How Much A Vacant House Really Costs

It’s amazing how many nice homes are vacant in the Memphis area these days.

Just take a look at homes listed for sale and you will see dozens of pictures that show the owners have moved on.

What most sellers don’t realize is that every day their home sits vacant, their equity goes down … and nobody gets any benefit from the home.

Even if the home is paid for, you still have to pay taxes, insurance, yard maintenance, utilities, pest control and termite contracts, home warranties, etc.

In addition to that, the home is more likely to be vandalized when it sits vacant.

That’s why most insurance companies stop insuring your home after it has been vacant for 30 days. When that happens, you have to get vacant property insurance, which is a lot more expensive than homeowner or landlord’s insurance.

If you don’t switch to a vacant policy, you take the risk of having an uncovered loss.

How Much A Vacant Home Really Costs

Consider the following scenario:

  • Memphis home worth about $100,000
  • 30-year mortgage at 6% with original balance of $70,000

This home can easily have the following expenses:

Mortgage (PI): $420
Property Taxes: $150
Vacant Property Insurance: $180
Home Warranty: $50
Utilities: $100
Lawn Care: $50
Pest Control and Termite contract: $50
Total Monthly Expenses: $1,000

Income? ZERO

If the home sells for $100,000 and the mortgage balance at that time is $60,000, after paying $10,000 in closing costs and commissions, there is $30,000 in equity.

But if it costs $1,000/month to hold the house, this equity disappears in just 30 months.

Even after just 12 months, the equity is down $12,000 (assuming prices stay flat), and it’s not uncommon to see homes that have been vacant that long.

So what can you do?

One option is to price and market the home more aggressively (likely to result in a faster sale at a lower price) or to offer incentives such as seller financing. The other alternative is to rent the property until the market comes back.

Leasing or financing the the property would reduce the insurance premium and eliminate utilities, lawn care, and pest control expenses. It would also generate income and in the case of leasing, allow the owner to wait until the market recovers to sell at a higher price.

Most sellers are hesitant to finance the sale or to lease the home because of “all the risk”. The perceived risk is that the tenant or buyer won’t pay or that they will damage the property.

While this is definitely a possibility, the likelihood of it happening is relatively low if the property or note is managed by someone with strong property management skills. However, by leaving the property vacant you are certain to lose thousands of dollars in a short period.

So the decision boils down to …

a) Do you keep the home vacant and lose $1,000/month with almost 100% certainty? or

b) Do you lease or finance the property to “stop the bleeding” and get exposed to the possibility of something going wrong with the tenant/buyer?

In my experience, option (b) is a much safer bet.

Do you have a different view? Post your comments below.

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