How screwed am I that I bought my first home at the peak of the RE market in California in June 2005? If it

Asked by Scott, Grover Beach, CA Sat Nov 10, 2007

were not for a personal loan for what would be a 2nd, I would have tried a short sale. bought 2BR townhose in Grover Beach, CA (Central Coast) for $395k, comp is now $335. That's down 15%, with no end in sight. I might be forced to move out of the area for work.

Should I sell at a loss, or rent it out (with a negative cashflow of ~8-10k a year). btw a jog relocation package might cover commision and closing costs.

I am bearish on RE for CA, and the nation for a long time.

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Suzanne Walk…, Agent, Oklahoma City, OK
Sun Nov 11, 2007
Kudos to Kaye's answer. Real estate is a long term investment and always pays in the long run.

I feel so sad when I hear, "How screwed am I" from home owners. A home owner is not always screwed, it is just time to re-evaluate your options. Personally, I'd rather take a negative $800 cash flow a month, equallying $10k a year for 5 years, than take a 15%+ loss today just because the market wasn't friendly to my need. Of course, the big question is, "Can you afford it?"

You've already been told to talk to a CPA and highly recommend you do. Will there be any tax incentives for you take this loss annually?

Since, I don't know specific numbers these are for conversation purposes only. If you can afford the $800 a month loss then consider, what will the tenant be matching. $1000 a month? Basically for $800 a month, you have a tenant matching $1000. You get the tax breaks (speak to CPA), and have something to show for it (house) which will eventually stop depreciating and will always be worth something. Traditionally real estate always goes back up. We still can't buy houses for the same price we could in 1990. Real estate doesn't always stay a buyers markets, how long is the big question. I don't know of a company 401k account that matches like being a landlord with renter.

Lastly, you may be able to afford an $800 month negative cash flow, but can your stomache handle it? Very stressful and you might deem putting a price tag on your serenity and sell now. Either way, don't be too bearish, real estate, if approached as a long term investment, is in my opinion the safest financial risk.

You've gotton some good suggestions and I encourage you investigagte them all. Most importantly talk to a CPA.

Best of luck,
Susan Walker
2 votes
Keith Sorem, Agent, Glendale, CA
Sun Nov 11, 2007
I recomend trying to look at ALL options BEFORE making a decision.
1. Talk with the relocation dept. and find out what they are willing to do. depending upon the company policies there might be some financial assistance. If you don't ask, you won't know.
2. Residential investment property is a great way to go. My wife and I became accidental investors in the exact same situation. Talk with a CPA about the tax consequences. As the other posts have noted, over the LONG TERM real estate, particularly in California, is a good investment.

I am not a CPA, so here is just a quick summary:
1. You purchased the property as a personal residence. Therefore you purchased at a "least cost" method. Purchasing non-owner occupied property is more difficult and costly than a personal residence , so you are ahead financially.
2. You don't "lose" any money until you sell it. I would avoid selling if all possible.
3. When you own rental property, all the expenses that you pay become deductions. One deduction you don't have with personal property is depreciation, which is a non-cash expense that can have a great effect on your state and federal income taxes. The government will; actually help you pay for the property.
4. Real estate is cyclical. Your property will appreciate over the long term, and although you may be "negative" for a year or two, in the long term you will not only become cash positive, but the value of the property will appreciate over time. Many people are not clear on the principle of appreciation.

That's why you should talk with a CPA.
One caution. Your HOA may have rules on the percentage of properties that can be non-owner occupied, so check those CC & Rs.
1 vote
Kaye Thomas, Agent, Manhattan Beach, CA
Sat Nov 10, 2007
Scott- I bought my current home in 1991 at the top of the market and watched the value go down for a number of years.. today it is worth 3 times what I paid for it..
If you can keep it without undue hardship then I would do that.. if not then you might do Ok with a short sale and relocation package.. if the lender allows that..
As to the personal second..if it is from a private party speak with the holder of the note.. they might allow you to move it to a new property or secure it to something else.. possibly even an unsecured note as long as you agree to make the payments.. if you can work that out I would set something up immediately before you try for a short sale..
Please consult with your CPA before you make any decisions.
1 vote
The Hagley G…, Agent, Pleasanton, CA
Sat Nov 10, 2007

Consider holding on to the home if you can. Think of the negative cash flow as putting money in your savings account. Real Estate, especially in CA, should rebound....we have a great track of appreciation in the state over the last 30+ years and there is no reason to think this will change. Hang in there.
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1 vote
Dave Rivera &…, Agent, San Francisco, CA
Sat Nov 10, 2007
Hi Scott,
Basically, my advice is similar for most people in your situation: if you can afford to hold onto the property,
then do so. California real estate has always appreciated over time. Yes, if you bought in 2005, your property is most likely worth less than your mortgage. However, appreciation in CA over the last 25 years or so has averaged out at about 4% per year, so please don't be bearish! If you cannot afford to hang onto the property and must sell to relocate for work, does your company have a relocation buyout? Many do, and if you cannot sell your home in a certain period of time, the relocation company agrees to buy it from you. Make sure you investigate all your options, and, best of luck to you!
1 vote
Linette Carr…, Agent, Wilmington, DE
Sat Nov 10, 2007
If you do the math the difference between 395 and 335 is 60,000. If you rent and lose 10,000 a year it will take you 6 years to lose that much money. If you sell right now and sell for 60,000 less than what you bought the property for (plus your expense to buy ) You lose 60,000 plus in one year (some of which you may be able to claim on your taxes???) Can you afford to do that? This sounds like a question for your financial person.
1 vote
Randy Wilson, , Yorba Linda, CA
Tue May 22, 2012
Can you refi? Rates are soooo low and the market is getting hot in many Ca. areas. Low inventory usually means prices may firm up.
0 votes
nacny smith, Home Seller, Arroyo Grande, CA
Tue May 22, 2012
I would also not sell with a realtor. Sell your own home. In this area. Brokers like Tni are very unethical.. if this were LA or San Fransisco.. Sell your own home. Doing a short sale is just saving your credit.
0 votes
nacny smith, Home Seller, Arroyo Grande, CA
Tue May 22, 2012
I took a $800 month negative cash flow,for 2 years.. Not worth it..
0 votes
Tni LeBlanc, Agent, Santa Maria, CA
Sun Jul 6, 2008
Hi Scott,

Does it make you feel better that a lot of people are in your same position? I didn't think so.
I would say to make your decision based on the assumption that you will have to hold a minimum of 3-5 years for the recovery to happen. Do the math and make peace with your decision. Since you are moving you should consider a short sale as well. I usually recommend that my sellers consult wih any attorney on this. Also, have you refinanced the property? You may have purchase money protection which would limit the lenders recovery to only takng the property back in foreclosure. This is why you should at least have a legal consult.

Good luck to you,

0 votes
Michael West, , Corona, CA
Thu Nov 15, 2007
Dear Scott,

You spoke on being Bearish, so I'll assume that you have an understanding of stocks and how they work. With that being stated, the California Real Estate Market is very cyclical. If you know how this applies to stocks you know that at certain times (cycles) prices appreciate and during other cycles they decline some, but still hold a strong value if all the principles are there. This is the same thing with California Real Estate, during the current economic reseting phase, you're going to see some drops in prices. This is inevitable because the market has to correct itself. As some of the posters have stated, they've seen homes drop in other cycles and those homes are now worth three times what they were worth before. Your property purchase was an investment and you should treat it as such, so I'm always an advocate of renting the property out if it's possible. How did you arrive at the negative cash-flow estimate? Did you take your mortgage and subtract market rent for your area? And that might be adjusted within the next six months as various market rents throughout California are rising steeply.
0 votes
Christopher…, Agent, Hemet, CA
Sun Nov 11, 2007
Sylvia is right on with her answers, as were many others. The only thing I would add is a remote possibility that; if forced to move and your company does not provide a relocation package, there may be a remote possibility that there is someone from that area that is forced to move near your current location. Reader ads in local papers and online avenues provide a great way for you to reach out and test the water in this scenario. You are not the only one facing this issue and, who knows, that other someone may be looking to head to your neck of the woods and happy to trade. A remote possibility yet....a possibility that I would not ignore.
0 votes
Sylvia Barry,…, Agent, Marin, CA
Sun Nov 11, 2007
Hi Scott:

I agree with others in general. Unfortunately, I am not familiar with the market condition in Central Coast, but for California in general, I believe this is a Golden State and the market will rebound just because this is the place where people will want to move to. Although some people wants (or wanted) to buy real estate for short term purposes; the truth is, real estate is a long term investment and should be treated that way if you can.

If you keep the house as rental, other than the negative cash flow which you can write off, you can also write off depreciations, rental related expenses and some maintenance items due to the fact that it's a rental property.

You also want to make sure your interest rate will stay the same and not adjust up which will make paying the monthly mortgage even more unbearable.

If you ended up doing a short sale, you need to consider the effect it has on your credit and also don't forget that the lenders and send you 1099 and you will have to pay tax on the portion they forgive.

I like the suggestion about Relocation company buy out, but they might not do that anymore in the current market.

Check with a tax account before you take any definite step. This is a serious decision and getting professional advise is worth it.

0 votes
Pam Winterba…, Agent, Danville, VA
Sat Nov 10, 2007

Based on your questions and no having all the information on your 2nd and if it is recorded or just a personal loan I would strongly recommend you consult with your CPA or accountant to help you assess you situation and what works for you.
0 votes
Ute Ferdig, Agent, Newcastle, CA
Sat Nov 10, 2007
Hi Scott. That's a tough spot you are in. I am not sure I understand your question. You say you did not attempt a short sale because of a personal second. This suggests to me that your first is more than the current market value and you don't want or can't get rid of the second because it's a personal loan. If you sell at a loss without asking for a short sale, you'll have to come up with money to close escrow. Since I don't know how much the total debt is, it's difficult to assess what you should do.

If preserving your credit is important to you, you may want to sell at a loss and take advantage of the relo package (at least you would not have to pay the commission and closing costs). What's best for you will depend on factors that we do not know.

My recommendation to you would be to seek the advise of a tax professional who can take a look at your overall financial situation and advise you which route will have the least adverse effect on you. Anything we Trulians have to contribute will be based on speculation and could do more harm than good.
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