Home Sellers Without Equity Pay to Sell
Selling Without Equity Means Bringing Money to the Table
Sometimes home sellers can end up paying to close a deal. You're probably thinking, But, wait, if I am selling my home, why would I need to bring in cash to sell? Isn't the buyer paying to buy my home?
Good question. But circumstances like this happen far more often than you might imagine.
Why Would a Seller Pay to Sell?
- Not Enough Equity
If you've owned your home less than two years and took out a type of mortgage loan that was greater than 90% of the purchase price, it's likely you don't have enough equity to pay closing costs. Closing costs, including a real estate commission, can run 8 to 10% of the purchase price.
- Declining Real Estate Market
Perhaps you're trying to sell in a falling real estate market, which would mean your home might not be worth enough to generate a profit upon selling. Real estate cycles can make markets move down as well as move up. Not every home appreciates every year.
- Neighborhood Values Change
Sometimes external factors or nearby foreclosures affect property values. When new subdivisions are built nearby and the homes are offered for less, buyers will gravitate toward the new construction, shunning slightly older homes. New commercial developments change the value of surrounding homes. Sometimes homes with views lose those views when high-rise buildings are constructed.
- Unexpected Repairs
Few deals are solid until the buyer has completed a home inspection. Home inspections and pest inspections can turn up undisclosed problems or home deficiencies that run into thousands of dollars to fix. What can start out as a simple repair job may expose other problems when walls are opened up or roof shingles are removed.
How Do Sellers Pay to Sell?
- Some Sellers Tap Retirement Accounts or Borrow From Family
Sellers who end up on the short end of the stick bring in a check. A woman in Sacramento took out a home equity loan against her condo to help make the payments. When she could no longer afford to make the payments, she bought another home with 100% financing. Then she rented her condo and put it on the market.
Her tenant was uncooperative, however, and made it difficult for the woman's agent to show the condo. The tenant had to go. Coupled with falling prices, this seller was going further into debt every month.
This seller finally had to face the fact that if she wanted to sell her condo and not lose it through foreclosure, she would need to bring money to the table to close her sale. Fortunately, her parents gave her the cash.
- Some Sellers Decide to Bite the Bullet
A seller in Roseville called me recently to ask if his agent was telling him the truth when the agent suggested he bring in money to close his deal. This seller's best financial move was to stay put and not sell. After all, he already owned a home; he wasn't a renter wondering if he should buy or rent.
The seller insisted on selling because he no longer like his neighborhood nor his neighbors. Out of all the homes in his subdivision, he was the only owner occupant. The rest of the homes were rentals, which pulled down the values. It was worth it to him to spend $30,000 to get out of that neighborhood and into a more desirable neighborhood. He withdrew the money from savings.
- Some Sellers Ask for a Short Sale
Not all lenders will agree to a short sale. There are specific requirements and conditions that will persuade a lender to forgive debt. A seller in North Sacramento had no assets, no income and he had refinanced his home over market value. He owed more than the home was worth.
For him, negotiating a short sale with the lender meant he could walk away from the property without a foreclosure on his record. He also had to pay taxes on the amount of debt that was forgiven, but that amount was taxed at a low tax bracket of 15%. Paying 15% of short sale taxes was preferable than bringing in the entire amount in cash, plus closing costs to sell.
Every situation is different. Sellers who find themselves in financial difficulty should first talk to a financial adviser or a CPA to help them weigh the pros and cons of bringing cash to close the sale of their home.
At the time of writing, Elizabeth Weintraub, DRE # 00697006, is a Broker-Associate at Lyon Real Estate in Sacramento, California.