Sell Your Home or Wait for a Price Rebound?
By Steve Gillman - 2009
Perhaps prices have dropped where you live, so you wonder
if you should sell your home now or wait. A decision like this
depends on a lot of factors, of course, like whether you have
to move, whether you're upside-down on your mortgage, and whether
you will be buying another house right away. This latter situation
is what this article covers.
Suppose you want to move, and your home will sell for $160,000,
but it was worth $175,000 last year. Unfortunately, this is becoming
a common scenario in many areas of the country. And if you actually
bought the home for $175,000 last year, it's even tougher - none
of us like to sell a home at a loss. If you purchased the home
for $90,000 years ago, you could more easily accept missing the
top of the market.
The temptation in either case is to wait until prices go back
up, as they certainly will in time. But to look at this objectively,
let's suppose we are at or near the bottom of the market, and
within four years prices in your area will be up 20%. We'll also
assume you have the option to sell now or wait. In this example,
then, your house will be worth about $192,000 in four years.
Is it best to sell now or wait four years?
When to Sell Your Home
We're assuming you'll be buying another house immediately.
Now, since you could be down-sizing or up-sizing, we'll look
at each scenario. For the sake of this example, interest rates
are at about 6.5% for your current loan and will be the same
for the new mortgage loan.
Scenario One - Downsizing
To reduce your monthly costs, you're considering a condo or
a smaller house that will cost about $120,000. If you wait four
years to sell your existing home, you'll get $192,000 - $32,000
more than if you sell it right now - but wait! The smaller home
also went up 20% so you'll pay $144,000 for it - $24,000 more.
But then you made $32,000 more by waiting, right? It seems you'll
be $8,000 further ahead if you wait then. Ah, but, it's not that
simple - more on why in a moment.
Scenario Two - Upsizing
You want to trade-up to a home that would cost $240,000 right
now, but you decide to wait, because even thought you could do
it, you hate the idea of taking a loss on your current home.
In four years you sell it for $192,000. However, now the nicer
home costs $288,000, so even though you got $32,000 more by waiting
to sell your home, you had to pay $48,000 more for the new one.
It seems you are $16,000 further behind for waiting.
Now for some of the many complications that make these decisions
so tough. The examples above don't take into account the difference
in payments. In scenario one, you paid $253 more each month on
the larger mortgage because you waited (assuming the mortgage
is 90% of the value in either case) - $11,000 more over those
four years. The real cost of waiting is $35,000 then ($11,000
plus $24,000). This is $3,000 more than the $32,000 you gained,
so now it looks like you shouldn't wait, especially when you
also consider the higher monthly costs for taxes and utilities
you were paying on your existing house.
Now, in scenario two, you were paying $455 more per month
(assuming the mortgage is 90% of the value in either case) once
you bought the $240,000 house. You pay $48,000 more for the new
home, and get only $32,000 more on your current home by waiting,
but you also spent $22,000 less on payments during those forty-eight
months. Now it seems like you'll be $6,000 further ahead now
if you wait.
Unfortunately, it's more complicated than that, and we won't
even consider property taxes, real estate sales commissions,
and the annual "personal value" you place on being
in a nicer home. You see, there will be yet a larger mortgage
on the nicer home if you wait. For as long as you live in it
(up to the end of the mortgage period), you'll be paying $3,336
more per year than if you bought it when it was $240,000 (again
assuming the mortgage is 90% of the value in both cases).
Confusing isn't it? But to simplify, when down-sizing, selling
means you immediately reduce your monthly expenses. When trading
up, you lock in the equity-appreciation on a bigger investment,
and do so with a smaller payment than if you wait. You also get
to enjoy that nicer home for those four years, which is worth
something, right?. Bottom line: whether the current value is
lower or higher than a year ago isn't very relevant to your decision.
Sell your home if the time seems right, and as long as you're
investing into another house you'll do fine.
Another page to check out:
How to Sell a House -
Free e-book now on the pages of this site!
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