Good informative post.  Negative equity is going to cause the failure of every economic forcast coming from the "experts". 

They just don't have a clue. 

Are we spoiled? Why is it that we use a car for a year or more, take a loss and think nothing of it, but we use a house for 5 years or more and cry like babies if we have to take even a small percentage of the value as a loss?

This is a good post.  More and more often there are stories about home owners being upside down in their mortgage.  Sometimes the best option is to cut your loses and move on.  Its hard for a lot of owners to think about, but at times it is the best option.

Negative equity is causing a lot of home owners to sit tight when they normally would be taking advantage of some great bargains in the real estate market.  These home owners would have been trading up in previous markets.  My heart goes out to them.  Each time I encounter a negative am situation it punches me in the gut.

Hi Carol~ Fot those that have lived in their house for a few years and now need to sell, they need to consider what they would have had to pay had they rented and just move forward and get going with their plans.....we have had to sell a home for a lot less than we had in it, but we had to move forward and get on with our lives.   

Great post.  Way to stand up to your seller and tell them what they don't want to hear but need to hear. 

It's nice that you write about other options aside from the short sale. Right now the short sale seems to be the main game in town . . . at least in our town.

I read Judy Chapman post and was anxious to read your reply.  You are both great!  These were wonderful and informative posts.  I started my real estate career in the 70's and interest rates were 21 %.  I remember agents stating that we'd never see single digit again.  Well, never say never!  Here we are in a bad housing market and I believe we will have a recovery faster than they say.  If the banks start to lend you will see homes fly off the shelf.  The federal government should be seeing to it that the banks are lending the money they received.  Right now buyers with good credit and steady jobs can't get a loan. 

Good post. Thanks for sharing and I hope you have a wonderful week ahead!

I don't believe that negative equity in a vehicle is in any way comparable to negative equity in real estate. 

No more than real estate licensees are comparable to automobile sales persons.

One is quite related to mileage.  The negative equity we're experiencing in real estate is related to the perfidy of the Wall Street gangs.

Carol, Folks these days automatically assume negative equity means they have to do a short sale. That's just not true. Agents need to understand this too. Always ask if they can bring money to closing first.

Thanks for the link love!!!

Carol,

I have a listing with a national relo company whose client purchased a home from the transferred owner.  The appraisal was done over a year ago and then it was over priced.  Steadily we have gotten then to reduce the price - sadly is is still woefully over priced.

I have brought them 3 qualified strong buyers in the last month.  All the initial offers were 60K or more under asking.  Two were countered to within 30K of asking. That is right about what it will appraise for in todays market and should have been accepted.

The client of the Relo company rejected the negotiated offers.  The reason?  We are taking too much of a loss we want to continue to market.

Unrealistic expectations surround us everywhere.

I have turned many clients into landlords.  This waythey get a temporary short term fix while the market will hopefully get a little better and then we will end up with the listing and look like the hero (again, hopefully)!

Hi Carol -- Thoughtful post and very informative.  I too think the experts are mostly clueless due to the decentralization of the industry.

Prisoner in the house? Welcome to Texas. We have had many prisoners here for years. Negative equity is a way of life for many when cycles go the other way. Options? Rent, take a loss, stick it out. It is never pretty but cash at closing however you can find it is a way out. I love these stories Carol, because it seems so new in other areas of the country but commonplace here.

This was a good post, great way to present to clients.  Thanks.

Thanks, Carol, for getting it. And for the links. And the kudos. You're great!

Plus, you got a Feature, too!

Carol, you brought up some great points.  A buyer has never said, "How much does the seller need."  And borrowing to pay off the negative is good advice.  It would be something like having a loan after going to college.  You definitely learned something.

Nice discussion on the issues and options of those with negative home equity. Our market will be in much better shape if people consider all of the possibilities rather than just walking away.

A great informative post to get people thinking creatively about what they might be able to do to sell a home with negative equity.

It's tough and getting tougher for some. There's really positive news in our area. The news headlines for tonight are about what I already know...homes are receiving multiple offers and prices are moving up locally.

I'm with Lenn in Comment #1 on this.  The banks who hold the paper are going to have to figure out what they're going to do to keep this landslide of negative equity from toppling them.

Mike in Tucson

Mike & Lenn;

Great comments about what could happen here. 

I see it all the time. . . people are waking up slowly to the fact that their home is no longer an investment but a liability. . can't enjoy a home like that..

Another option for sellers - is to get someone to assume their loan.  I found out that my loan is assumable and that there are very little costs to assume -- a buyer would only have to come up with about $700 to assume it VS the thousands they would have to come up with in order to buy the home outright - which in my opinion makes it much more desireable!

As a short sale specialist in a market that has not lost value, than seems like a contradiction, but it isn't. East 100% financing, the American tendency to want everything immediately even if it means you are living to make interest payments, and not putting money back in a rainy day fund will keep us busy ion Oklahoma for the next three years. it isn't just the bubble to curse anymore. Your point about what is owed not meaning anything is huge. I believe that the greater fool theory has lost all its power. Why should my buyer bail you out of bad decisions.

What an idea - I've been involved in many short sales, and only once has a seller brought money to the table to get his house sold.  It was a shock - 

Barb Mihalik Coldwell Banker Sea Coast Realty, Wilmington, NC

This post and yesterday's about being imprisoned in your own home have been very timely and informative.

I just made a landlord out of a young investor who was looking to sell, too. He would have lost tens of thousands and was unable to bring a large sum to the closing table.  Some sellers can't swallow a whale whole, they just need it cut up in small bites.  It's our duty as professionals to tell the truth, not what people want to hear.

Great post Carol.  Sellers need a reality check; "their house is not their piggy bank".  They bought it, lived in it and enjoyed it and if they can't realize a profit in dollars from their home, they should recognize that they've been pulling equity out of their house in pleasure if not dollars and in savings of rent not paid.  You've outlined some great options.

Renting your house out is a great option to keep from being "trapped" as long as you do  not need to secure another mortgage.  Most lenders, here anyway, will not give you another mortgage on a principal residence unless you have a boat load of equity in it.

This is a great post and good response to Judy's post.  Thanks

Agreeing here with Edward Bachman relative to obtaining a mortgage on another residence. And, adding that if one is able to obtain a mortgage on their new principle residence it's fairly likely the interest rate will be higher. Another consideration is that insurance on the rental property will be higher. Plus, in Homestead states (like Florida) one would lose that status resulting in increased property taxes. I advise my clients to speak to their financial advisor to run the numbers when considering this option.

That is a positively good post! There are ways out although it does take some creativity.

Something to consider: in the case of a RELOCATING Seller- they MAY be eligible for an additional FHA loan...my understanding is that you CAN get a second FHA mortgage IF you being transferred for work (obviously out of state OR a substantial distance.)

Jeff Burnham-The WIZARD (Rosen & CO., Las Vegas, NV)

The steps being taken by the government to solve the problems is not really doing anything but making the banks richer and more powerful.

Can I just respond to Ron Tiller?  How on earth can you compare a home to a car?  First of all - automobile depreciation is normal and expected.  It's a machine and machines like that have a life expectancy that a homes do not.  Further,  if you lose 40% in a $30,000 vehicle its not the same as losing 40% in a $500,000 home.   There is one heck of a difference between $12,000 and $200,000.

I agree with the basic premise that  sellers have to be more realistic and that they can't force buyers to purchase their home where they "need it" to be.  But at the same time - comparing the loss in a home to the loss in a vehicle is really trivializing the seriousness of the wealth erosion that has occurred. Further, many REALTORS were touting homes as "investments" in the past - we can't turn around and say "Opps - sorry - you shouldn't have put so many eggs in one basket."

Disagree with this comment:

if one is able to obtain a mortgage on their new principle residence it's fairly likely the interest rate will be higher

Most likely rate will be lower, not higher.

Regarding Lenn's comment about the comparison of negative equity in a car with negative equity in a home:

When someone buys a car, they do not expect it to go up in value. They KNOW it is going to depreciate like mad, they accept that fact, and often the loan can not be paid down fast enough to ever have "equity" when you buy a car...especially a new car.

A very important difference is that for years, auto dealers have had the ability to "roll the negative" into the new loan, thus delaying the liability of paying that negative in cash.

The mortgage world has no escape route when the old house sells for $250,000 and the homeowner owes $300,000. So the homeowner has made his own escape clause:

He walks away. That's when every other house on the block goes down another $20k because some bank had to "dump" it.

As soon as everyone buying a house gets a grip on the fact they have exposure for negative equity (yep, just like when you buy a car) slowly......we will rearrange our finances, our economy, and our lives to accept this fact.

Because it is a fact.

Carol, So much good advice here. I like your take.

Many homeowners don't want to hear that they can't get always get what they want for their house, and that a buyer won't purchase a house for more than market value.

This is a great marketing in for us as real estate agents who want to do short sales.  Thank you!! 

Carol, you bring up some good points about looking at other available options such as renting out the property or coming up with cash to close.

However, I feel that you and most of the other commentators here are being much too simplistic.

In my market it is quite common for the negative equity gap to be over $100,000; sometimes much more than that! If an owner's credit or job situation is not good enough to qualify for a loan modification, there are not many options available.

Don't tell me that someone could rent out their property easily...a house worth $500k a couple of years ago will (probably) have a large enough loan on it to make it financially improbable for an owner to absorb so much negative cash flow. In addition, rent prices are softening; not increasing.

Creative Financing roared to life in the early 80's because there were so few financing options. These days, even creative financing may not work because of little-to-no-equity and the inability to take mortgages "subject to". I would love to help facilitate people's dreams of moving on or moving up...I just don't know if there are any more rabbits to pull out of my hat...

Hard times call for creative, yet responsible, measures. Even if you will pay a little more each month just to rent it out, it may be better in the long run.

This is a well written post. I think you packed a great deal of information into a realatively short article. The larger issue for me though is that the consumer, after treating their home like an ATM for a decade is now perplexed that the bill has arrived. If people have skewed their thinking along the lines of their home as a purely investment vehicle then they are missing a key point of home ownership; that is, having a place to live. If they have made risky investments in stocks, they can sell and take the loss; same with their home. If they don't want the loss, remain in the home and let the equity replenish, which we historically believe will be the case....Borrowing to pay off one bad investment is a risky investment in and of itself.

I have to agree with Sinone #48. I do a lot of property management as well as Short Sales. If the homeowner has not recieved a loan modification prior to renting it out, chances are the difference on what they will pay on their mortgage vs rental income is still far to great for most to bear. If your mortgage is $2000 a month, typically you wont be able to get more than $1400 that leaves a difference of $600 you still have to pay in addition to wherever you are living now. It would still make sense to just stay where you're at or do a Short Sale versus renting it out. I usually wont take on rentals in this case,because eventually the homeowner stops paying the mortgage all together and this leads to a foreclosure and angry tenants. This is a Major problem in my area!

I am a home owner who's husband has taken a job 400 miles away and we are trying to sell our home. He comes home every other weekend and it's really starting to get old. Our place is country property and small acreage and I'm killing myself keeping it up so it looks it's best. Prices in our area are still falling fast, we aren't upside down but at this rate it won't be long. As Judy pointed out in her blog I am truly feeling like I'm under house arrest at a hard labor camp. Is it worth it, I cry uncle!  

NegEq is surely the other shoe yet to drop and will nip us in the no no before parting the dust on the road.

Carol,

I own a duplex and three houses and I am very pleased that I am not in the market to sell any right now. They are all renting fine and I live in one.

Hello Carol,

Really good post. From my perspective a lot of people (including Realtors) have a misunderstanding of what an investment entails. First and foremost and investment of any kind has risk. Secondly an investment is usually, but not always, made into an asset. An asset is something that generates wealth after accounting for all overhead and operating expenses, e.g. net profit from rental income after maintenance, debt service, taxes, etc. This is versus a liability which is something that not only does not generate wealth but actually incurs costs such as loan (hence it is a liabilty). Most people would say their home is an asset, but I disagree. Yes in quite a few cases real property does appreciate, but overall it costs the home owner in loan costs, maintenance, taxes, and more. The typical home owner does not generate wealth off their principle residence; it is not paying them to live at the location. Does this mean people should not buy a home? No it does not. A lot of people forget that buying a home is a responsibilty and yes it can produce a return through appreciation, but that does not make it an asset and there is always risk.

Carol I do take issue with your statement, "Is there a retirement account you might be able to tap into early?" I would personally never recommend anyone touch a retirement account regardless of how serious their situation. Retirement funds are for retirement.

Good post.

In Toronto, the market has fully recovered so this is not a problem.

There are still some outlyng areas which are problematic.

Brian

This is quite interesting. I recall a incident where my friend was selling his brand new home because he badly needed money for some family reasons. He had purchased this home, which was under litigation for some time, and he had taken home loan at a higher rate. At the time he was selling it, the potential buyer was ready to pay almost 300,000 rupees less than what my friend has actually invested! Forget the market appreciation!! This had happened only because of the litigation thing and my friend has suffered from "negative home equity." Now I understand this whole concept, so thanks for sharing it.

I love this post on selling short (not short sale!), Carol....I wish it was available as a re-blog!  VERY well written!

Good point Sagar.  This can even happen in India, or anywhere in the world.  As the world becomes more connected, the property market has truly become global.  What will happen when all those vacation homes in Dalmatia become a burden just like this post mentions?  We need to let people know that real estate is not just a one way bet.  You can loose money, we just need to do a better job of informing the public of this.  I still have clients say they want to buy a home as an investment to live in.  They are contradicting themselves right there.  So hard to educate people that have been brainwashed by the media, advertising, and I hate  to say it, by other Realtors to believe they can't loose money when buying a house. 

Carol - This is the situation many have found themselves in.  When this is the case, all option should be considered while keeping the emotions in check.

I suspect  the option of bringing money to the closing must be rather painful.