My wife and I have been living in our current home for almost 6 years now. We've loved living here, but as we consider having a second child we'd like to have a bit more space to move around in, as well as having more outdoor living space at our home.
Our current house (shown below) is a “detached townhome”, which basically means that it's a stand alone house, but with hardly any space between our house and the next one over. That means we don't have much of a yard, and we're not able to fence it in at all because we live in an homeowner's association that doesn't allow it. If we want to take our son outside to play we have to go to the playground 2-3 blocks away. While it isn't the end of the world, we'd like to have a slightly bigger house with a bigger yard for our son, and future kids to play in.
Searching For A New Home
We've been searching around for new homes and lots to build on over the past months, and it's pretty amazing some of the deals we've been able to find. Houses that were going for $400,000-500,000 a few years ago are now going for anywhere from $250,000-350,000 or so. We even saw one on a local golf course that cost over $650,000 6 years ago, that is now being sold for $450,000. We can get a lot of house for the money right now.
Our only problem? Our current house has dropped in value from our purchase price of $273,000 in 2006, to a recent property tax valuation of around $200,000. Given that those values tend to be a bit on the high end, we're realistically looking at a loss of value in our home of probably around $80,000-85,000. That's going to be a problem if we try to sell as it means we may be underwater, or if not, we will have lost that $60,000 down payment we put down last time we bought our house. While we can most likely come up with another 20% down payment, what are our options when trying to upgrade homes with an underwater house?
Options When You Have An Underwater Home
So what are our options when trying to upgrade houses when our current one is possibly underwater?
- Stay in our current home until values come back and we're not underwater: We had been doing this one already I think to a degree, hoping the housing market would start to rebound some. Unfortunately our area has been hit by a rash of foreclosures, which has helped depress values even further. The longer we wait, the more of our mortgage gets paid down, and eventually we'll be no longer underwater.
- Sell our current house at a loss: If we were to sell right now, it's a real possibility that we'd sell at a loss and would have to bring a check to closing to cover the difference, as well as commissions, fees, etc. Luckily my in-laws are builders and have a realty license, so they'd be able to help us out with at least half of the commissions being reduced or removed. But it would still mean quite a big check at the closing. Not something I'd look forward to.
- Do a short sale: I only include this because someone had mentioned it as an option. It's not something I would want to do. Part of the problem is that a short sale can hurt your credit, and it can make it tough to get a new mortgage anytime in the near future (which we would need). Add to that we don't really have a hardship to help us qualify for a short sale.
- Keep our house, rent it out: This is one I've been considering. Our former next door neighbors and friends have done this, renting out their home and living in a rental while their new home was built. Of course having a rental home has the added risk of double the house payments, utilities, etc, as well as the hassles of dealing with renters. On the upside if you can get a good renter it can be a decent investment, and buy you some time for values to come back while the renter pays down the mortgage. Problem with this idea for us is that our homeowner's association may have restrictions of how many rentals can be in the neighborhood, or right next door to each other – and there is already a rental right next door.
- Stay where we are, forget about upgrading: This is another real possibility. Some of the other options listed above are problematic or slightly risky. I'm pretty risk averse by nature, and as such I'm leaning towards just remaining where we are indefinitely – or at least staying here until we're not longer underwater and can sell the house without bringing a check to closing.
Are there other options that we're not exploring here? Bring it up in the comments.
Reasons Why To Sell A House Before Buying A New One
We've been through a situation in the past where we tried doing two transactions at once. We had our townhouse on the market, and had an offer in to build a house, contingent on selling our current place. The first time around we weren't able to sell the townhouse for what we wanted within the required time period, so we had to back out of the deal.
The second time around we sold the townhouse first, before we signed a contract to build our current home. The process went a lot smoother that time since we already had a nice settlement check in hand when we signed the deal. We did have to live with the in-laws for a few months, but it was worth it.
There are a lot of reasons why you should try to sell your current home before you buy a new one, but here are a few I came up with off the top of my head.
- Selling a house can be harder than you think: As a seller you often think about all the hard work you put into your home, and in your head it may be worth more than you think. If your pricing is a bit high, it can be a lot harder to sell than you might think. (Here are some tips to sell your house fast).
- You never know what you'll end up selling it for: Quite often people end up having to sell their house for much less than they thought. As such they end up needing more money saved when they buy their next house – the settlement check won't cover it. When you've already sold the house you'll know just how much you need, instead of counting on a sale price that doesn't come through.
- Doing two transactions at once is twice the stress: Selling a house is stressful by itself. But when you're having to sell your current home and work out a deal on the second, it can get quite stressful.
- If you can't sell, you'll be stuck with two mortgages: If you sign a contract to buy a new house before you sell your current home, you could end up getting stuck with two mortgages if your current home doesn't sell. Can you afford to cover those costs?
- Being a landlord isn't easy: While renting out your house can help to pay for a second mortgage and give you more time in order sell your house when prices have rebounded a bit, being a landlord opens up a whole other can of worms. Hopefully you'll be able to find a good renter, and not a tenant from hell.
I believe there are a lot more reasons for selling a house first before considering the move, than there are for trying to buy and sell at the same time. It can be tempting to do both at the same time, especially if you've found a house that you really like, but to me the disadvantages outweigh the advantages right now.
I found a similar discussion on a post on freemoneyfinance.com about trading up homes. The situation described is similar to ours, a buyer looking to possibly trade up homes despite their current home possibly being underwater. Most of the commenters felt that the person should make sure that they have enough cash on hand to cover the shortfall if the house did sell for less than they owed, as well as having enough on hand for a 20% down payment and to cover the increased costs with a larger house. I think that's probably sound advice.
What are your thoughts on the topic? Tell us in the comments!