Editor’s note: This is the second of a two-part series. Read Part 1: "When it makes sense to keep an underwater home."
Q: At the top of the market, I owned three properties: my first home (in a marginal neighborhood, now about 100 percent upside down), my own residence (a big fixer in a great neighborhood), and a triplex I bought as an investment (an OK neighborhood, needed some work, fully rented, but now upside down by about 30 percent).
When the market turned, I had a couple of bad tenants in my first home and the triplex that set me way back financially, and I was unable to borrow the money I needed to fix the house I lived in. I did a short sale on the fixer and got temporary loan mods on the other two, and moved back into my first home.
The problem is, they’re both so upside-down and don’t seem likely to come back up anything soon … should I just sell everything and start over?
A: Last week, we covered the preliminary step I want you to take with respect to your personal residence, of examining whether the home still works for you, for the most part, as a personal residence, notwithstanding the fact that it’s upside-down.
Many a homeowner makes the wise decision of staying put in an underwater home on the grounds that the home is functioning well as a home for their family, is affordable and looks like it will remain functional on those counts for the foreseeable future.
I’m aware, though, that your situation is complicated by your perception of both of the properties at issue, at least in part, as investments that now seem likely to have outlived the purpose for which you bought them.
I can’t give you a black or white answer in terms of whether you should sell or hold either or both of your properties. But I can give you a set of considerations to factor into your decision. After you evaluate the life-property fit of the home you currently live in, consider these three things:
1. Your options. One of the biggest, most stressful mistakes we make, as humans, is to agonize over decisions without a complete understanding of the full spectrum of options that are available to us. So, educate yourself!
Get online and do your reading, talk with your own lenders to see what options they might have available, and then also talk with local professionals you trust — at the very least, include a real estate broker, a mortgage pro, an attorney and a tax expert on this list. They might know of options you don’t, and they might be able to help you understand the timelines and feasibility associated with each option.
For example, banks seem to be granting short sales at higher rates than before, but they still take a long time, and the exemption from federal income taxation on the debt forgiven via a short sale is currently set to expire at the end of 2012. That might suggest you should list your properties for sale and apply for short-sale approval, stat.
On the other hand, there have been a number of governmental foreclosure relief program developments that might offer help for you, some of which are available only in the hardest-hit states.
The pros can also help you get a deep understanding for all of the tax, credit, financial and even legal implications of all the options available to you. Get the information and professional input you need to fuel a clear, complete understanding of your options before you move forward with your decision-making process.
2. Your values. The decision whether to hold or sell your properties is a hybrid business/personal decision that will impact the overall "after" picture of your life. While you can and should factor in input from professionals and even personal advisers whom you trust are knowledgeable and have your best interests at heart, only you can decide what’s really important to you in a way that drives the ultimate decisions you make.
(And decision really should be decisions, plural, because you could very well create an action plan that involves putting the place on the market as a short-sale listing while you apply for a loan modification, or some other set or sequence of actions.)
So, when I say to factor in your values, I’m simply encouraging you to get clear on what is important to you. Owning the place you live? Tax advantages? Reducing your expenses? Saving up to secure your retirement?
This phase of the process will help you get out of the very common real estate decision trap of doing things for their own sake: owning because ownership is good, or getting out of the market because that’s the supposedly smart thing to do.
Whether you decide to hold, sell, or try to make some other changes to your situation then sell as a backup plan, it’s important that each action step you build into your plan be set in service of some higher life aim, goal or value.
3. Your priorities. Once you do a deep dive into your values and even list them out in writing, one essential truth will quickly become very evident: You can’t (likely) have them all. Early on in this decision process, you’ll need to rank your values and objectives in order of importance, and communicate that to the professionals you look to for advice.
There are trade-offs involved in virtually every real estate decision. For example, you might have to give up some tax benefits of property ownership to cut your costs and save your financial acorns for the winter of retirement.
You might have to sacrifice free time and get a side job to make your real estate obligations if you decide to keep the triplex after the mortgage adjusts (if you’re currently paying only interest, a mortgage adjustment that happens in January might involve a decrease in interest rate but still increase the overall payment if you have to begin paying toward principal).
Only you can know what’s important to you, in your finances and your life, to make the critical decisions you now face. So get clear on your full range of options and the implications thereof, build out a strong sense of your own values and life vision, then prioritize and rank the things that are important to you. Once you have these inputs, your action plan should soon become clear.