The press loves writing about two things. One, the slowdown in the real estate market (including stories about rising inventories … but, oddly, not so much about how prices have remained steady). Two, the fact that some sellers may end up having to swallow a loss on their home sales.
It’s called negative equity. You know, a situation where, say, you owe $400,000 on your condo, but someone’s only willing to buy it for $380,000 … or less.
In my opinion (educated), there isn’t much chance this sort of thing will become widespread, all things staying constant (is that a self-fulfilling prophecy, or what?). The only people who are facing negative equity are those who bought in the past year or two, and have to sell, for some external reason, such as loss of job or illness. There’s nothing unique about that – people have had to face these types of situations for the last 100 years.
I expect home prices to appreciate at the rate of inflation, over the coming years. Therefore, people should be able to pay off their mortgages (at least), plus pay real estate commissions, with no problem (even if they’ve taken out 100% loans).
What to do if you do have to sell, and take a loss?
I don’t know. I’d start by drinking heavily to forget your problems.
There aren’t many good options, as you’ll see, if you read this story. And, in case you were wondering:
When you sell your house, you must pay off all liens on the house — all mortgages including HELOCs, and any tax or mechanic’s liens. If you don’t retire all existing liens, you can’t convey good title to a buyer, which means you can’t sell.
You cannot escape this trap by transferring an existing lien to another property. Hardly a week goes by that some homeowner with negative equity does not ask me whether, in selling his/her house, the second mortgage can be transferred to the new house he/she plans to purchase. The answer is “no”; liens are not transferable. Liens apply to a particular property and can’t be transferred to another property without the permission of the lender, which you won’t get.
More: The curse of negative equity: Is there an escape? – By Jack Guttentag, Inman News, by way of The Boston Globe
Suppose you’re a Boston luxury condo seller, and someone is interested in buying your condo, but he says he needs to sell his own home, first.
Should you accept his offer, contingent upon him selling his own home?
Ugh. You may have no choice, right? Not, if you plan on selling your condo this winter, not with the current high level of inventory.
However, there’s always the risk that his home will never sell, right?
How can you protect yourself?
There’s a reason why sellers hate sales contingencies. They have very little control over what happens with the buyers’ homes, right? Maybe their buyer has set an unrealistic price on his or her property. If you take your property off the market, there’s the risk you’ll have to put it back on, three months later, if your buyer pulls out.
[M]any sellers who accept contingent sale offers insist that a release clause is included in the contract. A release, or escape, clause allows the sellers to continue to offer their home for sale until the buyers remove their sale contingency. If they receive another offer before the sale contingency is removed, they can accept it in backup position, subject to the collapse of the primary offer.
The sellers then give the first buyers written notice that they must remove their sale contingency within a time period specified in the contract. This time period is often 72 hours. However, it can be any mutually acceptable time period.
Sellers who accept a contingent sale offer with a release clause assume that their home will continue to be shown to buyers.
If you’re a buyer, you might have to settle for the above, if you want your offer to be accepted. What does this mean? Best case scenario, you’ll be able to sell your current home, and, meantime, no one else will put in an offer on the new home you love. Worst case scenario, your own home is still on the market, and the seller receives a new, attractive offer, and gives you 72 hours to remove your contingency.
If that happens to you, walk away, would be my advice. Your contingency is there for a reason. You do not want to be faced with the prospect of paying two mortgage loans, at the same time.
Updated: 1st Quarter 2018