Home prices in 20 major cities this last summer were up 12 percent compared to the same month of the previous year, according to USA Today. That’s a nice statistic, but if your home has been underwater — in other words, you’ve owed more on the mortgage than your home is worth — it simply leaves you wondering if you’ll finally be able to see the other side of the water.
Undoubtedly, many Americans are still floating around the water’s surface.
Though a year ago their house may have been $50,000 upside down, they now may be right near the break even point; that is, until you consider closing costs. This impedes ability to sell a current home and buy another — which can be a huge hassle if the current home is now too small for a growing family.
If you’re one of the many homeowners who are unsure what to do in this situation, you have several options.
1. Factoring closing costs
Closing costs can be a real deal killer if you’re trying to sell a home with barely any equity.
You might be thinking, “I really want to move. I’d even be willing to break even to sell or come to the closing table with a few hundred bucks if I had to,” but closing costs might not make that possible.
First, there are real estate commissions. They are always negotiable by law, but typically run between 5-6 percent of the selling price (remember this is split between the listing agent/broker and selling agent/broker). So on a $300,000 sale price, you’re looking at around $15,000 to $18,000 for commissions alone.
Then comes title and escrow fees which can easily run $1,000 each, or possibly more depending on the sale price. If you agree to any of the buyer’s requests for repairs or to have termite work done, you’re looking at going deeper and deeper into the red. Check out BankRate.com’s nationwide guide to closing costs to closing costs and closing cost calculator for a more personal estimate.
2. Reduced-commission brokerages
Because commission is such a huge chunk of closing costs, reduced commission brokerages offer an enticing concept, the ability to sell your home without paying very much money in selling costs. There are some legitimate reduced commission brokerages out there, but there are a lot of scams as well.
If you’re considering using one of these companies’ services, take the time to interview them. Find out what they charge and exactly what they do for that cost. Generally speaking, you get what you pay for. Reduced commission brokerages often post the listing on the MLS and then do nothing until a buyer falls into their lap. That means you arrange all the showings and open houses as well.
You may have to do all of the marketing on your own if you hire a reduced commission brokerage, but that just might be worth it to you.
3. Renting the property
Getting a tenant in the property may be an option if the rent is enough to cover your mortgage payment. Some homeowners are so concerned about the credit aspect of doing a short sale that they are willing to rent the property out at a slight loss each month, waiting until the value comes back around.
When renting out your home, you need to consider all the additional costs that you will still have to fork out each month after your tenant hands you that monthly rent check. Homeowner association fees are always the responsibility of the owner of the home; therefore the monthly cost should be factored into the rent rate. Other costs usually tied into being a property owner and landlord includes maintenance, repairs and an allowance for vacancies.
4. Short sale
Short sales are a hassle, there’s no denying it. You have to list your property for sale with an agent, allow for showings, accept an offer and fill out massive stack of paperwork that the bank requires, along with your pay stubs, bank statements and tax returns, all before your agent can even negotiate for short sale approval.
However, if you must sell and you don’t have enough equity, a short sale may be the only option left on the table. For example, if you’ve been given orders for a job relocation but the current house you own is underwater and the potential rent wouldn’t cover your mortgage payments, then you may need to short sale.
Short sales can take anywhere between one to six months to complete depending on how many liens are on the property and who the lenders are. Participating in a short sale will damage your credit … and even more so if you stop making your payments. But if the lender approves the terms of your short sale, then you may be able to walk away with peace of mind after it’s closed.
5. Wait it out
Another option that you have is to maintain the status quo. You can stay where you are even if you are outgrowing your house or the neighborhood isn’t right for you anymore. Waiting it out as the market continues to rise, until the point where you have enough equity to sell, is the safest way to deal with the situation. It doesn’t harm your credit like a short sale does — plus you don’t risk having irresponsible tenants in the property if you try to rent it out.
That being said, no decision is risk-free. The risk with waiting it out is that it may take years for the market to come up enough for you to be able to sell and by that time, you may have a hard time buying if the prices are significantly higher.
Take your time to review the benefits and risks of each option before you make your decision. Non profit organizations such as Community Housing Works can provide free counseling to help you determine which option is best for you.
Have you been in this situation — unable to sell your house and unsure what to do? How did you solve it? What other questions do you have?
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