Selling in a Declining Market
No one likes to lose money. If you scraped and saved for years for the down payment to buy a home, finding out that your house is worth less than the amount you paid for it can be quite a blow. In the worst cases we've seen, some homeowners find themselves upside down, which simply means that the mortgage on the house exceeds the amount for which the house can be sold. When deciding whether to sell in a depressed market, consider the factors discussed in the following sections.
If you still have adequate equity. Although your local real estate market may have recently declined, if you've owned your house long enough or made a large enough down payment, you may still be able to net a good deal of cash by selling. If you can make enough money to enable yourself to buy another home, we say don't sweat the fact that your local real estate market may currently be depressed. As long as the sale fits in with your overall financial situation, sell your house and get on with your life!
All real estate markets go through up and down cycles. Over the long term, housing prices tend to increase. So, if you sell a house or two during a down market, odds are you'll also sell a house or two during better market conditions. And if you're staying in the same area or moving to another depressed housing market, you're simply trading one reduced-price house for another. If you're moving to a more expensive market or a market currently doing better than the one you're leaving, you do need to be sure that spending more on housing doesn't compromise your long-term personal and financial goals.
If you lack enough money to buy your next home. Sometimes, homeowners find themselves in a situation where, if they sell, they won't have enough money to buy their next home. If you find yourself in such a circumstance, first clarify whether you want or need to sell.
If you want to sell but don't need to and can avoid selling for a while, we say wait it out. Otherwise, if you sell and then don't have adequate money to buy your next home, you may find yourself in the unfortunate position of being a renter when the local real estate market turns the corner and starts improving again. So you'll have sold low and later be forced to buy high. You'll need to have an even greater down payment to get back into the market, or you'll be forced to buy a more modest house.
If you need to sell, you have a tougher road ahead of you. Hopefully, the real estate market where you buy won't rocket ahead while you're trying to accumulate a larger down payment. You may also look into the methods for buying a home with a smaller down payment. For example, a benevolent family member may help you out, the person selling you your new home may lend you some money, or you may decide to take out one of the low-down-payment loans that some mortgage lenders offer.
Renting your property: If you must move or relocate and don't want to sell in a depressed market, you can rent out your home until the market turns around. If you convert your home into a rental, be sure that you understand the tax consequences of this arrangement. Before becoming a landlord, consider your ability to deal with the hassles that come with the territory. You must also educate yourself on local rent-control ordinances. Also, compare your property's monthly expenses with the rental income you'll collect. If you're going to lose money each month, that constant cash drain may handicap your future ability to save in addition to increasing your total losses on the property.