Ask Brian is a weekly column by Real Estate Expert Brian Kline. If you have questions on real estate investing, DIY, home buying/selling, or other housing inquiries please email your questions to [email protected].
Question from Gil in OK: Hello Brian. I’m in big trouble. Right now, I’m more than a month behind on my mortgage payment and I don’t see a way forward to make the payments for many months to come. I’d like to blame it on COVID-19 but that isn’t the reason. What happened is my paycheck was garnished due to back child support. They’re withholding almost half of my paycheck. It’s going to be a year or more before I put this behind me. Adding to my problem is that I only bought this house 14 months ago. All things considered, I can’t sell the house to pay off the mortgage. What are my options when I have little or no equity?
Answer: Hi Gil. Something to understand is that any house can be sold. That doesn’t mean that you’ll come away with a profit but it does mean there might be a way for you to get out from under the mortgage one way or another. Let’s begin with a couple of terms for clarity. Underwater is a term that you hear a lot that means the house is worth less than what is owed on the mortgage. Gil, the better term for what you are referring to is "under-equitied" meaning having less than 20% home equity. The 20% is arbitrary but is associated with refinancing a home without paying private mortgage insurance. When you're selling, having equity needs to at least cover the costs associated with selling, including paying off the mortgage. With that in mind, let’s look at some options. Generally, these are listed in the order of most favorable to least favorable for the seller.
Stay in the house. Gil, this doesn’t look like it will help you but it might help other readers. If you don't need to sell right away, your first consideration should be to "just sit tight" because rising home values in most markets will bring the home equity value up with time - if the house is maintained.
HARP expired on December 31, 2018. I’m only including this expired program because it was once a possible solution that no longer exists. Today, with millions of Americans missing their mortgage payments because of COVID-19, something similar to this program or some type of partial loan forgiveness might come back in the next several months.
Home improvements. If you can make a few inexpensive but needed home improvements, you might be able to increase the value of the house quickly. This is the first step that many house sellers take when they are ready to list the house for sale. A real estate agent can help you get the most for your home with inexpensive home improvements and expert marketing techniques to offset your low equity.
Rent the house out. Research your local market to understand if you can rent it for more than the cost of the mortgage and other costs. Along these same lines, you might consider taking in a boarder that could make it possible for you to make the payments and stay in the house. If you rent it out, there are a few things to consider. Gil, in your situation, one thing to learn about is if the rent can be garnished for the child support payments. It’s going to be considered income to you. Also, make sure you clearly understand the cash flow from the property. You’re still going to be responsible for taxes, insurance, HOA fees, maintenance, and other costs. A vacant rental might hurt you more than help you.
Negotiate the agent commission. The typical 6% commission is usually the biggest cost of selling a house. But it’s not the only cost. The total cost is probably going to be between 8% and 10%. Shaving a percentage or two off the commission and minimizing other costs could bring you in under the wire when it comes to paying off the mortgage.
For Sale By Owner. This can avoid the sales commission altogether but it has risks. You need to have a clear understanding of the entire sales process including all requirements unique to your location. One of the biggest risks is mispricing it, which could cause you to miss out on some money that an agent could have negotiated into the deal for you. You’ll also be on your own when it comes to marketing to attract qualified buyers ready to make the best offer and close the deal in a short time. Any professional advice needed, you’ll have to seek out yourself. And in the end, there is a good chance that you’ll have to pay the buyer’s agent commission of 3% anyway.
Short sales can be complicated. This is an available solution but you’re not going to walk away with even a nickel. This when your lender accepts less than the full amount but credits the mortgage as paid in full. On your credit report, a short sale is considered better than a foreclosure but it is still a big negative that can remain on your credit report for seven years. If you’re really savvy, you might convince the lender to not report the short sale to the credit bureaus but that is the best you can expect and it’s not likely to happen. Short sales are complicated. You’re going to want a real estate agent with short sales experience. You’re also going to need a patient buyer that will wait while your lender decides whether or not to accept a particular offer for less than what is still owed. It might be a better choice to skip this option and go directly to selling to an investor.
Sell to an investor. Not all or even most investors are interested in underwater houses. The mortgage is going to have to be settled one way or another and this might be your last opportunity before the house goes into foreclosure. One way investors buy underwater houses is “Subject to Existing Financing.” This means that you sign over the title of the house to the investor. The investor then begins making payments on the existing mortgage. Something that you need to be aware of is that your name will still be on the mortgage although title to the property will be in the name of the investor. This definitely adds risk to the transaction. The investor might have to bring the mortgage current if you are behind with the payments. You aren’t likely to see a nickel but some investors will give you a little money to cover moving costs and possibly a deposit for a rental. There are a few other techniques that investors can offer you such as a sandwich lease option.
Gil, I strongly suggest that you seek out professional legal help to make sure you fully understand the risks and liabilities that can result from any of these options.
Please add your comment about what creative ideas for selling a house when the owner doesn’t have any equity. Our weekly Ask Brian column welcomes questions from readers of all experience levels with residential real estate. Please email your questions or inquiries to [email protected].