Homeowner · Tucson, AZ · Member since 2013 · 14 posts · 0 votes
Im no expert on the economy, or investing, and especially not the real estate market but I do know how to balance a budget and jump on bigger and better opportunities. Our current house is too small and not working for our situation any more. We need a bigger home, but do we rent or sell this home?
First of all, I know nothing about being a landlord, or hiring a property manager, but the little advice I have gotten on the subject tells me I'd rather do the work myself. According to the numbers my real estate agent gave me and what shows on Zillow, our house is worth about 25K less than we owe. Now that doesnt mean we cant sell it for more. That number is simply taking into account the square footage and number of bedrooms right?
We have a lot of attractive features I think would draw people to this home, but if we sell we run the risk of losing a lot of money. If we rent, we run the risk of someone destroying our home, making a ton more work for ourselves, and losing a lot of money. But we could also sell for what we owe or rent to lovely tenants and actually make a little money.
So how do you decide?
On a related note, another question is how does it work when you cant afford two mortgages, do you find someone to rent/buy then try like hell to find that perfect house and move out fast? Or do you find a small rental in between? Neither situation sounds that great.
Any help/advice as we enter into this journey would be much appreciated!!
I have decided my small family and I dont fit into our 1258 sq ft home any more. We are looking into buying bigger in better school districts. I want to sell this house because renting seems like a nightmare to me. Here is my situation:
We have a beautifully maintained home built in 2004. We haven't upgraded hardly anything except solid wood window coverings, whole-home alarm system, lights in the closets and a new kitchen sink (big whoop) but we have a very expensive hot tub in the back yard and the location of our home in relation to the rest of the neighborhood is what attracted me to the home in the first place (corner lot, backed up to a wash, sunset in the backyard, sunrise in the front, no house facing our front door). The house came with some very nice features like a beautiful security gate and front door and an extended patio, irrigation system, landscaped low-maitenence yard.
My real estate agent ran the comps and says we probably cant get more than $135K for the house....we owe $158K left on the mortgage.
I dont expect to make a profit on this place, but I definitely dont want to sell it and owe the bank over $20K....$5K maybe, but we still have to buy a second home.
My question comes down to this: How much worth do I give those comps? Are they just based on homes with the same square footage and number of bedrooms? Because I'm sure my house is worth more than the other homes in this neighborhood for that square footage, but how do I know for sure?
(if your still reading, thank you!)
My other option, and one that my real estate agent thinks is a better idea, is to rent this place out, but I probably couldnt get more than $1000 a month for it, and the mortgage is $878. Is that a good deal?
Thank you all for your opinions/advice! I clearly have no idea what I'm doing and although I trust my real estate agent, I just want to be more informed.
Kelly McMahon I've combined your two very similar posts into one and moved them into the proper forum.
You're asking a bunch of questions here. The big one is sell vs. rent vs. (though you don't say it) stay put. Let me hit some of the easier ones first.
Comps say $135K, you think its worth more, based on some specific features. These features may make a little difference. Those other houses may have similar features. Have you been inside or at lease driven by? Do you ask the agent about these? Before selling, I would have at least three agents give you their opinions about pricing. But in the end, comps absolutely matter. An appraiser will make an overall determination of "condition" of your house and the comps and might make an adjustment. But the value will be based on comps and the buyer's lender will not use a number higher than the appraisal.
Don't fall into the trap many sellers fall into. They think their house is somehow special and better than the others. Bottom line - its not. To you, maybe. To potential buyers, nope. Its just another house for them to consider. If your price it extra high at the start, you won't get a buyer. It will sit and sit on the market, you'll eventually start making reductions and eventually it will sell. Probably for less than it would have brought had you priced it right from the start. If I was selling, I'd tell the agent "I want a contract in 90 days, what price should we use to get a contract in 90 days?" If three agents give you similar prices, that's the price, regardless of what you think.
If it will sell for $135K, you'll pay about 6% in commissions and 2% in closing costs. In some areas, seller concessions to buyers are common. Ask the agents. This is typically another 3%. If you have to give concessions in your area, you'll net about $120K after costs. $124K if not. Vs. the $158K your owe, that leaves you a shortage of $34-38K.
One option is a short sale. But I'm not sure a bank would approve it. Usually they want to see some hardship (medical, forced relocation due to job, loss of job) and "we want a bigger house" probably won't be considered a hardship. Like you allude to, it is possible the bank would give you a loan for the shortage. But that's painful.
The big question is, does your agent know what s/he is doing?
If so, you can trust that the $135K resale figure is about correct. Your agent should take into account the size, condition and a few other factors, like big upgrades. Even if you can find someone to pay more than that, you run the risk of the appraisal coming in low and not being able to sell it for what the offer price was.
In fact, even if your agent isn't that good, there's a huge difference between $135K and $158K, and it's doubtful that your agent is off by that much.
I wouldn't get my hopes up about being able to sell it for what you owe. As for renting, that's a much bigger question, and I would recommend reading a good bit here on BP about what it means to be a landlord.
Speaking of moving, the logistics after a sale are somewhat dependent on the market in your area. Usually, if you sell, the buyer will want to get the house at closing. So, you would have to be ready to move out before closing. That may mean storing stuff and living in a hotel for a few days (or more). Or moving to a temporary rental. If you're buying, you can make your offer on the new house contingent on selling your old one. The process there is you get both deals in the pipeline, then close at about the same time. You put your stuff in storage (or in a truck), vacate the old one and move in shortly later. Or, you buy the new one, move in and sell the old one later.
Speaking of two mortgages. If you go ahead and buy the new one and you're planning to rent the old one, you will need to be able to afford both loans. Banks are wise to the "jump and dump" scheme where people bought a new house claiming they were renting the old one and then let the old one go to foreclosure. Banks will not count the rental income toward your loan qualification until you've had the rental on your tax return for two years. I seem to recall some situations where you can avoid this, but I don't recall the details. Speak with potential lenders about your situation.
As far as renting, this looks like a loser from that angle, too. You say it will rent for, maybe, $1000 and your PITI payment (I assume that's what you meant) is $878. Would you be willing to manage it yourself? Or, would you pay someone to manage it? If you pay someone, your cash flow will be, roughly:
cash flow = (rent *50%)- your P&I payment.
Notice that's just the P&I part of your payment. Check your mortgage statement. If you're willing to manage it yourself, bump that 50% up to about 60-65%. Realize that many months you will be OK. The tenant will pay you $1000 and you pay out $878 and have $122 left. But some months the tenant will call and say the AC is broken. There's $500 to the repair guy. No delaying, no living with it. You write the check on the spot. That's being a landlord. Other times you call and say "where's the rent" and they say "uh, we've moved to CA". No rent and a mess to clean up. I recommend cash reserves equal to at lease 6X your PITI payment, 6X the rent is better. And you have to be mentally prepared to spend those at the drop of a hat.
Also realize the tenants will not treat your property like you do. They will make a mess. They will break things. They won't take of the carpets or floors like you will. The IRS says flooring in a rental should last five years. If you have carpets, figure three. So, three years after you start renting, you need to plan to buy carpets. ETC. ETC. ETC.
I'm not familiar with taxes and insurance in AZ, so I'm not sure about your P&I payment. I'd guess that, as a rental, this is, at best, about break even if you manage it yourself.
The issue with keeping it is going to be qualification for your new one. Can you qualify for both loans without the rental income being considered? If not, this plan won't go anywhere.
So, you may have two other options. One is to just stay put. Can you add a room or two onto your house? Otherwise remodel to make it more livable? I know 1258 sq.ft. is a pretty small house, but I have a 900 sq.ft. rental and its had three adults and three kids living it in. Financially, you just may not be able to afford to buy a bigger house.
Another option is to rent. Find a bigger house you can rent and move into it. Live there for a few years. Rent the existing one. After two years, you'll be able to include the rental income on your loan application and you may be able to afford that new house.
Do realize, though, this rental is going to be costing you money to hold onto. And headaches. That may be better than taking a $35K loss or a short sale or foreclosure. But its not pain free.
Jon Holdman, wow thank you SO MUCH! You have given me a lot more to think about. It sounds like moving is not even an option right now. I just pray that if we stay here the interest rates dont spike along with housing prices, but then at least we'd sell this place for a possible profit if they do.
Thank you again and I will keep in touch on the forums to see if I can learn any more about being a landlord.
The one thousand a month may cover your payment to your lender but you failed to mention if your payment is all inclusive or PITI. Principle, interest,taxes and insurance. Are they all included in your payment? 122 dollars a month is not much when you consider all that could go wrong. Even if you could save it all every year it would only take one tenant moving out and leaving the place trashed to eat all of that up.
Landlord insurance rates are higher than homeowner rates. If you think you won't let your insurance carrier know think again. If your house gets damaged and you file a claim you are leaving yourself open to them not paying if they find out you are renting the place out. Can you afford that risk? You will need to find a good landlord policy.
The spread, in my opinion, is to small to even think about. The cost of renting will eventually eat up that small spread through repairs, upkeep and the unforeseen.
You didn't mention if there is any hardship in making your monthly payment. If there is a hardship the possibility of talking with your lender about a loan modification may be the way to go. You might want to check out the two government programs HAMP and HARP to see if you qualify for either of these.
As to trusting the comps. Do you have any reason to not trust them? You can always drive by them and check them out to see if they are what your realtor said they are. At the same time get a couple more realtors to give you the value they think it
is.
You can always attempt a short sale but this will definitely effect your credit score. Just be aware that about 50% of all short sales fail. This will most likely put you in a position of having a full foreclosure.
Staying there may be your best bet even though the house is small. Good Luck
Richard Hewitt thanks for your honest reply. Our current mortgage is $878 and that includes PITI. Is there a formula you use for estimating how much profit you want to make off a rental to figure out how much more to charge for rent than what the payments are? Thanks!