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« Is Early Semi Retirement Really All That Great? | Main | FMF March Money Madness, Round 3, Posts 5-8 »

March 27, 2012

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I'd take the loss all day long if you found your ideal home that's on sale for a price you can afford.

Plus, I'm not a tax guy AT ALL, but talk with a CPA. There may be a chance to take the "loss" on your taxes next year, essentially getting you an even better "deal" on the switch. Even without the write-off I would do the deal if I could afford it.

I try not to look at the price I paid for things in the past. And with stocks or ETFs, if something's lower than I paid for it, I think that's all the more reason to sell and move to something I prefer moving forward (google "tax loss harvesting").

So either your realtor is off or the appraisal is off. At the end of the day your house is only worth what someone is willing to pay for it.

The bigger question I would ask is what kind of down payment are you going to be putting down on this new house? And what makes you think you can now afford a 150% more of a house when you haven’t been able to pay of much of the first house?

If you are going to buy anyway, take the loss and do it now. If both houses appreciate the same percentage, you will make more on the new one than you lose on the old one.

T 0, he didn't say he hasn't been able to pay off much of the first house - we don't know how much the original mortgage was for or how long ago he got it, for one thing. But more importantly he may not have been trying to pay it off more rapidly than the scheduled rate, which is perfectly reasonable.

I agree with Nick - if the new house is affordable and truly is THE house, I'd buy it. The current combination of low prices AND low fixed financing rates are nearly unbeatable. There's no guarantee that home values will rise in the near term, though interest rates will probably rise before too long. Also, if home values rise, you'll be in a better position to realize the appreciation in a larger, nicer house (50% appreciation on $350k >> 50% appreciation on $200k).

Appraised value and what you can get for it are two different things. The realtor is looking for a quick sale so that is why it is lower than appraised. A higher than appraised value is good when someone is going to buy the place.

What is the appraised value of the hous you "LUV". If you can't get a mortgage for $330 becasue the appraised value it $320 then you are screwed.

What do you mean by "ofering $330 becasue of the condition of the house" and only offering $330 instead of $347. This sounds like a red flag that could hurt your chances of getting a mortgage.

What are requirements for getting the mortgage you are looking for. 0% 5% 10% down. Do you even have that sort of cash? Is your credit score stellar enough to borrow the kind of money you are looking for?

Put your emotions aside and step back and objectively look at it.

Have you considered renting out the current place, instead of selling it? If you can cover the mortgage + insurance + tax expenses by renting out, you will not have to take a loss on it, but rather be able to sell it in a higher market.

When did you buy the house you are in? Did you have the same "forever" feelings about your current house?

I'm not a homeowner, but I've read about people who keep thinking "this" is the house—and then see something else they like in a few years and move again. If that's the case here, and you don't have the money saved to put down on the new home, you may want to wait.

Constantly buying and selling homes right now doesn't seem like a good financial move because of the small, if any, increases in home value year-to-year.

You stated the realtor says you can get about 215 for your current home and you owe 212K. If you sell it for 215 you will net yourself 3 thousand over what you owe minus any selling fees. Which at the end of the day is not too bad of a price to pay to move into your dream home. This would only make sense if you have a good amount of down payment for the new home, if you can get the new loan with a reduced rate than you are currently paying, and if you can effectively get the new house for 15K less than the listing price with seller paid closing costs. I would shoot for a 20 year loan coupled that with a lower rate/big down payment and you could be paying the same amount monthly as the old home loan.

I agree with Matt. The first thing you need to do is get pre-approved, so you know what you can spend. and, that's going to include how much you have to put down.

According to an article at: http://eyeonhousing.wordpress.com/2012/03/21/existing-home-sales-up-strongly-from-a-year-ago-slightly-down-from-a-month-ago/

"The January contract cancellation rate was 33 percent compared to 9 percent in February 2011"

These are Mortgage contracts that didn't go through because of the 20% down requirement and low appraisal rates.

Kent

We are in a strikingly similar situation in about the same price ranges. In the end, I think we'll try to make it work because prices are probably bottoming (if not soon) and rates will never be this low again.

How long are you really likely to stay in that big dream home, and can you very comfortably pay the likely mortgage? Because I would worry that you're likely to be stuck again in an underwater or near underwater house if you can't put up much of a down payment and you try to sell the new house in less than 7-10 years.

If your kids will be gone by that time, you may want to pass on the giant, super kid-friendly house and look instead for something that you'll like living in/can well afford even after the kids leave.

Or just tough it out and stay where you are and save the extra $ for the kids' college funds, which they would probably appreciate more than a larger rec room.

I imagine I'm probably rehashing a few things here, but the following items are important to consider:

1. There are no tax advantages to selling your principal residence at a loss. (http://www.irs.gov/businesses/small/industries/article/0,,id=98921,00.html)

2. Say you sell for the $215,000 your realtor has estimated... Remember closing costs will likely eat ~10% of the sale price. That means you'll need to come to the table with roughly $20,000. Do you have those reserves available? How will this affect your down payment?

3. Remember FMF's rules for homebuying. Will the resulting payment make you house-poor? Can you still achieve other savings goals you may have with the new payment?

I'm not familiar with your particular situation, but as I read your post, I see nothing about needing additional bedrooms for kids, moving for sake of school district or proximity to family, or because you live in a rough neighborhood(reasons people typically 'need' to move). You, instead, focus on how the house is your dream home that needs a little work. My impression is that your eyes may be bigger than your stomache.

Some phrase that should always engender caution:
1. "This time it is different..."
2. "I am in love with this house..."
Buyer's remorse is also an emotion-just like love.
Gran Torino

In simple terms - you can't afford it.
After paying closing costs and real estate commissions you will end up owing money just to get out of your current home. Unless you have a boatload of money stached away somewhere that you haven't mentioned I doubt if you would even qualify for a loan on the new home that comes with a far higher price and more closing costs. Add to that, it's not as if the whole real estate market has bottomed and there is any urgency to climb aboard before it really takes off again.

You are letting your emotions rule rather than your brain, especially when you have young children at home.

Old Limey, I read through the letter 3 times to be sure and nowhere does the guy say anything about his income or his ability to afford the new payments or the down payment - Frankly, we don't know if he can afford it or not. He thinks he can afford it, and his question is really geared toward whether it makes sense to take a loss on the current home in order to buy the new home now instead of waiting out the market.

Not sure if anyone already mentioned this, but beware of realtor fees -- even if you could get $230k for your house, after their 6%, you're left with $216k. If you can only sell for $220k, you'll actually have to bring cash to closing to cover the realtor fees.

I wouldn't do it. If you feel that you can afford a home that much more expensive...why do you not have more equity in your home? Either all your income is being spent and it will be more difficult to pay the new higher mortgage, or you have a lot saved earning much lower interest than you are paying on your mortgage. Whichever it is, there are some changes I would suggest.

There seems to be a lot of assuming from many people here.

The letter does not say when he bought his current house, if they refinanced, or what their incomes are.

Frankly, I would only buy the new house if you can get out of the old one. That's a pretty big IF in this market. I would not buy the new house AND try to sell the old. You have no idea how long you'll be stuck with 2 mortgages and, unless you are extremely wealthy, few families can afford 2 mortgages.

If you can get out and are approved for a new mortgage, then I'd buy the new one.

Can you afford to buy the new house?

We have no idea what your financial situation or income level are. If you have a 6 month emergency fund, your income would easily cover the higher mortgage payments and you've got plenty of money for a 20% down payment AND paying the short fall on your current home... then maybe you can afford the upgrade. If you don't have all that then I wouldn't upgrade.

If you can afford to upgrade then I would only do so if you can first sell your current home. You do NOT want to carry two mortgages at once. So if you can afford the more expensive home and you want to move then the first move is to put your current home up for sale and wait and see IF it sells.

I have no idea whether or not they should buy the house they 'love' but my dad used to say it was always a bad idea to "Spend money you don't have to buy things you don't need."

Dad's advice has served me well.

Most of the posters agree. Buying a home is far different from falling in love with someone. Buying a home is a serious financial transaction where you have to sit down, run the numbers, and decide whether or not it makes sense.

I'll give you a relevant example involving the purchase of the home that we have been living in since 1977. Like the poster of this article we wanted to move up to a much nicer home, on a bigger lot, in a particular custom housing tract that would not require our 3 children to change schools.

We contacted a realtor that "farmed" this particular tract and asked her to contact us immediately that a home came on the market. The first one she called us about was a corner lot, owned by a realtor and the asking price was $150K. The interior layout didn't really suit our needs, and we knew the asking price by the owner was "top dollar" so we passed on it. About a month later I received a call at work from the realtor I had engaged telling me that she had just taken a listing from a couple that had a huge argument the night before and had decided to get a divorce. I called my wife immediately and we met the realtor at the house within about half an hour. The house was just what we wanted, was at the bottom of a very quiet court and had the largest lot in the whole tract - best of all the couple had agreed to a sales price of $107,000. They hadn't done their homework because we knew the house was a steal at that price and bought it on the spot at the asking price. It was probably unethical for the realtor to represent both the buyer and the seller but once our offer was accepted it was a done deal. We sold our existing home within a week or two for $90K (it had cost us $27K when new in 1963), borrowed what we needed and have been very happy there ever since. The house is now worth about $1M since the area around us has changed from cherry and apricot orchards to being the home of many of Silicon Valley's largest companies, such as Apple and HP.

Your realtor is telling you that the conditions of the market are not that good, so the expected price on your home is lower. If that is the case, the downside is even larger for a more expensive home. Another 10% market drop would cost you another $21-22,000 on your current home, but would cost you $34-35,000 on the new home. I would wait until the market not only bottoms, but begins an upside move. Otherwise you are taking on greater risk with the new home.

As Old Limey says, this is a serious transaction and you need to look at the risks involved.

I think everyone's making far too many assumptions about the author.

I wouldn't worry much about taking the loss on your current home. If the homes are in the same market then prices are probably depressed equally on both. Its very similar to selling off some investment funds and then buying a similar investment fund. As long as you feel comfortable financing the new property then you should go for it.

I would recommend making your offer contingent on the sale do your home. The sellers might not go for it but if they do ( and many more sellers are considering this) it gives you some leeway of you have trouble selling your place.

If you use the same Realtor to handle both the sale and purchase you should be able to get them to negotiate a lower fee on the sale portion. We did this a few years ago and was able to get the sale commission down to 4%.

You said " if we wait a few years, and maybe make a small profit, we would not take a loss and have some money to put down on a new house." Sounds like you do not have enough funds, sir. If I'm wrong then listen to Jim's advice. Don't let a few thousand dollars loss be the driver of your decision for moving, that does not matter much at all. Also, never ask if something is worth it, ask if you can afford it and apply Jim's criteria.

Any home that is $100K more than your current home should be much nicer... but is there anything really wrong with your current home? It doesn't sound like it.

Taking on an additional $100K in debt means you are going to be paying at least another $435 a month assuming an excellent credit score. You may have to put down 20% ($66K) to get that rate. You had at most 15K down on your current house. I suspect that it would cost much more. Also, a larger home generally costs more to heat or cool.

Just think how hard life could be to come up with an additional $500-$600 more per month, every month for the next 30 years. If that sounds like a hardship then this isn't a dream house, it is a nightmare.

Even if you have the cash to do it- are there more important things to put the money toward? Retirement, kids’ college funds, etc. ?

-Rick Francis

When in doubt, don't. If you even have to ask the question, you're in doubt.

I don't know... If the market is down, and you lose 20% on your $200K+ house, then your saving 20% on the 300K+ house. No matter how you do the math, you're getting a bigger savings, than you are a loss, so do it if you can afford it.

Kent

A home appraisal is completely different than what you can get for the house. There can be tremendous variations in home appraisals, so I would not put too much weight on what your house appraised at.

I would have to recommend you wait on selling your home to buy your "dream home." Based on your letter, you are acting on emotions rather than strictly finances. Believe me, I know purchasing a home can be an emotional experience, but you need to keep your emotions in check especially if you are apt to lose money in the transaction. I would also caution you on speculating on the future of the real estate market. You (nor anyone else) truly knows what will happen in the market, so making a decision today based on what you THINK will happen is not the wisest decision. I would recommend staying put and waiting to see if in the future you can actually afford that dream house.

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