Tell me what to do

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Submitted by sc_alum on February 9, 2009 - 1:05pm

Just kidding - I'm just hoping to get some 3rd party/disinterested input on a sh*tty situation that I'm too caught up in to look at objectively. If you hate Temecula/Murrieta and think that it's the 7th level of hell, no need to read further.

We're being relocated (which is a cool and exciting thing), and are homeowners in Murrieta (next street up from Harveston, so very close to Promenade, etc), and so we need to decide what to do with our current house.

The details:
Bought new in early 2003 for 363,000, 20% down, 5% 30 yr fixed (payment right now is 2100 PITI, all told)
3500 sq feet
Vintage Reserve
Put in:
Pool and hardscape = 40,000
Walnut flooring = 17,000
Granite, stainless steel, blah blah - very well upgraded and we've got it totally dialed in - I'm in love with it.
At the end of the day we're in it for give or take 120k
Never refi'ed, no Heloc's

So we're moving - no question there. The market SUCKS, obviously, and has hit us hard. I'll be honest, I didn't really care when we had no need to move - our payment's awesome, our house is gorgeous, no issues.

Market analysis (2 different realtors) puts our probable sales price at 319,000, plus probably closing cost concessions.

Ray of light: The relo package includes covering Realtor comission as well as a 2% bonus to us for successfully signing a contract of sale.

Crappy part - more than likely, we're looking at getting out for give or take 320,000 - a loss of 100k-ish.

So now the question(s):
Do we cut our losses and get out?
Do we rent it out? (I picture someone dragging a large sofa across my hardwood and I cry :( )
I have to think we're in the "overshoot" period or the correction, so how long does that take to revert to a more reasonable norm? Our area is looking at only about 4 months of inventory. Most of the glut of forclosures has hit and passed and been absorbed. Do any of the housing bailouts that are coming down the pike have any chance of propping prices at all, or inflating them at all?

Basically, just looking for any thoughts other than my own, good or bad. If you feel like musing on my problem, I'd appreciate the input.

Thanks

Submitted by Coronita on February 9, 2009 - 2:07pm.

Is this a forced relo?

Submitted by harvey on February 9, 2009 - 2:09pm.

You asked for some advice, so here’s my attempt at some wisdom:

It seems like you are being more objective than most folks these days. The thing that you have to accept is that the decline in value and cash put into upgrades are all a sunk cost. This money is gone and you have to make your decisions based upon what the market price is now. Your investment lost $100K – there is no changing that.

Since you are leaving the house and it will no longer be your home, don’t be sentimental about it. Now the house is just an asset with a market value, nothing more. Your decision should be based upon objective facts and financial goals, such as risk levels, liquidity needs, tax consequences, diversification, etc. Don’t just hold on to it because you like it.

Your $100K loss over 6 years averages to about $17K per year. I’m sure this stings, but it sounds like you have a good career, so it isn’t much in the long run.

Submitted by sc_alum on February 9, 2009 - 2:18pm.

Not a forced relo, but a very desirable one that we're excited about. Executive level position in a major global company.

I ran the numbers, and could certainly make the argument to myself that we basically "rented" for 6 years, plus a tax write off benefit... that takes out some of the sting. And got to live in a house that we loved and that we had fun in, etc etc.

But now that it's time to make the financial decision, I'm stuck as to whether to rent or to sell.

Sell pros: Don't have to manage a rental property from 3k miles away, get SOME equity out of the deal, have no mortgage debt to count against us if we want to buy over there.

Sell cons: Lock in the "loss", lose out on any re-appreciation of the market since it seems like we're selling into the absolute worst market in my lifetime.

Submitted by sdnerd on February 9, 2009 - 2:22pm.

What would it rent for?

Submitted by UCGal on February 9, 2009 - 2:26pm.

We tried the long distance rental thing with my husbands pre-marriage house in Philly.

It sucked. Big time.

I'm not positive that Temecula/Murrietta will regain that $100k you lost anytime soon. If your horizon is more than 10 years... maybe. But how long do you want to hold onto something that is worth less than you paid for it... in hopes it comes back. How would you feel if renters trashed it?

I agree that you need to look at this from a strictly financial point of view. I don't think it makes sense to hang onto it.

Submitted by sc_alum on February 9, 2009 - 2:38pm.

Rent is probably 2200/2300, something like that. Our neighbor is renting for 2300, in a slightly smaller house - but the lease started about 8 months ago so I'm factoring that rents have likely decreased.

UCGal - agreed, I'm not sure when/if it's coming back... I ran the numbers and since they're covering Realtor commission, it makes it even longer before we can "break even" in any sense of the term.

With renting, it seems to make sense if you have a small-ish house, because if somebody trashes it you can rip up carpet and repaint. You can't just repaint and carpet a 3500 sq foot house in a weekend...

So I think you're all validating what I was thinking, so far - that I should cut my losses and run. It hurts, but I wanted to see if someone was going to tell me how they saw a bounce in the valley's future, etc, etc, and if I just hung on one year we'd have some mitigation of the loss... it was a nice pipe dream ;)

Submitted by Diego Mamani on February 9, 2009 - 5:27pm.

You spent a lot of money in down payment and upgrades. Why? Where you planning on staying there for many many years?

If so, do you see yourself ever coming back to this area? Would you consider retiring and living in this house? If the answers are yes, then I'd consider renting.

OTOH, if you'll never be back to the area, then take your losses now and sell. If you rent, there are ways to minimize the likelihood of bad tenants: charge a below-market rent, but be super aggressive and picky when checking credit scores and references; only rent to people with high FICO scores, spotless references, etc.

Submitted by temeculaguy on February 9, 2009 - 5:55pm.

The rest of the financial picture would be helpful but I understand it's your life and you probably don't want to publish it. If a few hundred a month wont kill you, i'd rent it out as long as you can qualify for another purchase if/when you decide to buy. There are a number of families who bought at peak and have lost their home but want to stay and rent, it is a 150x rent multiplier, while there are better deals to be had in some condos or smaller homes as far as the multiplier goes, yours doesn't need any work and has some appealing features. Those people who lost their 600k no down toxic loan specials didn't all vanish. They can afford 2k, they just couldn't cut it when it jumped to 5k and they cant buy for a few years. If you can afford it and you think it is near bottom, place your bet and wait and see. I sold a property about a mile from you in 1997 and did exactly what you did, walked away with about nothing, lost my down and upgrades but I couldn't handle the fear of the unknown. My mortgage was close to what the rent would have been but I was fearful of qualifying for the next one and dealing with months without a renter. Eleven years have passed, I would have been cash positive about $500 a month for the last 8 years and could have sold at a profit anywhere between 50k and 350k in that time, I'm still kinda mad at myself for being a wuss. What is worse is that it would have been paid off by now, I'm an idiot, you don't have to be one. Excuse me, I'm still kinda reeling from the realization that it would have been paid off already, I hadn't thought about it for a while. That would be about 1500 free money a month, dammit!! I need to go find a nice solid door to bang my head into.

Submitted by DataAgent on February 9, 2009 - 6:28pm.

Please consider renting your place. Here's why:
1. Losses on a personal residence are not tax deductible.
2. Losses from rental property are tax deductible.

Pay for some solid advice from a good tax accountant. Not H&R Block. Your situation is much more complicated than they can handle.

It may be possible to:
1. Convert your property to a rental for a few years.
2. Deduct the loss when you sell it.
3. Loss is defined as: original purchase price
PLUS all improvements MINUS selling price.

Your loss could make a nice tax deduction in a year when you get a big bonus from your new job.

Good luck.

Submitted by Veritas on February 9, 2009 - 7:01pm.

Get a decent security deposit and video tape the condition of the house especially the floors prior to renting.

Submitted by Coronita on February 9, 2009 - 7:26pm.

sc_alum wrote:
Not a forced relo, but a very desirable one that we're excited about. Executive level position in a major global company.

I ran the numbers, and could certainly make the argument to myself that we basically "rented" for 6 years, plus a tax write off benefit... that takes out some of the sting. And got to live in a house that we loved and that we had fun in, etc etc.

But now that it's time to make the financial decision, I'm stuck as to whether to rent or to sell.

Sell pros: Don't have to manage a rental property from 3k miles away, get SOME equity out of the deal, have no mortgage debt to count against us if we want to buy over there.

Sell cons: Lock in the "loss", lose out on any re-appreciation of the market since it seems like we're selling into the absolute worst market in my lifetime.

You asked the company to comp you for the difference?

Submitted by paramount on February 9, 2009 - 8:24pm.

I am in a similiar situation: I bought my current home 6 years ago for 270k. I put about 25k down, have a 5% fixed 30 year loan, my PITI is just over 1500.

Now the problem: I estimate the value of my house at about 170k, not including selling costs. The neighborhood in those 6 years has become about 50% rentals and in general decline IMO.

Like TG, I made mistakes in the past with Real Estate (selling properties that I should have held) - now I don't have a pot to piss in or a window to throw it out of.

I am not a Happy Camper at all.

Submitted by sc_alum on February 9, 2009 - 9:07pm.

Perspective is appreciated in spades!

When we bought (first house) we had intended to stay here for the long term - we loved the area and had jobs with flexible telecommutes. We bought the house to enjoy it, and so the upgrades are all things that enhance our enjoyment of the house and I don't regret any of them. Careers take unexpected paths, though.

I honestly came into this thread thinking that cutting our losses was the way to go, but some of the rent-champions have given me good things to consider. Especially the rental property loss write-off... that one could be especially handy. I'll look up the restrictions, but any preliminary info on how long it has to be a rental before it qualifies? I'd imagine at least one tax year (when you don't take the mortgage interest deduction)? iiiiinteresting...

TG - if you're still following: As the area expert - I've got my doubts about the ability of the city to recover and thrive in the next 5-7 years. It seems like business have shuttered as quickly as they've opened in the past few. Some inside sources have also hinted at layoffs coming at Abbott in the very near future (manufacturing as well as white collar). I don't think we can do much in the way of recovery until San Diego does, and most folks on the site think SD still has quite a ways to go... thoughts?

Final thought (for this particular post): House is 6 years old - how long before I can expect the big maintenance-related repairs to start to come due, generally speaking? I don't know that I have the stomach for that...

Submitted by sc_alum on February 9, 2009 - 9:15pm.

For anyone who is interested - found the following. Looks like the IRS is onto my ploy and is one step ahead (emphasis is mine)... no dice:

"... law allows a deduction for a loss from the sale of a personal residence that has been converted to rental property. But it limits the amount of the write-off. No deduction for any drop in value before you begin to rent.

The starting point is the property's (1) adjusted basis at the time of conversion or (2) fair market value at the time of conversion, whichever is lower."

Submitted by moneymaker on February 9, 2009 - 9:32pm.

Not sure why I'm posting. This is what I would do. Keep your current house as a rental, I assume you have made friends in the neighborhood,have them keep an eye on it. I would rent in the new area until you have learned the neighborhhods. If the new job doesn't work out you can always move back to beautiful southern california, just that thought alone should balance out the discomfort of having strangers in your home. But above all "just let go" and do want you want to. How's that for confusing advice.

Submitted by DataAgent on February 9, 2009 - 9:45pm.

"The starting point is the property's (1) adjusted basis at the time of conversion or (2) fair market value at the time of conversion, whichever is lower."

Tax law has always said the above. 'Adjusted Basis' is factual. That's what you paid for your house PLUS improvements. Pretty easy to prove. However 'Fair Market Value in 2009' is subjective. It's your call. You're not a real estate professional are you? What is your place worth right now? It's worth what you paid for it, of course. After you've rented your place for 5 years (year = 2014), how could the IRS ever argue with your estimate of FMW in 2009? Buy some confidential time with a good tax professional. Maybe try a tax attorney.

Submitted by temeculaguy on February 9, 2009 - 9:55pm.

Damn IRS, they take the fun out of everything. I can't comment on Abbot, don't know anyone that works there. It's changed names and hands at least three times while I've been here and it always seems to chug along or expand. The stuff they make (stints, shunts, fake hearts, medical stuff) isn't as "optional" as say "motorhomes." But I imagine like any business, times aren't good.

A six year old house has at least 4 years before some things crap out, probably longer. The pool is another story, after ten years the equipment is borrowing time. Pools are not great things in rentals because neglect can be a big deal, best to have a pool guy and include it in the rent. It wont be easy and there will be expenses (deductible though). All I am saying is that when I've faced this decision in the past I've regretted every one I walked away from when it was close to nuetral. I like your location adjacent to harveston and of course I think the valley will be fine, be a tough two years but it will be fine, too many things on it's side. Right now if you have a property that doesn't have a high carry cost and you can weather the storm, don't buy high and sell low unless you have to. In your situation, you may have to. In paramounts, he doesnt have to, you only lose if you sell. His situation is much more similar to my last one, where I wanted a bigger pad in a better neighborhood and could afford one since the prices were down but the current pad was upside down however it would have been rent nuetral. I could be totally wrong and houses might be worth five dollars, rent may be free, but I've danced this dance, I've kissed this girl and every time I've dumped a property in this valley where the carry cost was about the same as rent I've lived to regret it. Yes it's different this time, blah blah, it was different last time and the time before that. You know what, now that I recall, on my last no profit dump, my dad begged me to keep it as a rental, offered to buy half of it or all of it, said he would cover any rent losses and I still refused. I wanted to be free of it, the news was all bad, values declined faster than I could keep up with and rent signs always said 1st month free. Why would I increase my stake in this depreciating investment class when anyone in their right mind would run and hide. I pussed out, I failed to learn from those who had seen more cycles than I and today I have one place that I have very little equity in and he owns a handful outright. Why is it that from age 16 to 35 we refuse to listen to our parents and every day after that we wish we had.

Now where's that door again!

Submitted by paramount on February 9, 2009 - 11:03pm.

TG: You described my situation perfectly except for one difference: we are not rent neutral.

At best I believe we could rent our house in the 1400-1500 range.

My neighbor rented and the renters have already stopped paying rent.

Isn't this time truly different though? In previous cycles, was there massive fraud going on - with all of these crazy loans?

Having bought in past cycles, those cycles seemed to be due to normal "natural" economic cycles.

Submitted by carlsbadworker on February 10, 2009 - 11:30am.

I think since you asked this question, no matter what you decide, you are likely to regret later.

If you sell it, eventually the price will come back up (as well as the rental price), so from the long term financial point of view, 150 x rent-price is not an attractive price to sell. If you rent it, managing the rental business 3000 miles away would be much harder than you currently believe.

Generally, I think it's the best time to establish rental property when you move. However, in your special case, I will probably take that $20-30K relo package. I like hard cash better than future prospective given that you are not yet ready to be a landlord whereas coping with your new position and new city would already be hard enough for you.

Submitted by carlsbadworker on February 10, 2009 - 11:38am.

By the way, if you it rent out, I think you should be prepared to lose money on it for a while. One, the rental price is still declining in the valley. Two, I just don't believe a property can be called cashflow positive if the rent just covers PITI. You have to factor in vacancy, management fees and maintenance costs (of course, as TG points out, it probably does not need major maintenance in a few years). But that's probably just a few thousands a year, I myself don't mind losing a few grands a year on investment if I have a decent job. Eventually inflation will kick in. 30 years from now, rents will be much higher and you won't have the mortgage anymore.

Submitted by NeetaT on February 10, 2009 - 2:24pm.

It just means that your next home purchase will be at a depressed price, which is good for you the buyer.

Submitted by paramount on February 10, 2009 - 8:21pm.

From the street level, I would say rent in and around Temecula is falling sharply.

Submitted by sc_alum on February 10, 2009 - 9:23pm.

"From the street level, I would say rent in and around Temecula is falling sharply."

It does look like that, yeah...

Silly question, but rental income is taxable income AFTER you've deducted mortgage costs, right? It's net, not gross?

So I either walk away with about 50/60k (equity) now (+ closing cost considerations, though that's not cash in hand, just cash not spent)...

Or in a sense "buy" my house for 50/60k... assuming rent more or less balances mortgage. Maybe it ends up costing us a couple grand a year, but not a huge deal...

*Sigh* I am thoroughly engrossed in all the replies, but I honestly can't say I'm any closer to a decision. The poster that said that I'm going to end up regretting whichever option I choose is probably right on the money. Grass is always greener...

If rent and real estate stay flat for 5+ years, I look ahead to that time... I'm about 35k-ish more paid down in my equity, so that 50/60k is now maybe closer to 100k... but now I've got closing costs to pay, so subtract +-22k... So 5ish years out and I'm maybe 10k up, net... assuming nobody trashes the place and that I've got decent occupancy... big if's.

So short term it makes no sense... but then if we get modest appreciation and modest rent appreciation beyond that time frame, it starts to look like a brighter picture...

The decision boils down to whether I want to be a long term landlord of a big house from far away, I guess. We may at some point come back to So Cal, though to San Diego, if we did, so then it wouldn't be so long distance...

Sorry, just using this as a blank space to do some musing - back to your regularly scheduled programming.

Submitted by 92027_guy on February 10, 2009 - 9:37pm.

I'm kinda dealing with a similar situation but in reverse, I have a couple of outside CA rentals (one in TX and one in NC) and I'm on the edge of BK'ing them away. I think the downturn has been around long enough that people are starting to think of missed opportunities vs. getting out while you can. I can only imagine how pissed I'd be at myself for selling in 98 like the previous poster, but that is hindsight and the unknown future is really unknown. My NC house was bought for 137k in late 05, comps showed 150k in December 08 before the BofA layoffs. It's a 250 a month neg. So far I've had no renter nighmares but there's always that anxiety of getting a call about something expensive. Non money issues like Stress/complexity are also factors to consider.
I guess I'm trying to say it's a gamble either way, and I have to agree with carlsbadworker whatever you choose hindsight will cleverly hide the bad and exaggerate the good so you will regret it. Not sure if that helped...

Submitted by paramount on February 10, 2009 - 9:45pm.

NEWSFLASH

According to my Realtor friend, 2008 was the 2nd best year going back 7 years for Temecula in terms of RE sales (I assume # of transactions).

Submitted by FormerSanDiegan on February 11, 2009 - 9:21am.

sc_alum wrote:

Silly question, but rental income is taxable income AFTER you've deducted mortgage costs, right? It's net, not gross?

Yes, it's net, not gross, and it is figured on Schedule E with some "real" expenses as well as "phantom" expenses such as depreciation, which ultimately results in a decent tax advantage.

Here's the long-short of it ..
Net income = Gross Income - Expenses

Gross Income = rent

Expenses:
Mortgage Interest
Property Taxes
Insurance
Maintenance
Property Management fees
advertising
Travel to/from property (with some limitations)
utilities while vacant (or if paid by owner, which I don;t recommend)
Some other stuff I am probably leaving out
Depreciation **

** You get to take a paper loss of ~3.63% of the value of the structure (not including land), since it is depreciated for tax purposes over 27.5 years. Assuming the place is worth 350K and 275-300K of that is the actual house, you are looking at a Depreciation (phantom, paper only for tax purposes) loss of ~10K per year.
Or in other words if you were able to pay down the mortgage such that you netted 10 K a year (not including depreciation), the depreciation would allow you to collect that 10K tax free. You do have to pay depreciation recapture when you sell, so this phantom loss is essentially a temporary tax loss for as long as you own this property.

So, most likely, for tax purposes you will be "losing" about 12K per year, though your out of pocket loss might only be $2000-3000 per year.

If you are married and make less than 150K this loss can be taken against ordinary income (it phases out at gradually starting at 100K). If you make over 150K, then it becomes a carryover loss for use in future years or when you sell.

Keeping the house as a rental can make a lot of sense if you keep it for the long haul. However, you need to read up as much as you can and decide if that is what you want to invest a few hundred per month into for the foreseeable future.

Also, if you are considering this solely as a financial necessity brought on by current market conditions, rather than part of a well-thought out financial strategy than it is unlikely you will be satisfied with the result.

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