My friend today just told me about his concern over the purchase of his 3 bedroom residence in the outskirts of San Francisco, in Contra Costa County. He bought it 2 years ago and in a year and a half had a total gain of 20%. Today, his gain has evaporated and he is sitting on a 5% gain. His plan was to somehow acquire equity from this house, sell it and then be able to buy closer to the city of San Francisco where he works.
I told him that it sounded rather tricky — you would need to sell the house at just the right time and buy a house near or in the city at just the right time to make it work. Two transactions have to be done right for it to work out, and what are the chances of that exactly? Netting a gain on the sale is one thing, but being able to buy at a more affordable price into a location of higher demand may not even be possible. So would he be resigned to living far and away from work…ever?
With a 5.5% ARM that will expire in 3 years, who knows what he’ll be facing then. I get the feeling the housing slump has just started and will need to wind itself through the next couple of years before it picks up again. So I told him to just ride it out, love his house and hope he secures huge raises or bonuses between now and 3 years down the road.
Truly what other option do you have if you are stuck in this slump? I guess you can sell(?) now and start renting again — but rents are rising as well, as it is wont to do when cautious buyers turn to renting again due to market conditions — and wait for the opportunity to fetch a new home at a more attractive price. Do so at your own risk, which is great, for can you really be sure that new home closer to jobs will ever get discounted? I guess you can also rent out your original house, while allowing yourself to rent closer to work. That may be a reasonable option if you really really hate the commute but still want to ride out the downturn.
I wish all would-be sellers well… it is indeed a trapeze act to try to ditch one house for a new one like when you are trying to upsize in a down market. You’re timing needs to be more precise when attempting this since to sell the house you’ll need to undercut the competition with a lower list price, leaving you with possibly a much smaller downpayment for your planned purchase. Upsizing in an up market seems easier as you buy a new house while keeping the old one, carry two mortgages and apply for a bridge loan, usually at much lower rates, which is usually the reason for the up market in the first place. With that loan, you could theoretically be able to cover the 2nd mortgage, while preparing to sell your original home without as much pressure.
On that note, have you checked out this house for sale yet?
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I think people who try this kind of stunt really set themselves up for failure. It’s a bummer, but not totally unexpected. Hopefully s/he will think things through a little more carefully in the future.
Why do people think they were going to buy homes and flip them asap? My plan was 5-7 years, it could happen short or bit longer. But when I bought in 2005 the idea wasn’t to make money, it was to live somewhere I didn’t have to move, keep my dog, and pay a mortgage instead of rent.
Which was about the same a little less. There was less than a 5% difference in renting versus buying. So I figured even if I lost a little on the houes, it wouldn’t be as bad as renting for 5 years.
I actually tried this out.
I bought 2 condos in san diego - 1 in 2001 and another in 2003. in the summers of 04 and 05 I sold both for pretty much the same price. I now rent back the nicer one.
They’ve both dropped around 20% from the peak price. I’m renting so I have lots of time to wait until I see the declining prices firming up.
I expect it’ll be atleast 18-24 months before that happens though.
Hope you don’t mind a piece of advice for your friend.
I don’t know how deep his pockets are but I’d get out of that ARM ASAP if I were him. His property value may go down to the extent where he may not have the equity to re-finance in a couple of years. (There are very few 100% loans available anymore) Then he’ll be stuck with higher payments for a home he doesn’t want to live in.
If he ends up upside down in the loan (owing more than the property is worth) and he wants to sell, he will take a loss.
I’m an appraiser and a loan consultant-those of us in the real estate industry have seen over and over again.
Consulting with a financial advisor is recommended when dealing with housing investments with the housing market slump. Being well advised is the way to go!