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.

Should You Sell or Rent Your Home? (Part 2)

This is the second part of a 2-part blog post that discusses the decision many homeowners face in today’s market. “Should You Sell or Rent Your Home? (Part 1) discusses advantages and disadvantages of selling and renting. Part 2 talks about the 3 factors you must consider to determine the best option for your situation.

3 things to consider to decide if you should rent or sell your home

In addition to understanding the advantages and disadvantages, you must consider other factors before deciding to sell or rent your home:

Can you afford the payments if you decide to rent the home?

One of the most important things to consider when making the decision is whether you have the ability to cover all the expenses on your home (with or without the help of a tenant).

When figuring out your payments, make sure you factor in utilities, lawn care, taxes, insurance, as well as your mortgage payment. A good tenant can cover a significant portion of these costs, but you need to be prepared to cover the expenses while the home is vacant.

Keep in mind that the amount of rent you can collect has nothing to do with the amount of your payments. Your payments depend on how much you borrowed, the interest rate, and the repayment term, as well as your property taxes and insurance premium. The rent is solely determined by what the market is willing to pay and that depends on how many homes are available for rent and how many people are looking to rent homes (supply and demand).

If your payments are higher than what you can afford over the long term, you should strongly consider selling your home. It does not do you (or the tenant) any good to struggle making payments for a year or so only to face foreclosure some time down the road. We’ll discuss selling even if you have no equity in the next section.

What financial resources do you have available to induce a sale?

Selling a home costs money. Real estate commissions, repairs, upgrades, closing costs, holding costs, etc. can add up to thousands of dollars. If you have significant equity at today’s market value, you should be able to sell your home and cover all selling expenses with the proceeds of the sale.

If you do not have equity, you would need to use other financial resources to induce the sale. The most common case is bringing cash to closing in order to supplement the proceeds of the sale to pay off the mortgage and cover selling expenses.

If you don’t have equity or financial resources to sell and cannot afford the payments, you should consider contacting your lender to discuss your options.

If you want to stay in your home, your lender will consider modifying your loan to lower your payments. But if you really have to move out and you cannot afford the payments, the lender will most likely agree to take a short payoff on your mortgage (also known as a “short sale”). Essentially, the lender will agree to take less than what’s owed to allow the sale to happen and avoid having to “take the property back”. To approve a short sale, most lenders will ask to see proof that you do not have the resources to continue making the payments.

Another alternative is offering the home to the lender in lieu of foreclosure. Most lenders will prefer to go with a short sale as they do not want to own any more houses.

Keep in mind that not paying your mortgage in full will damage your credit. Bad credit can prevent you from borrowing money, especially at good rates, and could hurt your ability to rent the best homes or even get a good job. Walking away from a mortgage can be the only solution for some people, but they should exhaust other options as the consequences of this alternative are lasting.

If you decide to rent your home, the rent you receive may or may not be enough to cover your expenses, depending on how big your payments are. Keep in mind that even if the rent does not fully cover the expenses, paying a small amount of money each month on a home you are not enjoying is not ideal, but doing so may allow you to keep your good credit and move on with your life.

Is your home in good condition?

Your home must be in good condition in order to rent it. Good tenants usually do not rent homes that are in bad shape. Many people make the mistake of renting a home that needs work to the first person that is willing to rent it. Tenants who do not mind the condition of the home are likely to be trouble in the future. This does not mean your home has to be perfect or that it has to have the latest updates, but your home must be fully functional and safe for the new occupants.

If your home needs work, you can either fix it or sell it in its current condition. Fixing a home to rent is cheaper than fixing it to sell. Buyers are much more selective than tenants because the risk of buying a “bad” home is much higher than the risk of renting one.

If you decide to sell a home that needs work, you must be prepared to discount it significantly. The pool of buyers who are willing to buy a home that needs work is much smaller than that of buyers looking for homes in good condition. The amount of discount you must offer will likely exceed the cost of fixing the home.

In summary, renting out your home can be a good option if you can afford the payments and if your home is in good condition (or you have the resources to put it in good condition). If you cannot afford the payments and really have to move, makes sure you discuss your options with your lender.

Questions? Please post them in the comments below.

Should You Sell or Rent Your Home? (Part 1)

This is the first part of a 2-part blog post that discusses the decision many homeowners face in today’s market. Part 1 discusses advantages and disadvantages of selling and renting. Should You Sell or Rent Your Home? (Part 2) talks about the 3 factors you must consider to determine the best option for your situation. […]

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