Reading this article from Rismedia called: “sign of the times, accidental landlords”, it reminded me of several situations I have seen recently here in the Bay Area, with clients who became exactly that: an accidental landlord.
What do you do indeed when you need to move, but your property would not sell for what you bought it for?
One solution is to sell it at a loss, and recuperate this loss in the new purchase, which is going to be less expensive too; but you cannot do this as easily nowadays. It used to be that you could purchase a home and get a “bridge loan” from the house you were moving from. The bridge loan was predicated on the house being sold within 2 or 3 months. Banks did not have any problem doing this because they were pretty sure your old house would sell fairly quickly. You cannot get such a bridge loan today, and therefore you have to sell your previous house first, and then move to temporary housing and start looking for your new house. Not very convenient…
Another solution is to buy subject to the sale of your current home. This is harder to do than to say; often it means you’d have to pay more, to compensate for a weak bargaining position. It is almost impossible to do if you are looking for a desirable property, and other people want it too.
The remaining option is to rent out your previous house and purchase your new home. But there again the banks are a lot tighter with their money (hum.., your money…), and the rules are much stricter. The ideal is when you have enough income to qualify for 2 loans easily. If you are not in this ideal case, you need to show that your previous house has a tenant in place before they will lend you on your purchase. And there you go, you are an “accidental landlord”.
People do not intend to remain a landlord for long, just the time for the market to improve enough that it will make sense to sell. But actually, if you are going to have savings, it makes sense to spread them over several investment vehicles: the usual suspects are “real estate”, CD’s, bonds, stocks and cash. Over the long term, a real estate investment can be a good retirement account. But remember to check with your tax advisor: depending on your specific situation, the tax implications will not be the same.
If you think you may find yourself in such a situation, call me to discuss your options.
Thanks for reading!
PS: Mortgage rates: Week ending 10/13/2011:
- 30-yr. fixed: 4.12 fees/points: 0.8%
- 15-yr. fixed: 3.37 fees/points: 0.8%
- 1-yr. adjustable: 2.90% Fees/points: 0.6%
(Source: Freddie Mac)
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