they're doing the adjustments

One more point.  Seems like this property has been empty for a while.  Hopefully you've switched your insurance from homeowners to empty house.  This will be much more expensive and will have less coverage.  But it will at least pay a claim if you have one where the homeowners might result in a denied claim because it was empty.

Dion DePaoli · Answer

There are a couple of not so great implications here.
	
	The home is still priced too high otherwise it would sell.  Pretty straight forward there.
	
	I am not sure how you had your home listed for sale and also took out a refinance loan.  That is usually not allowed.  A Lender needs payments over time to recoup the cost of origination.  Typically the home must be removed from MLS for 30 days prior to allowing a refinance in almost all conventional loan settings.
	
	The approach here is admirable.  Sell the home over the total amount due to pay the loan off.  It seems like that may not be all that actionable since it has yet to sell.  A short sale might be needed.  
	
	I would find a little better real estate agent as if they have had this listing for more than 8 months and it has not sold, you may want an experienced agent to help you reposition the home in the market.  Sometimes homes with long Days On Market are skipped by other agents showing homes for a variety of reasons.  One of the more simple ones is, the agents with buyers might only run searches in MLS for recently listed homes.  So longer listings are not seen as much.  Again an experienced agent should know this stuff.  
	
	Putting a renter in the home will limit the potential buyer pool.  This home sounds more of a primary or second home for a buyer and not so much of a rental property.  Not sure renting the home is a great idea.  That said, we can understand the trouble that goes with this situation and the cash demands it creates.  
	
	I would get tough with the expectations of the agents.  I would terminate the listing with the current agent and pull the property off MLS for a month or so and then re-list at a marketable price.  If that price will create shortage to pay off the loan, perhaps seek approval to short the lender.  Again, an experienced agent who works with short sales should be able to help you with this.  Find that agent and use them.

Bryan H. · Answer

So many people take this into consideration when they owe more than it's worth. I've never heard someone that owns a free and clear property say their property is worth nothing.

Jon Holdman · Answer

This is simple, as others have pointed out.  Its overpriced.  End of story.  Yeah, its harder to sell in winter.  Yeah, the right agent will help sell it quicker.  But at the end of the day price sells.  If you put it on the MLS today for $10K it would be sold this weekend.  There is some price that's a lot closer to your current listing price that will get an offer this weekend.  If you really want to get rid of this albatross quickly you need to figure out what that is and get close to it.

You mention what you owe currently.  Sorry, but that is absolutely irrelevant in setting the price.  You may well have to bring cash to closing to get rid of this.  Or do a short sale with all the baggage related to that.  But a buyer will not pay you above the market price just because you're underwater.

Rick Fischer · Answer

Thanks everyone for the quick feedback.

@Marcus Johnson - I should have specified that we lived in the house for the first year and a half of the home being listed.  In that time we were searching for and purchasing land and then going through the building process of our current home.  Since we needed somewhere to live during that time, we didn't have the urgency to sell that we have now.  Dropping the price is an option we considered but I didn't want to jump to that conclusion without consulting the experts here first to see if there were other options we hadn't considered.  Based on yours and others feedback - we may not have a choice.

@Dion DePaoli - We did have to remove the home from the MLS while we were refinancing.  We thought that pulling the home off of the market during that process might also allow it to show as a new listing when we put it back on.  We got a small spike but not much.  When we moved out of the house 6 months ago we changed realtors to someone that has more experience.  He owns his own real estate agency with a number of agents working for him.  He has a much more aggressive marketing plan than our previous agent so I thought it would be a good move.  We listed with him at 479k and dropped to 459k right around Thanksgiving time.  This is a tough time of year anyway so we wanted to see what happened through the end of January.  The end of January is here and nothing has happened.  Our listing contract is expiring soon so that's why I'm looking for my best option to unload the home quickly and get out of the monthly bleeding situation.  Also, are you suggesting that we keep the home off of the market for a couple months after our listing contract expires?

@Fran Flanagan - Your estimates are pretty close but we also have escrow payments for insurance and taxes in addition to the utility bills.  It's a huge hit.  As stated above, we've only been out of the house for less than 6 months but enough is enough.  I'll look at the short sale option but I don't have any idea how that affects our credit (if any).  I'll do more research on the short sale.

If we drop the price drastically - does a for sale by owner make sense or is it generally just a waste of time?

Marcus Johnson · Answer

What jumps out at me here is the fact that you've been carrying this property for 2 years and haven't been able to sell it for the price listed and have dropped the price to 479k..   I mean I hate to say it, but you might want to drop the price drastically so that you can get out of the property.  You will have to bring some cash to the table, but why do you want to continue paying insurance, property tax and mortgage on a property that isn't being used for anything?  You might as well throw $100 bills out the window as your drive.

Rick Fischer · Answer

Matt R. that's a really great idea!  It would be great if I could use a platform like kickstarter.com where everyone gives the site their credit card info and once I hit a minimum number of tickets it would charge them all.  I think you would really need a good platform to get the kind of publicity needed to pull something like that off.  I'll have to think that one through a little more. Thanks for the creative idea!

And we are definitely going to be using the fantastic advice from @Jon Holdman

Chad Carson · Answer

@Rick Fischer You've received some great advice from others, and I can't add anything to it.

I live in Clemson and invest in the area near you.  I have a great realtor I use for my flips, so if you'd like her name just let me know. I am not associated with her or earn anything off it. She just does a great job analyzing market, staging (since it's vacant, that's big), and getting involved.

Best of luck with the sale and let me know if I can help (send PM).

Matt R. · Answer

here is the first one I found on google,  for a 2.5 mil Napa Valley dream home.

Link did not post but you can look.

Matt R. · Answer

That raffle I remember was years ago. Today a crazy viral youtube video and facebook campaign might make it happen in a matter of days or weeks. Every state has different regs...but I think South Carolina I have seen such offers for golf course dream homes.

How to escape from a double mortgage situation

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