Seven Ways to Survive the Housing Market

The housing market downturn has lasted longer and gone deeper than any other downturn in the history of this country–certainly longer and deeper than anyone predicted.

Three years ago, I listed a property for sale and received four offers on it–unheard of at that time. As strong as the offers were, they were not strong enough to cover the mortgage on the property. My client would have had to make up the difference with cash out of their own pocket or do a short sale which would have ruined their credit so they decided to rent the property out for a few years until the market improved.

Many homeowners are like my seller–prepared to hunker down until the worst was over and then jump back in when the housing market had recovered, but now they face difficult choices as the downturn continues beyond expectations.

How do you survive the housing market now?

The options fall under two different categories: those that don’t have to sell, and those that do have to sell.

If you don’t have to sell your home:

1. Update your home to accommodate new or growing needs of your family. Maybe your basement used to be a playroom for children, but now you can turn it into an area where your teenagers and their friends can hang out. Check out Remodeling Magazine’s Cost vs. Value report to ensure you get the most return on your investment when you finally do sell.
2. Consider refinancing your mortgage to give you extra cash for home improvements or other needs. This week, 30 year fixed mortgage interest rates continued declining for the fifth straight week to 4.61 perent. The rule of thumb is that a refinance is worth it if you can drop your current rate at least a percentage point.
3. Review your property tax assessment and file an appeal if you feel it is too high. Fairfax County has an online appeal process or an appeal application that you can mail in. Other local jurisdictions will have similar options. For residential properties, you should provide sales information that demonstrates the assessment is not at its fair market value or comparable properties that are assessed at a value that is not similar. An experienced real estate agent can provide you with this information, and I have done this several times in the last year for my clients.
4. If you need a bigger space or need to move to a different area and have enough savings to purchase a new home without selling your current home, consider renting your current home out. Rents in the DC Metro area rose considerably from 2009 to 2010. They are expected to go up at least 5.4 percent  in 2011 according to an article in U.S. News & World Report and continue to rise for the next couple of years. People that would normally be buying are renting instead–creating a high demand for rentals, which pushes rental rates up. Check with your loan officer to find out what conditions you need to meet to qualify for a new mortgage when you have an existing mortgage. I work with several loan officers that are very experienced with these situations.

If you have to sell your home:

Bloomberg reported recently that 28 percent of mortgaged properties are underwater according to Zillow; that number increases when you include properties that do not have a mortgage. For those that have to sell for financial, job relocation, or other reasons, the need to sell is a painful one.

1. If you are fortunate enough not to be underwater (the loan amount is higher than the home is worth) or are underwater but have the cash to make up for the loss at settlement, any “loss” you experience on the sale of your home will be made up for on the purchase of your new home. If you are also fortunate enough to live in the DC Metro area and are moving to another area, you might actually be making money. Washington DC was the only city out of 20 top cities that experienced an increase in values (2.7 percent) from February 2010 to February 2011 according to the S&P/Case-Shiller Home Price Index.
2. If you are underwater and do not have the cash to make up the difference, most likely your best option is a short sale–where your lender agrees to accept less than the loan amount that you owe. There are many things that you need to be aware of to make an educated decision. The list below is designed to help you start the thought process but please consult an experienced real estate agent and/or attorney before moving forward with a short sale.
   • Make sure any short sale approval you receive from your lender also includes something in writing that states the debt has been satisfied in full–forgiving or waiving any further deficiency. I have always been able to get this in writing for my clients, but I have heard horror stories about sellers who were hounded by collection departments after selling their home in a short sale. While the lender approved the short sale, they filed a deficiency judgment against the seller to collect the difference between what the house sold for and the loan amount. The seller was still on the hook for that difference, and in the state of Virginia, the statute of limitations can last up to 20 years.
   • Effect of a short sale on your credit: You will lose between 200-300 points on your FICO score whether you have a short sale or a foreclosure. There is not credit score benefit when doing a short sale.
   • Buying a home after a short sale: The benefit to a short sale versus a foreclosure comes in the ability to buy a home afterwards. At the time of this writing, here are the wait times before you can qualify for a mortgage again (click on links for more information including extenuating circumstances):
     • Fannie Mae (p. 437):
       • Two years with 20 percent downpayment
       • Four years with 10 percent downpayment
       • Seven years
     • Freddie Mac: Four years
     • FHA: Three years
     • VA: Three years
3. If your lender will not approve a short sale, your only option might be foreclosure. As with a short sale, the list below is designed to help you start the thought process but please consult an experienced attorney before moving forward with a foreclosure.
   • Be aware that just because a lender forecloses on the property, you might still be legally liable for the debt. In the state of Virginia, a lender can file a deficiency judgment against you to collect the difference between what the house sold for at foreclosure and the loan amount you owed. This means you would still be on the hook for that difference, and in the state of Virginia, the statute of limitations can last up to 20 years.
   • Effect of a foreclosure on your credit: You will lose between 200-300 points on your FICO score whether you have a short sale or a foreclosure.
   • Buying a home after a foreclosure: At the time of this writing, here are the wait times (click on links for more information including extenuating circumstances):
     • Fannie Mae (p. 437): Seven years
     • Freddie Mac:  Seven years
     • FHA: Three years
     • VA: Three years

The real estate market continues to change and evolve, and the local real estate market does not necessarily follow national trends. Fortunately, we in Northern Virginia tend to fair better than those in other parts of the country. Through this blog, I will continue to share latest trends and options as they evolve.

Visit me at MargieMac.com!