Seeking Your Feedback: Plan "B" for Unsold Condo (AKA Quality of Life? Math)

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code7700_IHB

code7700_IHB

New member
Hi,



I?m back seeking more advice from the collective group <em>(this is way cheaper than going to a mental health professional)</em>.



As you may (not) remember, I?ve been trying to sell my townhouse. It was listed twice. For all the obvious reasons it didn?t sell last year (I was too greedy on price) or this year (the market is worse than last year, even though I reduced the price by a lot).



Until the listing expired a few days ago, the townhouse is listed at about near breakeven. And still no offers. The good news is that (unlike many people) I don?t need to sell it (I can afford the townhouse payments).



So why am I posting here? Because the main goal for us (right now) is <strong>quality of life?</strong>. Simply put, we want to live in bigger home so we can better enjoy our lives.



Having said all that, a guy from work (who knows I am trying to sell my townhouse) just asked me if I?d consider renting it to him (he currently rents in West LA and is sick of the commute to Irvine).



While renting it out was one option, I never really put much thought into it until now. For one, we?re starting to see some very nice homes go up for rent at (relatively) reasonable prices. Of course those (relatively) reasonable prices also negatively impact how much rent I can charge for my townhouse.



In doing some math last night, I determined that the going (rental) rate for a townhouse similar to mine was about the same that this coworker was willing to pay. Unfortunately, this amount is about $450 <u>less</u> than my monthly payment (principal, interest, escrowed taxes, and HOA dues). The cost to rent a larger home is about $250 more than our current monthly payment. So in the end, this means my <strong>quality of life?</strong> improvement will cost me $700 per month (or $8,400 per year).



Of that $450 a month that I?m eating on the townhouse, $449 of it (as of today) goes right to the principal on my loan. This means that the money paid in by the renter would cover the interest, escrowed taxes, and HOA dues. Just not the principal.



We have not decided if we want to hang on to the townhouse and sell it in 5 - 7 years (assuming the market starts to recover in that timeline [which most of you do not think is the case, but I feel otherwise]) or keep it long term.



Our goal is to jump into the housing market (purchase) within 2-4 years (once prices have gone down to what we?re comfortable) with.



Having said all that, here are the options I am looking at:

<span style="color: blue;">

(1) Rent the townhouse to my co-worker and keep the current loan (at a loss). Total <strong>quality of life?</strong> cost is $8,400 per year (loss of $5,400 on the townhouse and an extra $3,000 to rent a larger home).



(2) Refinance to an interest only loan that will essentially lower our payment by $450 per month. Rent the townhouse to my co-worker and keep the current loan (break-even). Total <strong>quality of life?</strong> cost is $3,000 per year (break-even on the townhouse and an extra $3,000 to rent a larger home).



(3) Sell the townhouse now for whatever I can get it for it. My guess is that if I?m willing to reduce my price to $30,000 less than what I paid for it, I might be able to sell it. However, I?m not confident that this is possible. There is a bank owned property identical to mine for that $30,000 less price and it hasn?t sold. To be honest, I?m not exactly sure how to calculate the <strong>quality of life?</strong> cost for this scenario. Maybe diving the $30,000 loss by 5 years ($6,000 per year) ? or does that not make sense?



(4) Stay put.</span>



So, which one makes the most sense if you were in my shoes? And don?t forget the <strong>quality of life?</strong> aspect when you answer. :)



As always, I appreciate your opinions and time (but mainly opinions). :)
 
I dunno and do not know many of the answers to the questions you are asking. The only thing I know is that you infer that the price you are willing to accept for the sale of your townhome is based somewhat on what you owe or bought it for and those considerations have absolutely nothing with what someone may be willing to pay. If you are thinking of selling your townhome, you need to consider only what it will sell for with no consideration given to what you want. What you want is immaterial to the market. When you have a realistic view of what the market will bear, you will better be able to decide what you want to do, not the other way around.
 
How long are you willing to subsidize a renter? It may be 7-10 years before condo prices rebound to where you can sell at a breakeven price. Are you willing to wait that long?



How long would it take you to pay off the loss? Would it take a shorter period of time to pay off the loss than continue the subsidy?



Having the ball-and-chain of this condo is going to lower your quality of life indefinitely.
 
You won't be able to sell your townhome and break-even. If you can find someone who will rent it and pay for the cost of the mortage, then it seems like a decent option, The fact that you pay the $450 in principal is more of a "saving" account than anything else. Like you are saying your costs are fixed, but the rent you will charge should increase (at least if you look at it long-term). The only thing to keep in mind is, will you need to sell your home in 204 years to have a decent downpayment for your move-up home? However, selling now is probably better than selling 1 or 2 years from now when OC is 20% cheaper. In other terms, losing $50,000 now is better than $100,000 later. Not sure I answered your question or made it more difficult to find an answer!
 
Hello. Thanks for your reply. What I owe on it is irrelevant. I did not mean to infer otherwise. My estimate is based on what two or three similar properties sold for in the last 2 months. About 1 block away, similar design, similar square feet, etc. all sold for $30,000 less than what I'm asking now.
 
[quote author="code7700" date=1209449955]



(3) Sell the townhouse now for whatever I can get it for it. My guess is that if I?m willing to reduce my price to $30,000 less than what I paid for it, I might be able to sell it.



(4) Stay put.



</blockquote>


These are your only options that make sense. Best guess is that 2 years from now you will possibly get 80% of what you could get today and maybe less, so selling at a loss now is in essence putting a stop-loss in on your purchase. Read calcualted risk. Most economists, Warren Buffet included, are expecting a long and deep recession. Real estate may fall another 30% or more in the next 2 years. Job losses will mount. You surely don't want to be in the position of renting out a depreciating asset at below your cost. That's silly. A no-interest loan is just a loan from your future self to your present self and unless you come into a lot of money in the future so that you are in a position to pay future self back, this is really a stupid option from a financial point of view.



I don't know how much you have in your down but if you are really negative $30k or more now, since your 1st is non-recourse, you may have to consider mailing your keys back to you lender and walking. As much as I am morally opposed to that scenario, it seems that you have already put yourself in that position. If you do, you will not be able to buy another property for 5 years, which may actually be a good thing.
 
[quote author="code7700" date=1209451087]Hello. Thanks for your reply. What I owe on it is irrelevant. I did not mean to infer otherwise. My estimate is based on what two or three similar properties sold for in the last 2 months. About 1 block away, similar design, similar square feet, etc. all sold for $30,000 less than what I'm asking now.</blockquote>


A good asking price would be 5% less than whatever the last properties sold for.
 
[quote author="IrvineRenter" date=1209450951]How long are you willing to subsidize a renter?</blockquote>


Thanks for your feedback. Not subsidizing a renter is one reason I might do an interest only loan. Of course, there are repercussions to that (I?m no longer reducing the principal) - but it would help reduce the bleeding. In the end, it is what it is (I can?t magically wish the townhouse house away) and need to pick what is best for myself based on the facts. :) Just not 100% sure which option that is at this stage.
 
I put 20% down, so if I sold it for $30,000 less than I paid for it, I'd only be eating my own money. No need to mail the keys back to the bank. :)
 
perhaps I missed it in your explanation but I don't understand why you would want to PAY $450 a month in order to break even on a condo 5-7 years from now. Even with the low interest rates at the bank wouldn't that $450 be better off making some money for you?
 
[quote author="movingaround" date=1209451624]perhaps I missed it in your explanation but I don't understand why you would want to PAY $450 a month in order to break even on a condo 5-7 years from now. Even with the low interest rates at the bank wouldn't that $450 be better off making some money for you?</blockquote>


Now that someone else says it, it seems strange. :)



If I am not able to sell it, my options are to eat the $450 per month, get an interest only loan, or walk away. Walking away is not something I want to (or need to) do.



Of course, everything sells at some price, so I just need to find out where that number is.
 
If you are truly looking for quality of life improvement, elimimate the things that are causing you pain in your life.



If that means relisting it and selling the home, then do so, and be done with it.



If that means renting it, likewise, do it. Take your time, do a background check (even if it is your coworker) and get a good tenant to make sure you are not just trading one headache for another.



If it means to remove yourself from worrying about it entirely, then stay put. Don't dwell on it and act decisively.



You are the only one who really knows what will have priority to you. GL.
 
[quote author="IrvineRealtor" date=1209451900]If you are truly looking for quality of life improvement, elimimate the things that are causing you pain in your life.



If that means relisting it and selling the home, then do so, and be done with it.



If that means renting it, likewise, do it. Take your time, do a background check (even if it is your coworker) and get a good tenant to make sure you are not just trading one headache for another.



If it means to remove yourself from worrying about it entirely, then stay put. Don't dwell on it and act decisively.



You are the only one who really knows what will have priority to you. GL.</blockquote>


Wow. Good advice.
 
[quote author="IrvineRealtor" date=1209451900]You are the only one who really knows what will have priority to you.</blockquote>


Amen. Now I just have to ask my wife and kids.
 
Sell it. Sell it ASAP. You have already pissed away some equity by being reluctant to move your condo for a market price. Do you really want to live with the fact years down the line that you allowed yourself to continue to do so for so for more many years... It makes zero financial sense to hold a net loser rental right now. If you want to be a landlord, just buy a condo down the line when you can actually make money on it.
 
In my opinion... renting to a co-worker can be a huge can of worms you really don't want to open. What if this co-worker falls on difficult times himself? Are you ready to take the necessary actions to get him out of your unit if something happens? Will he expect you to be lenient on him, since it's someone you know? You will already be losing money on the property... now you are in a position to lose more.



Also, You are only factoring in the payments, HOA, etc in your loss equation. What about the cost of upkeep? What happens when you tenant has a pipe break? Or the stove stops working, needs a new hot water heater, etc. Your calculation does not factor in every part of being a landlord. Trust me, investment property can be a HUGE money pit.



Please be careful in this decision. Keep personal and business separate.



GITOC
 
Figure out why your wife and kids want a bigger house? What emotional need does it fill for them? (ex. status, space to play, escape from the kids 24/7 or whatever). Is there a cheaper way to fill that need (ex. Disneyland passes or daycare or whatever).
 
Let put myself in your shoes.



Plan A is to sell the place. But if it's too costly, I'll just keep it.

Plan B is just to live there for another few years and wait for the market to recover.

If the place truly is too small for your taste, this might mean a few more years of frustration.

Plan C is to rent it out, and live somewhere else. I like this idea. You'll still get the tax deduction on your current

property while living in a place that is better for you. If you can afford your condo payments, just keep it for 5 years.

You'll probably be able to sell it then without a loss. I think some are just too bearish here.

You only NEED to sell if you can't afford it.
 
Re option #2: Refi-ing to an interest-only loan only makes sense if you're planning to default on your loan. If you're going to do that, do it now and save yourself the money. I doubt you can swing a refi with no equity anyway, so that option is probably moot.



Re #1 vs. #3: $450/month is $5400 a year so it will take you roughly 6 years of that payment stream to equal a current 30K loss. That's probably close to the expected time to breakeven although I think it will probably be somewhat longer. Personally, I think the likely advantage either way is small enough I'd do what my spouse wanted so I didn't get blamed :-P



Re #4: That would probably be best for me. I'm increasingly down on big houses and yards. More work for upkeep and cleaning, more expenses for decorating. Right now we're considering redoing our kitchen (out of date plus deteriorating finish) and looking at the estimates I sure wish we had a smaller kitchen! Right now a smaller place with no yard is looking like a big boost to my QoL.
 
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