Ask Money

A home dilemma

Chris Farrell Jan 20, 2009

Question: In 2005 my son-in-law bought a house in Florida for $220,000. He financed this purchase with a 15-year prime-rate mortgage, which he has been prepaying ever since. This house is his residence and he owns no other real estate.

In 2008 he married my daughter, who has been accepted to a medical school in another state. They will need to sell the house and move this summer. The problem is that they will need to get $160,000 for this house, which is now worth only $140,000. What options are available to people who are current or even ahead in their mortgage payments, but whose homes have lost value and they need to sell? My daughter and son-in-law do not want to walk away from this house or do anything that will jeopardize their credit rating. Susan, Bethesda, MD

Answer: This is a classic real estate problem exacerbated by the historic downturn in home prices. It’s not unusual even during goods times for homeowners to face a loss when they want to move for a job (or in their case professional schooling) and they’ve only owned the place for a few years.

The classic answer is to rent it out. They’ll earn rental income until the market rebounds. Then they can sell off the property. To be sure, there are difficulties to renting. They’ll have to figure out if it’s a viable solution for them. They’ll want to find a good tenant. Since they’ll be living out of state they’ll need to contract with a professional property manager to oversee their home rental (which cuts into rental income). They should research the rental market in the area to see how much they can realistically charge. Still, renting is a classic way to buy time. For instance, when the New York City real estate market declined in the late 1980s and early 1990s a number of my friends rented out their condos and co-ops until they could unload them several years later.

Another time-honored solution is to dip into savings and make up the $20,000 shortfall to pay off the mortgage. In essence, it’s the cost of doing business, part of their “investment” in her medical career. Yes, this option is financially painful, but it also stops their exposure to the housing market in Florida, keeps their credit record sterling, and allows them to start a new life and a new career in another state with a clean financial slate.

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