A reader posted the following question in the forums a few days ago, and while there has been some good advice and discussion there, I thought it would be good to bring the question to the larger audience of the blog for feedback as well.
I have owned a 2-bed 1 bath 975 sq.ft. condo, built in the late 70s, in the middle of Fremont since fall of ‘03, and for a lot of reasons I’d like to move into a house or townhome in a lower-nightlife Seattle neighborhood.
My husband is starting a 10-month graduate program in July and will not be working, and while we can subsist in the condo on my teacher income, we can’t really afford to increase the mortgage until he goes back to work. FYI, my husband is a social worker and right now I make more than he does.
Oh, and we’re trying to get pregnant and ideally we’d like to move into a place that will work for us with up to two kids. It’s been our plan to stick it out until grad school is over and the kids actually arrive, but I’m telling you: Fremont is really really starting to drive us crazy.
So as I see it, I have four options.
- Stick it out in frat boy hell for another year with the plans to sell next summer.
- Sell now and buy a house with a risky loan (interest only ARM?) that will have an artificially low payment with plans to refinance when my husband goes back to work in a year.
- Sell now and rent until hubby goes back to work, buy next summer.
- Rent out our condo to frat boys and rent a house until the right time comes around to buy.
I’m not really a big fan of #4, but choosing between options #1-3 requires me to have a clue about the state of the market… and it turns out I don’t have one. I’ll take thoughts from anyone who is willing to give me the time of day… Thanks for reading.
Sarah
The consensus on the forum seems to be that option #3 is her best choice. I agree with that advice, assuming that she’s willing to price aggressively (see regular biliruben’s first-hand advice on that here) and can find a good deal to rent a place that her family will be happy in for a year or two (be sure to check out our how-to on watching Craigslist for rentals here).
What advice do you have for Sarah?
vboring » Jun 10, 2008 at 7:27 am
#3
but it might take more than 1 year for costs to fall enough to justify buying back in.
there are good places available in town for under $1k/mo (and that includes w/s/g). i’m renting a 900 sq ft 2 bed/1ba in a quiet neighborhood 20 blocks north of Ballard for under $900 right now.
be sure to find a place with electric heat, though. it’ll save you at least $100/mo vs natural gas.
shawn » Jun 10, 2008 at 8:38 am
#4. I figure once you own it you should keep it. Keep it for a long time, maybe till you retire. The value is like a yo-yo a kid is playing on an escalator. It goes up and down, but over time, as the boy goes up the escalator, the downs are still way above the earlier ups.
Flotown » Jun 10, 2008 at 8:56 am
Sounds like:
1) you’re not pressured to move
2) your cost of housing could decrease (monthly payments) if you were to sell and rent
3) you don’t want to be there
Why not stick it on the market and see if you can get a price you deem reasonable. then you can rent for 10 mos, reducing monthly payments in the process, and wait until you have two incomes online to decide to buy a house. The market will most likely look more affordable in 10 months than it does now
softwarengineer » Jun 10, 2008 at 9:11 am
SELL BABY SELL
Keep lowering the price ’til she sells; next year, the drastically “reduced price you got this year” will look like gravy.
Gill » Jun 10, 2008 at 9:19 am
We just bought a town house in Ballard and moved from a 2 bedroom 1 bath older rental home in Wallingford.
We had an open house on Sunday and 40 + couples showed up — from what I hear, and if you still want to stay in Seattle, the rents are still going up and there is some competition for the nicer rentals in town.
If you don’t have to move now why don’t you just look at places — if the right thing comes along to buy you should have no problem renting that condo for a great price.
Marc » Jun 10, 2008 at 9:22 am
Considering Sarah bought in 2003 she almost certainly got a great interest rate (hopefully fixed) and bought before the big run up. So, I’m with Shaun and think #4 is a great way to go if the rent you can get can cover all or a very significant portion of your monthly overhead (i.e., mortgage, tax, insurance). If she won’t need equity out of the condo for the downpayment on the new house I would recommend keeping it as a rental for a long time. Letting a renter pay down your mortgage for you is a great thing and there’s little doubt in my mind that the long term appreciation on a condo in Fremont will make the current downturn a minor risk.
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Dave0 » Jun 10, 2008 at 9:39 am
I say #4 as well, rent it out but not to frat boys. Frat boys are looking for some place cheap. Thus, price it high and frat boys won’t even look at it. You will get professionals looking for a nice place that aren’t concerned about price because they can afford it.
Scotsman » Jun 10, 2008 at 9:39 am
Sell and rent.
vboring » Jun 10, 2008 at 9:57 am
i wouldn’t do #4 because renting a place out can be a pain in the butt and because condo prices will probably tank the most in the next few years.
renting out a whole apartment building is fine. it brings in enough income to justify the effort. there are efficiencies of scale. renting out one condo will just be one big pain in the butt even with a good tenant. with bad tenants, you can lose a big chunk of change and end up in court.
condo prices will likely tank more than SFH because they tend to be on the low end of the price range, it is cheap and easy to build more, far too many have been built recently, and far too many are still being built right now. there will be vicious price competition once some of these builders go BK and leave it to the banks to liquidate the properties.
i say, list it for what it would have sold for in 2007 and get out while you can.
I actually like it here » Jun 10, 2008 at 10:06 am
Renting your condo will only work if you can get a rent that will cover your monthly mortgage payment which is likely to be tough. Also, finding a nice rental home at an affordable price can be difficult in Seattle. It is as if all the landlords near the University figured it’s easier to rent to college kids and not have to take care of anything. We got lucky when we found a place in Wallingford owned by a couple who wants to move back once their kids go to college so they take care of it reasonably well. But it was like finding a needle in a haystack when we were looking. Your best bet is likely to wait it out and move up when your hubby finishes grad school.
vboring » Jun 10, 2008 at 10:48 am
maybe i’ve been lucky, but my renting experience in Seattle has been great. the carpets are usually old and the trim is often scratched, but otherwise the places i’ve rented (and seen that my friends have rented) have been faultless. and rarely over $1200/mo including w/s/g.
during university, i rented a few wrecks from slumlords for $400/mo. but what do you expect for $400/mo? even then, the places were just run down, not bug or rat infested. just ugly and small.
Gill » Jun 10, 2008 at 11:19 am
You have been lucky — most 2 bdrm houses in good shape in the Wallingford area are renting for at least $1600 – $1700 a month right now.
When my wife and I moved here 4 years ago and the rental market was down we paid $1250.
Just out of curiosity have you rented recently?
vboring » Jun 10, 2008 at 11:32 am
i’ve never rented a house – too expensive and then you have to do yard work.
yard work on my own home is one thing – mowing someone else’s lawn is a different matter altogether.
i’m signing a lease in the next few days for a 900 sq ft apartment about 20 blocks north of Ballard for $900/mo. this is an exceptional deal, which is why i’d rather not say more precisely where it is (i don’t want someone else to sneak in and steal it). but it is in a nice neighborhood, quiet neighbors, no busy streets.
Nick » Jun 10, 2008 at 12:04 pm
IMHO, depends on what kind of mortgage/terms you have on your current place. I have a kinda similar situation (bought condo in ‘03, was considering selling about a year ago), and I decided to hold onto it because I have a 30yr fixed at a good rate, and I had always intended to rent it to cover the payments eventually. I’m told it is a pain to manage rental property, but if you can cover a fixed payment with some room to spare, it should make for a very good long-term investment.
OTOH, if you have an ARM mortgage or something more exotic, I’d probably sell now and rent until the market is better. All things considered I’d rather be renting now, at least financially speaking.
peter » Jun 10, 2008 at 1:09 pm
Hey Everyone,
I went to my first real estate auction of my life today. I thought I would pass along what I discovered. The property sold for 275k in Bothel’s Canyon Park. Here is the zillow: http://www.zillow.com/HomeDetails.htm?zprop=38588174.
It was a very informal auction. The house was 4bd/2ba. Cheap construction quality, pretty nice neighborhood, small bedrooms a great property to rent out to a young family.
There was about 25 people there. Most of them were gawkers like myself. I would say that there were about 12 registered bidders. The bidding started at 50k. Jumped up to 150k. At that point the bidding was between 2 bidders until it hit the magic 275 number.
I am going to start going to more auctions just to get a feel for the process. I’d love to hear other stories.
Steve Tytler » Jun 10, 2008 at 1:10 pm
Home prices are not likely to increase for the next 3 years or more so there is no point to keeping the condo as a rental. Sell it now while before it loses any more value and rent until you are ready to buy again.
softwarengineer » Jun 10, 2008 at 3:29 pm
HI STEVE, GOOD TAKE
I don’t know if I’d venture to guess how long the downturn will last or if prices [wages] will ever go up again. Lord only knows.
Did you hear Bernanke today, he said the worst is over and behind us. LOL
Ubersalad, Ph.D » Jun 10, 2008 at 3:36 pm
Rent it out while putting it on the market and stop paying your mortgage!
This way you get the money regardless if your house sells or not!
vboring » Jun 10, 2008 at 3:44 pm
Ubersalad,
1) would you rent a place if you knew it was for sale?
2) if they rent the place out while trying to sell it, where will they live during that time?
Ubersalad, Ph.D » Jun 10, 2008 at 4:27 pm
1) Easy. Find a tenant first and then rent it out.
2) Easy. Move to Tim’s place.
george » Jun 10, 2008 at 4:56 pm
I would go for choice 5) and sell quickly and rent a quieter place until it looks like housing will recover. Maybe that happens in 2009 but if things really go south, maybe 2010 or beyond.
Renters and sellers are the only sharp knives in the 2008 drawer. You built some equity. If you sell now it’s an insurance policy against future drops in price. Renting also make sense now in terms of personal finances. What a lot of people don’t seem to get is it can also be a better choice when it comes to lifestyle.
Of course, like everyone else including the real estate agents and the management here…I could be wrong. :-)
Jonny » Jun 10, 2008 at 9:57 pm
3.
so sad. fremont used to be cool.
Jonny » Jun 10, 2008 at 9:58 pm
vboring: not that exceptional of a deal. mine is similar.
mike mcc » Jun 10, 2008 at 10:49 pm
Keep it and rent it. It sounds like you’d be too stretched today to buy, so rent it, go rent something else, and don’t get pregnant until you see how hubbys job will go.
b » Jun 10, 2008 at 11:10 pm
Stop paying the mortgage, they won’t evict you for another 6+ months. During that time save money and when the SHTF then find a rental and move. Its easy to put up with "chocolatey" drunks if you are living for free. Save the difference between your new rent and old mortgage and add it to the 6+ months of mortgage payments you didn’t make. In 2-3 years when the market clears you will still find a fine loan and have a bunch of money saved to purchase again.
vboring » Jun 11, 2008 at 8:47 am
b,
delinquency of payment stay on your record for at least 4 years. a basic credit report will show that.
also, just because they are looking to sell doesn’t mean they have no equity. playing dead to get out of a mortgage is only profitable for ppl who are underwater.
they bought in 2003. unless they got a truly awful loan, they should have significant equity.
the trick is extracting the equity today, before it disappears.
Gill » Jun 11, 2008 at 8:56 am
Seriously, I cannot believe the number of comments on this blog that encourage delinquency — where’s the personal responsibility?
I know some of them are tongue in cheek, but — it’s scary.
I know the lenders were irresponsible, but they were only half the problem.
vboring » Jun 11, 2008 at 9:23 am
Gill,
if the tables were turned and the corporation had the opportunity to export a few $100k of debt load to you, do you think any of them would hesitate?
personal responsibility and morality are not even a consideration – or shouldn’t be. mortgages are contracts that dictate rights and responsibilities. deciding to return a property in place of paying the debt can be a rational decision fully within the legal rights of the borrower.
as for the support of the practice in the comments here, i think a lot of people are cheering for more affordable housing. that means falling prices. large numbers of delinquencies lead to to falling prices.
softwarengineer » Jun 11, 2008 at 9:27 am
GOOD POINT GILL
I’d add to your morality argument a salient contradiction though, why in Hades do law abiding moral folks that live within their means have to bail out this greed subprime mess, whether it be borrowers or lenders?
It makes you want to take the money and run, when you put it it that way, doesn’t it.
Marc » Jun 11, 2008 at 9:58 am
Vboring said “mortgages are contracts that dictate rights and responsibilities. deciding to return a property in place of paying the debt can be a rational decision fully within the legal rights of the borrower.”
If you “return a property” to the lender “in place of paying the debt”, you better hope the bank doesn’t find out you have considerable other assets because they can always elect to foreclose judicially and seek a deficiency judgment which can be executed against those other assets. If you’re truly broke, then this isn’t much of a risk. If you’re flush, then you should probably think twice.
Gill » Jun 11, 2008 at 10:50 am
I understand — I’m not arguing that corporations and banks don’t have the upper hand, etc. and wouldn’t and haven’t jacked it to customers when given the opportunity.
Corporations are just people, however, weather they be investors or CEO’s or what-have-you, and not living ethically is a choice they have made regardless of how they spin it. Same holds true for the borrowers, the agents, the loan officers, etc.
I get that certain circumstances dictate foreclosure, bailing, etc. but most people who took out irresponsible loans did so knowing it was risky and were gambling on the market — the same attitude of the banks not wanting to take responsibility for making bad loans is the same as the borrower not wanting to repay their stupidly high ARM now that it’s kicked in, and a lot of those same folks have WAY TO MUCH credit card debt, own a huge "licking" SUV and are maxed and diluted themselves into thinking they deserved to live like kings and queens for what reason?
I’ll get off my high horse now!!! : )
I actually like it here » Jun 11, 2008 at 11:11 am
Gill and Vboring,
I’ve got a nice 2 bedroom in Wallingford that we’re renting for $1500/month. It was $1350 when we moved here three years ago, and I’m sure it’ll be going up next month when our lease is up. We must have looked at 30 properties before we found this one, and this was the only one we found that wasn’t squallor. I know renting is still way cheaper than buying right now, but landlords are probably doing pretty well with the housing downturn now, no?
Harley Lever » Jun 11, 2008 at 12:47 pm
Sarah,
I think your need to get more information about every aspect of every proposed option. Each have caveats.
I would recommend talking to a professional property manager familiar with Fremont. A professional will tell you what you would likely receive for rent and have strategies that will lessen the chances of having “Frat Boys” destroy your home. Perhaps one of the many millionaire renters here on the SeattleBubble would rent it from you.
You do have to consider the possibility that it could take months to sell your home and if you are renting at the same time, this could be a huge financial burden. If you add graduate school and a pregnancy on top of that, you are now talking about potential for financial crisis.
I think the ARM option should be thrown out completely. If you can’t afford a house at a current 30-year rate, don’t bet you will be able to afford it in the future. Especially considering the cash drain caused by 1 income and a pregnant mom having to support the family.
3 could be very attractive. Based on previous stats posted by The Tim your area has not depreciated all that much. Assuming that you want to get away from the city and purchase something a little further out for the child, you may find some great deals in the suburbs. With gas prices skyrocketing first time buyers, renters, and those who just want “city living” may move closer to Seattle as a strategy to reduce gas costs associated with commuting, every day driving, and having to heat the larger homes found in the burbs. This would put upward pricing pressure on the close-in real estate and downward pressure on the suburbs.
Markor » Jun 11, 2008 at 4:06 pm
Whether to walk away or not should be treated as purely a business decision.
It should be obvious that the gov’t & business, esp. when the current party is in power, works against you to the greatest extent they possibly can. Then it’s only fair that consumers screw gov’t & business any way they can.
Businesses & the wealthy lobby hard for things that ruin your future. For example, if you’re under 45, you’ll not see one dime of your Social Security contributions. That money got funnelled to major campaign contributors, and worthless IOUs left behind. So why shouldn’t people walk away from their debts when it makes financial sense?
Markor » Jun 11, 2008 at 4:22 pm
The voters choose this, through action or inaction.
Jess/pumpkin MA, PhD (so we're listing our degrees now?) » Jun 11, 2008 at 9:51 pm
Hi from the other side (homeowner again, that is…). This person and her husband need to consider the financial ramifications of his graduate school experience. Is he taking out student loans? Does he have an RA or TA-ship and what will he claim for taxes? I don’t know if I mentioned this before, but we just bought our house on my husband’s income only because my student loans and past TA-ships sank my credit score. Nothing delinquent, nothing negative, but still… if my name had been on the loan application it never would have happened for us (not at 5.2% in April). The financial decisions he makes now in grad school WILL affect their ability to take out a new mortgage when he graduates, unless he gets some sweet 6 figure position…
I know, what am I doing here? The house is great, no regrets (though I’m constantly fighting the urge to file a lawsuit against the sellers because of the way they stripped the house and yard, including a Japanese maple in the front yard). Hard day at work and nothing on the boob-tube, so I thought I’d see what my old frenemies at SB were up to. Did you find a house yet, Bili?
Johnny 99 » Jun 13, 2008 at 10:05 am
I would do option #3. Here is why:
I bought a house despite the market about 8 months ago. I had been looking for about 1 year before I bought. Paid 417K for the house. I thought it was a very good value based on what I felt I could rent it for. The house is in the Maple Leaf, built in 1948, freshlyremodeled, total living area is 2000 square feet with a detached garage. One of the key characteristics for my home purchase was a second unit that was very nice. I put 5% down had the seller pick up closing and secured a 30 year fixed mortgage at 5.65%. Total payment 2,700/month. I have never been a landlord before and I was unsure how things would prevail.
This is what I have learned.
I posted the second unit on Craigslist for 1,100/month plus $50.00 for utilities. Within 1 hour I had 4 people schedule time to view the property. The first couple that viewed it wrote a check to retain the house. 8 months have passed and no complaints. I singed them to a one year lease. I wish I would have asked for more. I know I could have easily got a hundred or so more per month.
In short:
Unless the job market severely tanks the rental market will remain strong. We have a Fed that is showing inflationary concern and banks are still hesitant to lend to risky bowers. Even as housing prices fall the affordability may not directly follow suit. If you can rent the house and generate positive income do it. Renting a nice place will bring good tenants. The people renting my place have a combined income of over 100k, but because they buy cars and take vacations housing in Seattle is still more than they can take on. I am guessing because you bought your place in 03 you should be able to at least be par with the mortgage.
I would hold off buying anything until at least early 2009 to see where things are. Nevertheless good deals are there, but don’t let your real estate agent tell you what is or is not a good deal. I also would encourage you to look at least 30 homes before you even consider putting in a bid. Do your research and buy to hold for a long time.