At what point do you just cut your losses and leave?

Question

I purchased a home during the housing bubble in a middle class area.  Unfortunately, post housing bubble the area has deteriorated, renters have moved in, and my property value has dropped by fifty percent.

I'm not certain how to look at this problem rationally.  Part of me wants to recoup some of my losses.  Another part of me thinks because the area is deteriorating their can be more losses to come.  Another part of me knows, even if my property does go back in value it is not going to go back in value at the same rate  as the nicer areas.

If you need additional information, please ask.  Please help me find out what the best decision is.

Joshua Dorkin · Answer

The only question that matters to me is if you're living there as a primary residence, which you are.  In that case, the question is whether or not you're happy where you live.

If you are, the value of your home is relatively irrelevant.

Are you planning on being there for the long term?

J Scott · Answer

I came here to say essentially what Josh said.  Generally speaking, a primary residence shouldn't be considered an investment, as the cash flow is always going to be $0 in the best case (and if you purchased hoping for appreciation, you were just gambling).

So, assuming you like your house, plan to live there long-term and it's paid off, why be concerned with the short-term valuation?

The problem I see is that your succumbing to the irrational behavior of wanting to get out at the worst possible time.  Perhaps values will continue to go down, but if you've lost 50% already, I would imagine the bulk of what you would lose has already been lost.

If you don't want to live in that neighborhood anymore, perhaps you could rent out the property for some cash-flow, hold long-term and find another property to live in?

Jon Holdman · Answer

The US is a big place.  If its in Orlando or Phoenix, you're going to be a long time getting back to where you were, as far as the value.  If its Detroit, its unlikely (IMHO) you will ever see the value again.  If you're in southern CA its possible that in the next 10 years you'll get the value back, since SoCal remains a desirable place to live.
          
          If you're talking about a house you paid $200K for that's now worth $100K, then renting it for $2000 isn't too bad of a deal.  If you paid half a million, $2000 in rent is a terrible deal.
          
          You're in a tough spot with two seemingly bad choices. 
          
         You liked the place when you bought it and were OK with the price.  Yeah, I hear you that its worth less than you paid, but so is every car any of us buys.  Yet we don't abandon them.  Yeah, I hear you that the neighborhood has deteriorated.  That does happen sometimes.

Scott R. · Answer

What difference does it make saying what you paid for the property or what city it is in? were not looking for specific addresses, or exact values, some people on this site deal in $20,000 houses, some deal in $1 million dollar properties, theres no way to advise you what to do based on knowing nothing about the property, as said above, $2000 month on a $100k house is good, on a million dollar house its obviously not, also if its in detroit your probablly screwed, most other areas will probablly have values increase from where they are at now over the next few years..

Jon Holdman · Answer

I think you fell for the "real estate never goes down" and "a home is your biggest investment" BS that's floated around by groups with a vested interest in doing RE transactions.  A house is just another expensive doo-dad, same as a car or boat.

Yes, I've had a number of other investments that lost 50% of their value.  Several small holdings in various tech stocks lost much more than that.  A LOT of people lost 50% of their investments in stocks in the recent downturn, though they have some of that back if they stayed in.

You seem to be unwilling to say even a city or state, and without that its hard to say what's going on.  I think many areas are not going to see big continued declines.  There may still be a few boom areas that are still going to feel some pain.

You're unwilling to say what you could get from a sale, so its impossible to advise you whether renting is a good idea.  Personally, I like to see cash on cash returns in the high double digits for rentals.  In this case, "cash" is what you could net from a sale, which is about 90% of the selling price.  If rents are $1500, and you net $750 after all expenses (yes, they're that much, read in the Rental Property forum), you're netting $9000 a year.  A 15% return would imply a value of $60,000.  If you can sell for more than $60K, sell.

OTOH, you have a place where you can live with nothing out of pocket.  There's a lot to be said for that.  I keep my rentals fairly highly leveraged, but my goal is to get my residence free and clear.

Henry Moulton · Answer

Thanks for all the replies everyone.  I can tell every single one of you is a competent professional or experienced investor.

The consensus seems to be rent it out and use the cash flow to rent somewhere else in the hopes it appreciates in value then sell.

I agree this is irrational, but I think many people would feel somewhat out of state if they lost half of their money on what is a quasi-investment.  I say quasi because I was intending to live here for many years, but I did hope my property would at least maintain value.

I have a tough decision to make, but I think I know what I'm going to do.  Thanks to all the replies!!!  Thanks again.

Ralph S. · Answer

Given the lack of specifics, that

Jeran F. · Answer

By your response there is a couple of ways to look at it. If you are simply looking at the property from an investment standpoint and expecting a return on the home over the next few years you are better off selling.

I've been involved in various aspects of the real estate market for years and my instincts tell me we are on cusp of another downturn. The banks are currently controlling the inventory hence the markets look like they are in recovery mode. Unfortunately our government has utilized almost every option available to control supply and demand and over the last few months we are noticing some strong indications of another slow down on the horizon.

Cash will soon be king in this market, which unfortunately has not really been the case over the last couple of years. I believe you will be able to find a better place to put your money on the next wave down. It's an excellent time to sell with rates in the 4% range and buyers looking for a deal. Find yourself a good agent and get your property sold as soon as possible.

Don't look at the sale of your home as a loss, look at it as an opportunity!

Emilio Ramirez · Answer

you don't have to give me the address.

Just city would be fine.

You are in a much better position than most because you own it outright. You can sell it and walk away at whatever the market will pay for it.

If you want to get your money back, rent it out until the market recovers which could be 5-10 years.  Since you have no debt on the property, I'm assuming you can get positive cash flow, but that is hard to say for sure without knowing more details. If you don't want to be a landlord, there is probably someone who would manage it for you for a fee.

In order to weigh in on your decision, you would have to state what your goal is. Do you want to reinvest the money? Do you want to get out of the neighborhood? Do you have to move for work or other reasons?

Henry Moulton · Answer

Thanks for the reply.  I don't want to give too much information away but I will answer the essentials.
          
          Where is the house? 
          I don't want to give too much personal information away.  So, I'll pass on this one.

What did you pay for it? 
          I don't want to say exactly how much I paid for it, but I will say that I have lost fifty percent of the value since I purchased it.

What do you owe on it? 
          I don't owe anything on it as I paid for it outright through the proceeds of my first home.
          
          Do you know area comps? 
          I'm not familiar with that term
          
          Is it your own residence?
          Yes, I own it and live in it. 
          
          What are similar properties renting for in the area?
          
          I believe similar properties are renting for about 1,500 - 2,000 but I might be wrong.
          
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At what point do you just cut your losses and leave?

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