Selling Your House in a Tough Market
10 Strategies That Work
Alayna Schroeder, J.D. and Ilona Bray, J.D.
April 2011, 2nd Edition
Sell your house quickly at the best price in any market!
What do you do if you want to sell your home now, but getting a good price for your investment seems nearly impossible because of an unfavorable market? Selling Your House in a Tough Market provides the practical and legal steps you'll need to take to reach your goal: maximizing your return and closing the deal quickly.
Written with the current market and national economy in mind, this book has all the information and guidance you need, including:
- knowing your local market
- picking the right price
- hiring the best professionals
- marketing and setting your house apart from the pack
- how and when to consider options other than a sale, such as renting
- negotiating the sale
Selling Your House in a Tough Market is the only book available that gives you proven practical strategies to maximize the return on your investment in your home, no matter what the state of your local housing market. The 2nd edition includes expanded discussions of short sales and the latest on what to expect when waiting for buyers to get their financing in order.
“An incredible timely and informative book. The tips from experts make it easy to take real action.” - Pat Lashinsky, CEO and President, Ziprealty
Another helpful offering from a company that goes out of its way to provide timely, accurate material.” - Tom Kelly, Nationally Syndicated Columnist and Author
“ Like having a dozen real estate experts over for dinner.” - Steve Kropper, President of Bank on Real Estate, Founder of Domania.com
Alayna Schroeder is a coauthor of several Nolo books, including Selling Your House in a Tough Market and Nolo's Essential Guide to Buying Your First Home. A Sacramento, California lawyer, she has represented employers in litigation, drafted employee handbooks and policies and counseled employers on sound employment practices. She holds a law degree from the University of California, Hastings College of Law.
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1. Know Your Market and Price It Right
- Is the Market Hot or Cold?
- It Pays to Start With the Right Sales Price
- Is the Price Right?
- Can You Afford to Sell?
- Can’t Stomach the Low Price? When to Wait Before Selling
2. Get It in Shape: Preinspections and Repairs
- Root It Out: Inspect It Yourself
- Hire a Professional Home Inspector
- To Fix or Not to Fix?
- Keeping You Honest: Disclosure Laws
- Skipping All Repairs: Selling “As Is”
3. Dress Your House for Success: Staging
- Staging Fundamentals
- Should You Hire a Professional Stager?
- DIY Staging Outside: Maximizing Curb Appeal
- DIY Staging Inside: First, the Basics
- Staging, Room by Room
- Home Improvements: Are They Worth It?
- Ta Da! Finishing Touches Before a Showing
4. Get the Best of the Best: Hiring a Real Estate Professional
- Why Hire an Agent?
- Finding and Choosing a Top-Notch Agent
- Making It Official
5. Save on Commissions: Sell It Yourself
- FSBO—The Way to Go?
- A Cooperating Commission for the Buyer’s Agent?
- Doing Your Own Marketing and Advertising
- Receiving an Offer and Negotiating a FSBO Deal
- Almost FSBO: Discount Agents and Other Alternatives
6. Making It Better Than the Rest: Buyer Incentives
- Keeping Cash in the Buyer’s Pocket: Cost Incentives
- More for the Money: Home Value Incentives
- Helping the Buyer With the Loan: Seller Financing
- Other Ways You Can Help With Financing
- A Deal for Later: Lease Options
- Get the Agents on Board: Agent Incentives
7. Market Like a Madman
- Maximize Your House’s Online Exposure
- How to Get the Word Out
- Hit Your Target
8. Adjust Your Strategy If You Need To
- Dropping Your Price
- Figuring Out What Else Might Be Wrong
- Making a Reverse Offer
- Taking Your House Off the Market Temporarily
- Keeping the Cash Flowing
9. Don’t Sell Yet; Rent It Out
- How Much Rent Your House Will Bring In
- Congratulations, You’re a Landlord
- How to Find Good Tenants
- How Renting Out Your House Affects Capital Gains Taxes
10. Seal the Deal: Negotiating a Successful Sale
- What the Buyer’s Offer Will Look Like
- Back and Forth: From Offer to Contract
- Serious Buyer or Lowballer? Evaluating the Financial Parts of the Offer
- Big-Deal Details: Other Important Contract Terms
- Between Signing and Closing: Escrow
- The Big Day: Your House Closing
Know Your Market and Price It Right
If you’re like most homeowners, when it comes time to sell, getting the best possible price is your number one motivator. You’re hoping to make a profit—or at least minimize your loss—before moving on. But on the other side of the table sits a buyer who has the opposite objective: to pay as little as possible. That makes your job a tricky one. You’ll have to set a price you’re willing to accept that’s attractive enough to capture the interest of potential buyers. Make a mistake and you may find no one will even look at your property or that, with the weeks and months ticking by, you have to drop the price by many thousands of dollars to get any offers. Or (less commonly, especially in a cold market), price too low and you’ll find that you’re walking away from the transaction with less than you really should have.
So how do you find that perfect balance between underpricing and overpricing? Your real estate agent, if you hire one, should help you with this, but it’s also important to educate yourself. You need to know what to expect when you offer your house for sale, so you’ll be ready to negotiate from the best possible position, convincing buyers that your property is a good deal at a reasonable price. This chapter will help you do that, by covering how to:
• gauge your local real estate market
• set a realistic price
• make sure you can afford to sell, and
• consider alternatives if selling is impossible or undesirable.
Is the Market Hot or Cold?
Whether a house will be easy or difficult to sell depends on more than just the desirability of the house itself—it also depends heavily on the “temperature” of the market.
As a seller, you’d be happiest with a “hot” market, in which there are more buyers than sellers. Well-priced houses in hot markets usually sell quickly, as buyers compete to get their foot in the door, sometimes even paying more than the asking price. Only the true duds or grossly overpriced houses get rejected by this anxious flock of househunters, so the overall inventory of available homes stays low. Sellers often receive multiple offers and can confidently negotiate deals, knowing that if they don’t get what they want, another offer will come along soon. The seller may even benefit from waiting, as prices in hot markets tend to climb.
Unfortunately, when this book went to print, real estate markets in most of the United States were cold—freezing cold. In a cold market, there are more sellers than buyers and a high inventory of available houses, which often languish on the market for some time. Buyers can typically make less than full-price offers and negotiate for other concessions, knowing that the seller might not get another offer anytime soon—or at least not before the costs of maintaining the house force the seller to drop its price. Pricing is more competitive, and sellers may have to offer creative incentives to try to catch the attention of the relatively few buyers.
Markets can be balanced, too. Rather than strictly hot or cold, in balanced markets, there are about an equal number of sellers and buyers. Prices don’t tend to be either rock bottom or sky high. A balanced market is usually transitional, though—at some point, it’s going to tip toward hot (as more buyers realize it’s a good time to buy because prices are reasonable) or cold (when lots of sellers become motivated to put their homes on the market, because there seem to be plenty of interested buyers).
Though you may be reading doom-and-gloom media accounts of the U.S. real estate market, don’t leave it at that: Take a closer look at what’s happening your local area. Even when U.S. real estate is at a lowest point, there will still be localized hot markets. Here are some of the objective indicators that will help you figure out what’s going on locally:
• Average sales price. Looking at recent sales can give you a good idea of how much homes are actually selling for. You’re looking in particular for prices of comparable homes, or “comps” in real estate lingo. That means homes of a similar size and quality, sold recently (within six months or less) in the same locale (ideally within six blocks in an urban area, but stopping at any dividing lines like a large street that changes the neighborhood character). You can research sale prices yourself, but a real estate professional should also provide this information, if you’re working with one. If the average sales price is falling, that’s an indicator of a cold market.
• Days on market. Another important piece of information is the average number of days it takes houses in your area to sell. The longer homes remain unsold, the more likely that market is cold. This number is very predictive, too—when it starts climbing, it’s an early indicator that the market is cooling.
• Inventory. The “inventory” is the number of houses on the market compared to the average number of buyers in that market. For example, if 4,000 houses are currently for sale and 1,000 houses sell (on average) each month, there’s four months’ worth of inventory. The more inventory, the cooler the market is likely to be.
Get market information yourself. You can find a lot of helpful information, including average sale prices and days on the market, on websites such as www.trulia.com, www.domania.com, and www.zillow.com, for little or no cost. Also check the website of your state’s Realtor® association.
Every House Is Different
As we’ve mentioned, even the coldest markets contain pockets of heat. In fact, your particular house may be hot, perhaps because it’s one of the best-looking places in a popular neighborhood. Without being overoptimistic, you’ll want to recognize when your house is hot. And if your house is cold or market balanced, you’ll want to do everything you can to heat it up.
Begin by evaluating your neighborhood. Pay particular attention to the factors discussed in the last section: Are your neighborhood statistics better, worse, or about the same as the rest of the surrounding area? For example, if homes in your neighborhood are selling quickly and for their full asking prices, your neighborhood may be hot, even if the general market in the area isn’t.
Usually, a particular neighborhood is hot for some identifiable reason. It might be located near an attractive feature, like a beach, or have the best schools in the region. It may be an older, established neighborhood of historic homes in a sea of new developments. If you know your neighborhood has a feature that makes it more desirable than those surrounding it, factor that in when evaluating the market’s temperature. Look only at comps in your desirable neighborhood, not the next one over—even if it’s only a couple of blocks away.
Now, back to your own house. Does it have exceptional characteristics that will attract buyers? You may find, for example, that large, expensive homes in your neighborhood are selling slowly, because few buyers can afford them. However, if you have a smaller home in the same neighborhood it may sell quickly as people try to break into the market or get into a good school district.
Make Your House Hot
What’s the best way to turn up the heat under your house? The key is to convince potential buyers that your house is a better deal than the rest, either because it has unique and desirable features or because it’s offered at a better price. For example, if you have a three-bedroom, two-bath house in a neighborhood where most three bedrooms have only one bath, play up the second bath as an added bonus.
In a down market, the easiest and most typical way to make your house stand out is to have the lowest price among comparable homes. We’ll explain more about that in this chapter. But it’s not the only way to garner interest and increase visitor traffic. As we’ll explain throughout this book, you can do many things to make your house better than the rest, from decorating it perfectly to offering special incentives. For now, just know that the more attractive and intriguing you can make the total package, the more likely you are to sell quickly, no matter how dismal the market.
It Pays to Start With the Right Sales Price
Setting the right price from the start is among the most important steps toward successfully selling your home. As Rick Woods, a Realtor® in Tampa Bay, Florida, puts it, “The real estate mantra used to be location, location, location. Now it’s price, price, price.”
Most sellers think of their houses as special and better than similar homes. Some may even tour open houses in the neighborhood and smugly tell themselves, “Well, my garden looks a lot better than this one, so we should be able to get more,” or “This bathroom may be remodeled, but it doesn’t even have a double vanity.” Your house no doubt has some great things about it that the others on the market don’t.
But don’t forget that living in a house can also make you blind to its faults. For many sellers, relying on this inherent sense of superiority is a critical mistake, because they forget to look at the house through the unsentimental eyes of prospective buyers. They then set too high a price, which ironically enough can ultimately result in selling the property for too little. Here’s why.
The Right Price Helps Bring in Buyers
When a house is priced too high, especially in a down market, it typically generates little interest. Buyers who have lots of different options may not even look at it, believing the seller is unrealistic about the home’s true value. They may assume the seller is out of touch with current market realities and won’t accept a reasonable price or that the seller will be particularly tight-fisted or difficult to work with. Even if potential buyers take a look, they’ll rarely come for a second showing. In fact, real estate professionals may take clients to an overpriced house purely to convince them that another, cheaper property is a good deal, thus helping them close the latter sale.
On the other hand, when a seller sets the price at or even a little below the home’s true market value, buyer interest perks up. Potential purchasers will act quickly, fearing that if they don’t take advantage of the good deal, someone else will.
You may think, “Well, I’d rather wait a few months and get what I think this place is worth.” But the longer a house sits on the market, the less desirable it becomes. Buyers begin to wonder whether there’s something wrong with the place. Those who are mildly interested begin speculating about whether the seller is getting desperate enough to accept a lower price—perhaps much lower. As new competition enters the market, fewer buyers will even bother looking. And, of course, until you sell the place, you’ll be handling mortgage, insurance, utility, and maintenance expenses. Particularly if you’ve already bought a new home, this can get expensive, potentially wiping out any profit you make by holding out for a higher price.
Example: Ed and Sharon plan to put their home on the market. There’s a comparably sized home down the street listed for $275,000, but it doesn’t have the charming porch or leaded glass windows that their house does, and the carpet is an ugly green color, while Ed and Sharon have hardwood floors. Ed and Sharon decide these improvements mean their house should be able to fetch at least $300,000. They move to a new home and list the house for sale.
But Ed and Sharon don’t see some other important differences between the homes. The other house has one more bathroom than theirs does, and the kitchen is recently remodeled, while theirs is 15 years old. The other house also has a bigger yard. These factors increase other the property’s relative value.
A couple months later, the house down the street has sold, while Ed and Sharon’s is still on the market with no offers. Worried, they drop the price to $285,000. Still no interest, and in the meantime, prices are falling. Three months pass, and they drop the price again, to $265,000. By now, their listing is “stale.” Buyers notice it has sat unsold for five months, and few even bother to visit. Sensing an opportunity, a buyer finally offers $250,000, and Ed and Sharon agree to the sale—for far less than they might have been able to get five months earlier, and have paid mortgage and maintenance costs in the meantime.
The Right Price Avoids Desperation
Those buyers who try to sniff out desperation are often right—sellers who hold on for too long really can go into a panic. They may start to worry that the place will never sell or feel additional pressure to drop the price and get out quickly, especially if housing prices are declining or if they’ve already moved on to a new home. Their hope drops to all-time lows as the phone stops ringing and literally no one takes a look at the house, making it all too obvious that no offers are about to arrive.
If you set the right price up front, you’ll avoid this feeling of desperation. Not only are you more likely to get one or more good offers, you’ll be in a better negotiating position with the offers you receive. If a potential purchaser proposes terms that you don’t think are reasonable, you can counteroffer or even reject the offer with some confidence that another one will come along.
In a Down Market, Don’t Buy Before You Sell
It’s not uncommon, when you’re selling one house and buying another, to find the house you want to purchase before you’ve sold your current home. This is especially true in a down market, when you’re likely to come across some pretty good bargains.
In these situations, you usually have to come up with some way to make payments on both mortgages. You have several different options: You can simply pay both out of pocket, if you can afford to; you can take out a home equity loan or line of credit on your current home; or you can borrow from someone you know or another source. There are even special “bridge” loans for this exact situation, but they’re expensive.
None of these options are ideal. After all, if it takes longer than you expect to sell your current home, you may have much higher expenses than you can comfortably afford long term. And unless you rent out your old home—unlikely if you’re planning on selling it—you won’t have any additional income with which to offset the high costs. You might become the classic desperate seller, anxious to get rid of your house at any price.
For this reason, we don’t advocate buying a new house in a down market before selling your old one, if you can avoid it. You’ll be in the worst possible negotiating position as a seller. And keep in mind—there’s more than one bargain to be had as a buyer in a down market. Better to wait for the next one and avoid becoming a desperate seller.
Is the Price Right?
Setting the right price is all well and good in theory, but how do you do it in practice? You’ve already begun the process by evaluating the heat of the local market and how your house fits within that. Now, you simply need to take a closer look at what other houses are selling for to judge the relative value of your home, called its “fair market value.” No matter how priceless you think your remodeled kitchen or in-ground pool are, the market sets a value—the price a buyer is willing to pay. Here are some steps you can take to make sure your price is competitive.
Pricing isn’t about your own needs. As broker and adviser George Devine explains, “Some people set their price based on what I call a ‘need basis’ rather than a ‘market basis’—they look at what they think they need to achieve to pay off their current mortgage and afford their next house and go from there. Unfortunately, that has no relation to what buyers will pay.”
Get Outside Evidence
To compare your house to others on the market, you’ll want to look at:
• A comparative market analysis. A “CMA” is a report, often but not necessarily compiled by a real estate professional, that gives you information about houses similar to yours (in size, amenities, and location) that are either on the market, have sold, or were listed but expired (usually, because they were priced too high and no one bought) within a reasonably recent time period (ideally three months when the market is in transition and no more than six months). These sales can tell you what homes like yours are actually selling for, how long it’s taking for them to sell, and what their sale prices are in relation to their list prices. It’s especially important to pay attention to the prices of pending, rather than closed, sales, for the basic reason that they’re the most recent. (And in a falling market, the appropriate price for the house you want to buy may be even less than the most recent pending comps.)
You can get a CMA without hiring a real estate professional. Some websites, such as www.homegain.com, offer a comparative market analysis for free. These are usually prepared by a local real estate agent who will contact you and probably try to solicit your business. If you don’t mind the hard sell, it’s a way to get the information even without hiring the agent. Alternatively, you can pay a small fee for such a report, generated online. For example, at ushomevalue.com, $40 will buy you a one-time “appraisal emulation report” that lists several comparable properties that have sold in your neighborhood. That’s a step up from what you’ll get from online appraisal systems, like those on www.zillow.com, which will estimate your home’s worth, but aren’t always up to date and won’t give you immediate access to the comparative information that underlies their estimates.
• List prices versus sale prices. You also want to know the difference between what people are asking for their homes and what they are actually getting. This will prevent you from unrealistically valuing your property, for example by thinking, “That house down the street was on sale for $250,000—I should be able to get at least $315,000!” If the house actually sold for $225,000, you may be better off pricing lower to start with, to generate more immediate interest.
• A professional appraisal. When you bought your house, the bank probably required you to get it “appraised”—that is, have a professional view it and put a dollar figure on its market value. Banks do this to protect their own interests, because if you overpay for a property and can’t make your mortgage payments, the bank won’t be able to sell the property for what you owe on it. But you can pay to get an appraisal too, just to evaluate your house’s market value. Usually, the appraiser will give you a report that arrives at the value of your property by comparing it to others that have recently sold. But keep in mind—in most case, the appraiser won’t have actually have seen the comparable properties (while a real estate agent might have). An appraisal should cost around $300–$400.
• Real estate agents. Even if you don’t end up hiring a real estate agent (we’ll discuss the option of selling the property yourself in Chapter 5), it’s a good idea to get a few of their opinions as to how much your house is worth. An agent will usually offer an opinion if he or she thinks there’s any possibility of being hired. The benefits are that agents are familiar with the local market and can base their estimates on actually seeing the house. Chances are they toured through the other local houses that recently sold, too. “Sellers almost always estimate high,” says adviser and seasoned real estate broker Nancy Atwood. “An agent who really knows the market has seen what there is to see and can really set the seller straight, making sure they start out with the right price that will attract buyers.” Don’t use this as your only source of information, though—if agents think there’s a chance you’ll hire them, they may suggest an artificially high value to convince you you’re best off listing with them. This is called “buying” the listing. (As we’ll discuss in Chapter 4, the best agents will make their recommendations based on the CMA, which they’ll provide to you.)
• Open houses. Although it’s the least scientific measurement, open houses in your neighborhood, even of the houses that aren’t quite comparable to yours, will also be informative. Viewing other houses helps you get a real sense of what drives list prices up and down—and, if you listen to some conversations, how buyers are reacting to the price.
Between the list of comparable properties, the opinions of agents, a possible appraisal report, and your own hard look at your house and others, you’ll probably arrive at a likely value—or at least a range, most likely within around $10,000 to $25,000.
Visit some comparables yourself. If you’re working with an agent, ask the agent to show you some comparable properties. “Sometimes sellers are so attached to their homes, they think they’re worth more than comparable properties,” says adviser Nancy Atwood, broker with ZipRealty. “Looking at comparable properties yourself is a good way to make sure you set a realistic price.”
If the opinions you’re getting are still all over the map, do some more research. For example, taking a closer look at the comparable properties might reveal that a particularly low-priced one needs a new foundation or a particularly high-priced one is actually located across a school district boundary, in a better district.
Set the Price: High, Low, or in Between?
Now that you have a good sense of what your house is worth, you’ll have to decide what to do with the information. You have three options:
• Set the asking price below the market value. You stand the best chance of generating a lot of interest if you set a price that’s a little below what other similar homes are listed for. Potential buyers will see there’s a bargain to be had and, hopefully, come running. Of course, that may mean you end up selling to one of them for a little less than market value.
• Set the asking price right at the market value. You may want to put your house on the market for exactly what it’s worth. A fair price should generate some buyer interest, but you’re likely to get offers below the asking price, especially in a down market. And you won’t have much room to negotiate if you’re really intent on getting your price.
• Set the asking price above market value. If you set your price above the market value, fewer people may come to look at the property. (If no one comes to look at all, that’s probably a good indicator that you’re way off base pricewise.) Though you may figure this will give you plenty of wiggle room if you receive an offer below your asking price, keep in mind that your pool of potential buyers will probably be smaller, in part because fewer people will look at the place and, in part, because many who do may think you’re unrealistic and not bother to make an offer. You could even be helping your competition, by making their homes look reasonably priced by comparison.
Just a tad above market value can work. A house that seems overpriced by a mere $10,000 won’t drive away as many buyers as one that seems $50,000 too high. Buyers are apt to think that you’re willing to negotiate and haven’t completely lost your mind when it comes to the home’s actual value.
So if every price level has its disadvantages, what should you do? Your best bet is to keep your house on the lower end of the range of comparable homes for sale. For example, if there are four comparable homes in the neighborhood listed at $375,000, $350,000, $335,000, and $325,000, you’ll grab the most attention by pricing your house somewhere between the middle and lower end—say, at $339,000. Anything above the top price in the range, and your house is likely to be ignored. Then again, if your house really belongs at the top, you’ll want to advertise and highlight the features that make it stand out, such as extra square footage or an updated kitchen and bath.
$399,900 Versus $400,000: What’s the Big Difference?
If you’ve ever looked on the Internet for a house—and according to the National Association of Realtors®, 77% of home buyers do—you’ve probably seen houses at prices hovering just below a seemingly huge number, like $399,900 instead of $400,000. It’s not an unfamiliar tactic—after all, 99 cents still sounds cheaper (and is, slightly) than one dollar.
But there’s an important reason sellers do this that extends beyond buyer psychology. Many online databases give buyers the option to look at homes in a certain price range: for example, between $375,000 and $399,999 ($25,000 price points are pretty common, both when setting database search criteria and in buyers’ minds, when they think about how much they can afford). By pricing your home just below a cutoff amount, you can maximize the number of people looking at it, because buyers are usually willing to look below their maximum price points but not above them.
Keep track of changes in the market even after you’ve set your price. If the market is softening and new listings are coming in at even lower prices or other sellers are adjusting their asking prices downward, you could soon find yourself at the top of the range, looking like the unrealistic or unreasonable seller. To avoid this, refresh your market research every month that your house remains unsold, then decide whether you’re willing to adjust your price. (See Chapter 8 for further discussion on what to do if your house isn’t selling.)
Can You Afford to Sell?
Ideally, the value of your home has increased since you purchased it. And unless you took out significant home equity loans, you’ll cash out on this entire nest egg when you sell. But, what if your price research suggests that you might have to sell at a loss or will only break even?
You wouldn’t be alone. In the last few years, prices in many parts of the United States have dropped significantly. Combined with popular loan products that allowed borrowers to make very low down payments or none at all, some homeowners now owe more on their homes than the properties are worth. Unless they have additional cash to pay off their mortgages when they sell, these would-be sellers can’t afford to get out.
If you’re among those with very little equity, you should run some numbers to make sure selling is a realistic option. This is especially important because your mortgage isn’t all you’ll have to pay off; expect to pay some significant transaction costs when you sell—anywhere from 6% to 14% of the sales price, depending on numerous local factors.
Use the simple worksheet below to calculate how much you can expect to walk away with. Keep in mind this isn’t necessarily all “profit”—for example, if you’ve paid off a significant amount of your mortgage, you’ll walk away with more cash, but it will be money you invested, not money you earned. But having some money to use for your next down payment—or at least for your security deposit, if you plan to go back to renting—is an important first step.
To fill out this worksheet, you’ll need to know local real estate sales customs. Talking to a local real estate agent or escrow agent about practices in your area is the easiest way to find this out. For example, in some parts of the country, the seller pays for a home inspection, while in other areas, the buyer assumes this cost. Also, find out typical local escrow and attorney fees.
Projected sales price
Real estate professional fees (usually 5–6% of sale price)
Other closing costs (such as home inspection, title,
Liabilities (remaining mortgage obligations, liens)
If you find, after running the numbers, that you’ll end up in the hole when you sell, you have a few choices. If you can afford to make up the difference, you can sell and pay off the mortgage from another source. If you can’t, but cutting out agent fees will make a sale feasible, you can try selling on your own, discussed in Chapter 5. (Recognize, however, that buyers might expect you to drop the price a bit if you’re not paying an agent’s commission, and you’ll have some additional expenses, discussed in Chapter 5.) And if selling simply doesn’t appear to be a realistic option for you, but you really need to move, you can consider renting your house out (discussed in Chapter 9).
You may have another financial pressure pushing you to make the move—perhaps you’ve lost your job and can no longer afford the mortgage payments, or your adjustable rate mortgage is about to reset and you can’t afford the higher payment. If you think you may be able to pull off a sale at a price that gets you out of the hole, we encourage you to read through all the strategies in this book. But if you truly feel stuck—can’t pay the mortgage, and can’t sell—look into these options:
• Refinancing. Refinancing essentially means you take out a new mortgage. If you qualify to do so (which may be tough and depends on your income, debt load, credit history, and equity in the house), a refinance can help lower your monthly payments in two ways. First, it may lower your interest rate. Second, it will start a new loan term. For example, if you have a 30-year loan for $200,000 and have made payments for five years, you’ll probably owe around $186,000. If you kept that loan, you’d have 25 more years to pay off the $186,000. But if you refinance into a new loan term, you’ll have 30 years to pay back the money, meaning you’ll pay a little less each month. The downside is you’ll pay up-front fees to refinance, and pay more interest over the life of the loan, which can cost you thousands of dollars over the years. But if it helps you stay put in the short term, it may be worth it, especially if you think you’ll refinance or increase your payments in the future.
• Negotiating with the lender. If you’ve reached the point of having real trouble paying your mortgage, your lender may agree to a repayment plan to help you catch up on missed payments, a modification to your current loan that will make it possible for you to stay put, or a forbearance to reduce or eliminate payments for a period of time, until you’re back on your feet. But you’ll have to ask first—call, be persistent, and expect to share a lot of financial information to justify why you can’t make your payments.
• Selling in a “short sale.” With a short sale, you will still sell the property, but you get the lender’s permission to sell for less than you owe on the mortgage. You won’t walk away with any cash, but you generally won’t owe the lender anything, either. Lenders sometimes allow this because it can be cheaper than the process of a legal foreclosure, which involves hiring a lawyer, potentially paying an auctioneer or real estate agent directly, or even getting stuck with a property that doesn’t sell. If the lender thinks you’ll lose the house anyway, this is a money-saving tactic. We’ll cover short sales in more detail in Chapter 8.
• Walking away. Some homeowners consider walking away from their loan obligations, leaving both the house and the mortgage behind. They reason that there’s no incentive to stay if they’re just buried in debt. Of course, walking away is perfectly reasonable for people who don’t have any ethical opposition to it—some do—and who aren’t worried about the effect it will have on their credit. While there’s speculation that eventually lenders won’t care much about a history of walking away because so many buyers are doing it, for now, it will still make it difficult or impossible—or at least hugely expensive—to get another mortgage.
• Deed in lieu of foreclosure. Your lender may be willing to accept a deed in lieu of foreclosure, which means you surrender ownership and the lender takes the property, without the expense of foreclosure (or the harm to your credit).
• Foreclosure. If you miss three or four months of mortgage payments, the lender may file a notice of default (legal notice in the public record saying you’ve defaulted on the loan) and begin foreclosure proceedings, eventually obtaining the right to sell your home out from under you. At the same time, you’ll accrue more debt in the form of late and penalty fees, and if you get to foreclosure, you could be stuck with fees for that, too. Your credit will be negatively affected by a foreclosure as well, and you’ll likely find it difficult to buy another home for quite some time. All the preceding options are better than foreclosure.
Find out more about these and other options: See The Foreclosure Survival Guide: Keep Your House or Walk Away With Money in Your Pocket, by Stephen R. Elias (Nolo).
Can’t Stomach the Low Price? When to Wait Before Selling
If you don’t need to move right away, or have a choice about when to sell, figuring out your house’s probable selling price inevitably prompts the question: “Can I earn more by waiting?” Many sellers opt to sit tight when the local market is down, hoping for an upswing. Eventually, even if it takes years, the U.S. real estate market always seems to move upward in value. Before settling on a timing strategy, ask yourself a few questions:
• How can I make waiting workable? For example, if your family has expanded, you may want to add on to your current home, which would have the extra advantage of saving the transaction costs of moving. Or if you’re changing jobs, you might rent your house out in the short term (as described in Chapter 9), and plan to sell it when the market is stronger.
There are tax consequences for turning your home into a rental. While renting property entitles you to certain tax benefits while you own, it can have a big impact on your taxes when you sell. We’ll explain more in Chapter 9.
• Will waiting make it harder to buy my next house? If you sell a small home in the hope of buying a larger one in the same community, you may be better off making the transition earlier rather than later. After all, if the value of your smaller house is less than you’d like, the value of the bigger house is probably down, too—and the proportional difference will be greater in a higher priced house.
• Do I expect the market to improve? Real estate markets rise and fall. But if you think the market in your area has taken a permanent dip—perhaps because there’s a new freeway going up next door, or some other physical blight makes it more permanently undesirable—there’s little to be gained from waiting.
• Can I wait even a few months? Real estate markets tend to be weakest in cold, dreary winter months (who wants to look at houses in the rain or snow?) and strongest in the spring. If you’re trying to unload your house in November, the number of interested buyers is almost sure to be lower than the number in May. Even waiting a few months can make a huge difference. And as we’ve already described, there’s not much point in putting the house on the market in November and figuring spring will come eventually, because the house will appear stale by springtime, and buyers will shy away.