Conflicting Information (Should I stay or should I go?)

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code7700_IHB

code7700_IHB

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Hi semi-anonymous people. A few days ago our condo listing expired. Needless to say, we didn’t sell it (no surprise given the market). We had it on the market for 6 months (since March) starting at 500K and ending at 485K. We purchased our condo 3-years ago for 440K.

Our goal was to sell this place now, rent for a few years (watch prices go down) and then buy a bigger (single family home) when it is cheaper. Obviously we could lower the price even more (475K or less) but we’re not that desperate.

We have a 30-year fixed and our payment is well within our financial ability (unlike many people, we purchased what we could afford), so it isn’t like we have to sell.

Having said all that, after seeing how slow the market was (we had a lot of traffic the first month or two, but it got slower and slower from there on out) we starting doing more and more reading (books, blogs, etc.) -- and now we’re starting to having second thoughts.

Specifically, we feel that maybe we should just keep our condo, live here for a while longer (with the tax benefits associated with my mortgage payment), and then after the prices come down (we still expect prices to come down) buy a house *without* selling our condo (and keeping it as an income property).

The logic being that we can afford a house in the future (without selling our condo) due to the fact prices will be lower. Obviously, this is a pretty big change of course in our thinking.

My biggest fear is what happens if prices tank (more than 25% down)? The good thing is that if prices come down a lot, we can but our single family home a lot easier, but then we’re stuck with a condo (that would become an income/rental property) that we may not be able to rent for an amount equal to our current mortgage payment.

Comments?
 
Any future rental income will still mean they are helping you pay off your current mortgage. While it may not mean a zero-sum game, it's still better than paying the full amount.

If you really want out, however, price it to sell. This probably means $440k right now, and that price is only going to get lower as time passes.
 
That is what we're afraid of. But we also have a lot of people telling us that selling my place is the worst thing we can do (people that have made millions in real estate [and no, not as sales people]) since we'll have to rent and not have a tax benefit. These people say long term we should keep our condo as in 5+ years it will be worth much much more. I'm not so sure. Then again, I don't see the bottom falling out now... its just slow slow slow. In theory that should lead to the bottom dropping out but I don't see that yet.
 
These people say long term we should keep our condo as in 5+ years it will be worth much much more.

I'd replace 5+ with 15+ in that sentence. A condo at $500k will look almost as hare-brained five years from now as it does today.
 
5 years? Go take a look at the graphs on yesterday's blog post and do the math on your place in 5 years. A 39% drop in the median price means that real houses with yards and garages and pools will be selling for less than what you will still owe on the current mortgage. You seriously think you'll be able to sell your condo for the same price as that house, much less what you paid for it? If your friend is so confident, let him buy you out for $475k and then you will both be happy.
 
"Specifically, we feel that maybe we should just keep our condo, live here for a while longer (with the tax benefits associated with my mortgage payment), and then after the prices come down (we still expect prices to come down) buy a house *without* selling our condo (and keeping it as an income property)."

Since you have a 30 year fixed payment well within your means, I think that saving to buy a new home in the future and keeping the current condo as a rental is totally viable.
 
"Since you have a 30 year fixed payment well within your means, I think that saving to buy a new home in the future and keeping the current condo as a rental is totally viable."



The only thing that worries us is the fact that rental prices may sink well below what our PITI (principal, interest, taxes and insurance). It is a 3 bedroom place that is about 1400 SF... and PITI is about $2500 for our condo. If you look on craigslist you can find a detached home rental for about that... though will admit not the nicest home rental. :)
 
code7700,

If you got in at a price that allows you to cover the cost of the condo, you can hold it indefinitely. The resale asset value does not really matter if you don't need to sell it.

Basically, you need to put it on autopilot and pretend you don't own it. Save your money for the downpayment on the house you want as if you were a first time buyer. It is very likely you will be underwater on this condo for some time, so you will not be able to sell it to generate the cash you need for a downpayment.

The people you know who have made "millions in real estate" are kidding themselves. They are probably imagining they are worth peak prices, and that those prices will come back tomorrow. If they are holding real estate, they are about to lose millions of dollars.

Personally, I would sell it and get out while you can, but your circumstances are not so dire that it is a must.
 
Hi Code7700,

My wife and I were in your exact shoes. We bought a condo in 2005 for 450k in Tustin Ranch (our first home...gotta get on the wagon before we were priced out FOREVER!), and had a small amount of equity in the house. It was fun to "play house" for a while doing upgrades, etc...then we had a baby and KNEW we wanted a bigger house. I did some quick calculations on Excel and Quicken (plus income tax consequence planning) and informed my wife the good news that if we sold our condo and move back in with her parents or a cheap apt, we can save between 2x-3x the money we are currently saving by owning the home. I also informed my wife of the bad news that we will lose almost all the 10% equity we had in the house after factoring in closing costs, commissions and all the upgrades we made to our home (recently remodeled bath and kitchen and paintX2), and that we'll have to start our down payment savings from scratch.

Friends told us to keep it as a rental, which we'll lose over 1k/month on after carrying costs since HOA is a whopping 250/month, and I had a second loan at 10%! We both make six figure incomes, affording the condo wasn't really an issue.

What drove us to list and sell was this manner of thinking: Our real goal is to own a nice newer 4bedroom SFR in Irvine...what will get us to our goal faster:

1. Staying in our current home saving X, and potentially being negatively affected by a downward pressure on home prices since we do not intend to be landlords. If prices stabilized, I would save X in each year. If prices dropped 20%, I'm under water for sure, and my savings are X minus the price drop. Yikes.

2. Sell at whatever price I can get, and save 2X- 3X per year. Basically, eat my loss and chalk it up to having learned a good RE lesson.

It was a no brainer for us. We listed in mid july 2007 and accepted an offer in a record 4 days. We instructed our seller to list at whatever price would sell our condo, and we closed the deal 1 week before the August, 2007 mortgage lending squeeze.

The interesting thing was...there were 3 condos similar to mine that were listed at about the same time. They all bought in 2002-2003, so should have had loads of equity. My unit was very nice, and I priced it under them as they were listing at 2005-2006 prices. The idiots...I still see their listings over 100 DOM. If they weren't so greedy, they would have sold, made a bunch of money and could probably afford to undercut me by alot. Maybe the market will turn around and they'll get their 2005 asking price next year!

Anyhow, my circumstances may be different than yours. Take it for what its worth...but I tell you, the freedom of not owning a depreciating asset that you don't even want to own long-term is priceless. We are booking a nice vacation at the end of the year for one month of the mortgage we're no longer paying. Woohoo!
 
Hmm-m-m-m, so many thoughts. First, from a traders point of view, when one finds that the intial reasons for entering a trade have changed, it is important to reevaluate realistically and not based on previous info or desire for the past. Second, from a traders point of view, a small loss now is better than taking a huge loss later. Third, is your condo a trade for you, or is it a permanent or semi-permanent home? In my home, my wife answers that last question. We sold our home in the summer of 05 and are now leasing and it is working out well for us. But, of course, only you and your wife know what is best for you. Good Luck.
 
code7700, I am not a RE agent or a financial expert, I am just a home owner.

Obviously you don't want to sell at a loss. So, you got to ask yourself these, #1, if you like your place and can see yourself continue to live in there for at least another 5 years. And #2, could you handle being a landlord. If the answers are yes, then take zovall's advice.
 
"#1, if you like your place and can see yourself continue to live in there for at least another 5 years."

Do you believe this is a wise course of action because they will not be underwater 5 years from now? If so, I question whether or not that will be the case. I think they will be deep underwater 5 years from now.
 
From code7700's posts, it is obvious that s/he is very well aware of the possibility that they may be "deep underwater 5 years from now."

Since they are "not that desperate" to lower the listing price any more and the fact they are very comfortable with their monthly payment, the only question remains that if they can enjoy their condo while it continues to depreciate.

It is my belief that people should see their house for what it is, a home. Not a money maker. If people can well afford and truly enjoy their house, why keep telling them that their house is depreciating?

Who is the real winner from all the selling and buying? The RE agents!
 
Thanks for everyone's feedback. The one big fact is that our main desire is bigger house to live in. If we keep the condo, about $140K of our money is tied up. Would rather use our money for a bigger house than an income property. At the same time we'd like to have some income property, but not now. Our biggest fear is not selling and prices tank. Our second biggest fear is if we do sell and prices go up (unlikely buy possible). Our gut says sell now, rent for a year or two. But many others say hold on to the property to "stay in the market". But if market is in decline that is bad advice. It is like holding crashing stock. So in summary I guess it is time to lower our price some more.
 
code 7700,

You must learn the number 1 rule of the free market, including real estate: "The market is ruled by fear and greed." The bubble was created by greed, now that the tide has turned and "fear" is starting to rule. this is the reason why so many people lose their shirt in the stock market. Don't get your emotions get the best of you and you will be fine. Now I don't know the specifics of your payments and rates but let say you had saved your money and did not buy when you did. Over the 5 yrs that you owned this home, you would have had to spend (my guess at the very least for an equievalent home) 5x12x2000=$120,000 in rent. Remember this does not include the tax savings, but of course this may be the same amt. as maintenance so I didn't figure it into the equation. So even if you had to sell your home 2 or 3 yrs down the road at the purchase price you still would be ahead. Secondly, if the market drops below your purchase price that will also mean that the SFR that you wanted to buy will also drop below the level that you could have picked up when you bought your condo.

In short, in any market you can take advantage of the herd mentality and win by being a contrarian. Don't ever let your emotions get the best of you.
 
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