The current real estate market might leave much to be desired for would-be sellers. Still, there are options for people who must move that can make the process less taxing, and possibly even profitable.
With real estate prices at historic lows, now may be a great time to buy a home, but also a less-than-stellar time to sell one. However, due to a variety of major life events – job relocation, decreased family income or need to downsize – selling might be the only option for some homeowners. For people who have to move, there are a variety of options to come out ahead, or at least cover their losses.
Selling for a Profit
Although property values have fallen from the peaks of 2005 and 2006, for many homeowners, their primary residence is still worth as much or more than its previous purchase price.
According to the 2008 National Association of Realtors Profile of Home Buyers and Sellers, the median tenure of recent sellers in the home they sold is six years. And according to the S&P/Case-Shiller Home Price Indices, the March 2009 average home price in the Chicago metropolitan area was $122,340, which is roughly the same as home values in 2002. Therefore, sellers who have been in their homes slightly longer than average – at least seven years – should break even or make a profit on their home sales. Sellers who have been in their homes at least eight years stand to make roughly $13,000 on their sale, or around 12%. The profit margin rises to $20,000 for sellers who have been in their homes for nine years, and it jumps to nearly $30,000 for sellers who have been in their homes for 10 years, assuming they haven’t already cashed out that equity.
Another option, especially for homeowners who have the financial means, is renting out your current home and purchasing a second home.
According to Judy Spicer, Senior Vice President and Regional Sales Manager for First Midwest Bank, this option can provide homeowners with additional cash flow. However, she says, there are many considerations to keep in mind before embarking on this arrangement.
“If you rent out your first home, you really have to consider if you can get enough to cover your principal plus interest, taxes, insurance and maintenance costs,” Spicer says.
Also, depending on your financial situation and credit, getting a mortgage to buy a second home might be difficult, she says.
Spicer warns that even if you have a signed lease on the first property, some renters might be willing to lose their security deposit to back out of the lease. As a result, you’ll be stuck paying both mortgages. Therefore, Spicer advises homeowners considering this option to have enough in savings to cover both mortgages for at least six months.
In addition, homeowners who consider renting out their home need to plan for associated, and often unplanned, maintenance costs, says Dorcas Helfant- Browning, Principle Broker for Coldwell Banker Professional Realtors and past president of the National Association of Realtors. “Homes are consumable,” she says. “Carpet needs replacing. Bathrooms need fixing. If you’re in a position to make a long-term investment, renting out your home can be a great option. But you don’t want to be upside-down on your rental either, unless you plan for it.”
Breaking Even or Taking a Loss
Depending on your situation, selling your home for what you owe on your mortgage, or in some cases, for less than you owe, might be your only option.
As a result, you might not walk away with a lot of equity, or any equity at all, Spicer says. In these cases, selling might still be worth the loss if you can no longer afford to live in your current home. If, after selling the home and paying closing costs, you still owe money on your mortgage, you can work with your bank to roll that amount into a new mortgage or find another alternative to finance that shortage, Spicer says.
Homeowners also might consider a shared equity arrangement, says Helfant- Browning. Under this option, you can sell an interest in your home to a buyer, who is responsible for most of the monthly payment and all the maintenance, she says. Homeowners can even benefit in the long run through an increase in home value and tax benefits. However, there are a number of legal and lending considerations to keep in mind regarding shared equity arrangements, so it’s important to work with a professional before choosing this option.
“Be creative, but be legally protected,” Helfant-Browning says. “Because you’re on the mortgage, you’ll want to ensure that you can’t be a victim.”
The New Lending Landscape
If you’re entering the mortgage market for the first time in a few years, you’ll likely find that many aspects of traditional lending have changed.
For starters, the number of brokers competing for your business has decreased dramatically. Many of these brokers went out of business or consolidated when the real estate market collapsed. For homebuyers looking to build a long-term relationship with their lender, it’s a good idea to select a trustworthy, established financial institution, Spicer says. Make sure the institution takes to time to get to know you, asks a lot of questions and uncovers any additional needs you may have, she says.
For homeowners who haven’t needed a new mortgage for several years, one big change they might notice is how quickly mortgages move now, Helfant-Browning says. “The process is much quicker today,” she says. “Information is flowing so quickly. You can make a mortgage application, and in 24 to 48 hours, get tentative approval. It used to take 60 to 90, even 120 days in past years.”
But that’s not to say lenders are being less careful, Helfant-Browning says. In fact, new lending regulations passed in July 2008 have resulted in less flexible and more regulated lending arrangements. For example, aspects such as your down payment, credit score, debt-to-income ratio and the loan-to-value ratio of your home will have a greater effect on your ability to get a mortgage and on your interest rate, Spicer says.
To prepare for these new realities, homebuyers need to make sure they have clean credit, little debt and high savings. Spicer recommends paying down as much credit card debt as possible and having at least six months’ worth of expenses in an easily accessible savings account. Together, these steps will show lending institutions that if something were to happen, you’ll be able to get by financially and still pay your mortgage.
“Institutions don’t want to put anyone into a situation where they can’t afford their house,” she says. “So mortgage lenders are going to be much more conservative.”