Being underwater can be scary, but don't panic.
If you put less than 15% down on a recent purchase, there’s a good chance that you owe more than your property’s current value. It’s a tough spot to be in—and tougher if you want to sell. But despite the risks, there are legitimate reasons to consider negative-equity sales. If you’re considering selling in the red, here are three simple rules to follow to keep as much money as possible in your pocket.
Rule 1: Consider Renting
Before you sell, think about renting. Relocating to a new home while renting your current home isn’t for everyone, but it might work for you. To determine whether it might, evaluate three key factors:
Time
The more time you have, the better an option renting becomes. It takes time to rent out your home, so if you need cash in a hurry, a quick sale may be your only choice. On the other hand, if you have a few months in which to make your decision, you might be able to avoid selling at a huge loss or potentially damaging your credit with a foreclosure.
Financial Pressure
Are you under financial pressure, or do you just want something better? How close are you to making ends meet? If you’re $5000 short on your monthly mortgage payments, renting probably won’t help. However, if you’re fairly close to even, and you just need to buy some time to get back on your feet, you may be able to rent your way out of the hole. You don’t need to cover your whole mortgage, either—just enough to continue making payments while you rent a different home. If you’re able to make payments already, renting out your existing home (even at a loss) while you rent a “tester” home or apartment in your ideal neighborhood can give you another 12-24 months to build equity while you scout out the perfect location for your long-term purchase.
Needs versus Wants
Of course, renting your current home only works if you move into something less expensive. If you bought “too much house” on good credit and a dream, you can probably find something more reasonable. This may well involve moving to a less desirable neighborhood, having the kids share a room for a year, or increasing your daily commute, but saving your credit, and possibly your home, are worth a bit of belt tightening.
Rule 2: Don’t Forget Repairs
You may not have a lot of money, but you can’t ignore the basic laws of home selling. Buyers buy the house they see, not the house it can become. Most repairs and many upgrades more than pay for themselves, and if you don’t repair your home, there’s another one down the street in better shape. In Additions & Remodeling and Three Ways to Improve the Value of Your Home, we outlined low-cost, high-return improvements homeowners can make without contractors, expensive equipment, or construction expertise. Put them to use.
Rule 3: Always Ask a Realtor©
You may be tempted to sell your own property to save commission costs. Properly-executed, For Sale By Owner (FSBO) sales can save a substantial amount, and many homeowners sell their own homes every year.
It’s important to note that a large number of FSBO homes are sold by professionals who renovate and “flip” distressed homes for a living. These people have studied local market pricing and trends, and have invested significant amounts of time, expertise, and labor to bring their properties up to snuff. If you’re new to the seller’s market, we suggest you enlist the help of a licensed Realtor© In exchange for your commission, a Realtor© will price your home appropriately, promote your home to buyers you probably can’t reach, handle all the paperwork, and advise you of the financial implications of your decisions. Given their expertise, most Realtors© can sell a home for more than a layperson (particularly if you’re under time pressure), so your commission dollars will likely pay for themselves.
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