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Thoughts on Losing $50,000 on Our House

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Selling your home in a down market is tough. It took us 7 months from the time we listed our house until the time we finalize the sale, and we lost just over $50,000 on the transaction. I have conflicting thoughts about losing this much money. Obviously, no one sets out to lose money when they buy a home, and no one feels good about it. But at the same time, I realize it’s probably not as bad as it seems.

Thoughts on losing money on our house

We knew we would lose money on the transaction, so we were prepared for it. Being mentally and emotionally prepared to lose money is important. In the grand scheme of things, we just considered losing money on our home a sunk cost and decided to move on. Here are some factors which made the loss easier to swallow:

We had enough equity to cover our losses. Losing money isn’t fun. Writing someone a check when you’ve already lost a lot of money is even worse. Thankfully, we had enough equity to cover our losses, so we didn’t have to write a check at closing. We put down 20% of the purchase price when we bought the home, and we paid extra on our mortgage payments. This combination ensured we would receive a small check when we sold our home instead of being upside down on our mortgage.

If we didn’t buy, we would have paid rent. Some people say renting is throwing away money, but I disagree. Many people who rented during the real estate bubble avoided taking substantial losses when they had to move. And in our case, we may have actually come out slightly ahead, depending on how you slice the numbers. We lived in our home for just over 5 years. If we would have “thrown away money” on rent for 5 years, we probably would have lost the same amount of money, give or take a little. ($1,000/mo rent * 5 years = $60,000). Again, this doesn’t take into account other factors such as the time value of money as the down payment could have been invested, home repairs, or other expenses. Either way, we would have spent a lot of money on housing.

We could have lost more money. The real estate market in our area of the US was hit pretty hard. We just left the Dayton, OH area, which lost tens of thousands of jobs, and for a period of time, it was in the top 10 for foreclosures. As you can imagine, that created an excess of inventory and decimated housing prices. Thankfully, our neighborhood was relatively insulated from the price drops compared to some of the other neighborhoods.

Some people can’t afford to sell, even if they want to. The real estate markets in some locations are so bad that the majority of people are upside down on their homes and selling would mean having to fork over tens of thousands of dollars they don’t have. Many people are so far under in their mortgages that they decided the best course of action was to walk away from their mortgage.

We can make it up on the back end. We want to buy another home, and the saving grace for us is that real estate prices are lower in most places, hopefully making this a good buying opportunity for us. Our hope is that we can get more house for our money when we buy our next home. Our goal is to stay in our next home for the next 5-10 years, so hopefully things will turn out better the next time around.

All of these things may sound like rationalizations, and to some degree they are. But it also serves as a reminder to myself and others that real estate isn’t a guaranteed investment.

Have you bought or sold a house recently? How did it work out for you?


Published or updated March 17, 2011.
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{ 18 comments… read them below or add one }

1 PigPennies

Such a tough pill, and I have been through the same “rationalizations” as you. I haven’t sold my house, but I can see how much I’d lose based on sales in my neighborhood. Even though it’s easy to toss those rationalizations aside and stew instead in the misery of lost money, I think the two best points are that you would have been spending money on rent anyway, and you are buying in the same down market that you just had to sell in. Given the insulation in your neighborhood, maybe you’ll even be buying in a further discounted market! And as for the time value of your down payment, given the way the stock market acted along with the real estate market until recently, you could very well be just breaking even now on an investment started 5 years ago.

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2 Ryan

I had the same thoughts regarding the investments – that I might have just broken even in the long run. The only way I could really determine that is to go back and look at my portfolio average from the investments I had at the time, and extrapolate based on those numbers. But I decided against doing that because spending the time looking back doesn’t do me any good moving forward and my time is better spent looking for a new home and making sure I get a solid deal so I can make it up on that end. :)

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3 KDB

Wow, that’s a big hit to take, yet you handled it well financially and emotionally. We have neighbors going through something similar, just got married and bought a house about a year ago, are already getting divorced, and will likely need to take big loss. Good luck going forward.

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4 Rich Cederberg

I couldn’t agree more about paying extra on your mortgage. Great tip to help people gain equity and avoid being upside down. Great article Ryan.

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5 Evan

Has this experience made you sour at all on pre-paying the mortgage unless it is your “forever” home? That money could have grown elsewhere?

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6 Ryan

No. We still received a guaranteed return on investment, and paying down the principal more quickly still reduced the amount of interest we paid on a monthly basis. I don’t think you can ever go wrong by repaying your mortgage or any other debt early.

And our next home will probably be a “forever” home. It’s tough to predict how long we will be there, of course, but I’m hoping to be there for at least 10 years or more.

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7 Evan

Ever compute that “guaranteed return?” I am only curious because that is one of the main arguments that everyone makes and I don’t really get it. If you bought the house in 2005 but made an extra payment of $10K a month before you sold the home, you didn’t get any return. If you put an extra 10K before the market fell out in 2007/2008 isn’t your return negative?

I haven’t worked these answers out in my head so I’d love to hear your thoughts on the subject.

Also, “still reduced the amount of interest we paid on a monthly basis” – I don’t think you did. A traditional mortgage is an amortized loan so your extra payment attacked the back end so you would have rid yourself of the last interest payment (moving forward in time)

http://www.myjourneytomillions.com/articles/happens-when-make-extra-payment-on-loan/

But by selling you got rid of that payment anyway.

I am not one of those guys who think you shouldn’t pay off your home as soon as possible, just some thoughts I have been struggling with recently and your post brought it all out!

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8 fredct

The “guaranteed return” is the interest saved. If you have a 5% loan, and you pay $1000 extra one month, you save $50/year on interest (minus what the tax benefit would have been) for every year going forward.

The link you post is interesting… essentially what it says (I think) is that in some cases, the payment isn’t credited now, but rather it’s credited against ‘future payments’.

That may well be the case sometimes, but I don’t think it’s standard practice. It does prove though that it’s worth watching closely what happens on your next statement. And to make sure the bank is doing what you expect.

The specific numerical examples given on that page illustrate the benefit of what happens when it’s applied to principal. See in example #2 that month 30 the interest charge would have been $46 for the standard payment, but decreases to $39 with the expedited payment. That $7 in interest saved in that month alone.

9 Ryan

fredct, I think some lenders automatically apply extra payments as future payments instead of against the principal. Our mortgage lender applied our additional payments toward our principal when we requested it. So in our situation, the additional payments saved us money.

But that wasn’t the case in the example on Evan’s site with the student loans.

10 Debt Donkey

Sorry to hear you took such a hit, but at least you were mentally and financially prepared for it. I bought my house at the height of the bubble in June 2006. How was I to know? The consolation is that I have no plans to move, and we love the house (but I still don’t even want to know how much value it lost). You just have to learn to adapt, move on and reach for the next goal I suppose. Thanks for the good post (and the great blog). Best wishes….

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11 Peter

Selling in this market can me hard. It’s very difficult to make a profit selling Real Estate.

One option might have been able to lease out your home for a few years till the market comes around. There are a lot of people that still have good jobs and need a place to live. And the number of people like that is increasing as this crisis continues. So doing a lease to own and you are their bank or just renting as long as the payments meet you mortgage payment and say plus insurance might make it work. When I bought my last home I looked at what if I want to move in a year. Can I rent this in this market to meet all my costs and still profit? It did so I bought it. When the market turns around in a few years I might make a buck or too.

Best wishes,
Peter

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12 Joe Q.

Your post should be required reading for people here in Canada. The housing market in the big cities here is like what the USA was like in the summer of 2006.

The average price of a detached home in Toronto is about $750,000 and in Vancouver it is about $1,100,000. The median annual household incomes in these cities are about $80,000 and $70,000, respectively. There is a pervasive “housing only ever goes up” mentality and rampant speculation, especially in the condo market.

We don’t have nearly the basket-case mortgage lending market that the USA had prior to its crash, but nearly all new buyers here put down tiny down-payments and take long amortizations. To top it off, mortgages in Canada are all structured like “balloon loans” where the payments are amortized over 20-30 years but the mortgage terms only last five years (after which the mortgage has to be renewed at a re-negotiated interest rate).

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13 Jeremy

Ryan,

If you honestly can’t tell that you would have been better off renting over the past 5 years, then you are not qualified to dispense financial advice.

Have you calculated how much of your mortgage payments were going to interest and included that in your $50,000 loss?
Have you accounted for maintenance costs you wouldn’t have if you rented?
Did you fully account for all transaction costs?

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14 Ryan

Jeremy, I did not calculate how much went to interest vs. principal during the 5 years we owned our home – I would need to dig up our mortgage payment records and quite honestly, it isn’t worth the time to do so, seeing as how nothing actionable can come from it. Additionally, I would need to account for the mortgage tax deduction since we itemize or taxes, then determine which tax brackets we were in during each of the years we owned the home to determine how much the tax deduction was worth.

As for maintenance, the big items were accounted for in the $50,000 quote: we finished our basement and painted the interior before we put it on the market. Other maintenance costs were minimal during the time we lived there – our house was fairly new, and we basically only spent money on things such as light bulbs, filters, etc. Other transaction costs, such as closing costs, real estate agent fees, etc. are included in the $50,000 quote.

Would we have been better off renting? It’s probably a closer argument than it appears on the surface. The fact remains that we would have had to at least rent a home for those 5 years, which would have cost us close to $1,000 or more per month in our area, or close to $60,000. (we were in the home for 5 years, 3 months, so let’s use $63,000 as our number).

So I could look up the numbers in my mortgage statements and tax returns, try to figure out exactly how much it would have cost us in rent, and try to determine an exact amount of gain/loss. But to what end? I think it would be an hour or two of number crunching to come up with a number that has no actionable purpose.

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15 fredct

While I don’t expect you to dig into your records, nor would be as rough as he was (you do a plenty good job running a financial board), Jeremy is undoubtedly correct that owning cost you much more than renting ever could have. And while it would take hours to get an exact number, it would probably take 10 minutes to get one that’s within a few thousand of being correct…

$63K to rent…

Now, the cost for the home?
1) $50K for the loss (includes realtor fees, closing costs, etc per your statement)
2) On a 30 year mortgage, in the first 8 years, roughly 80% of your payments are interest (on a 15-year, it’s 50%). So even assuming an insane mortage that was half the price of rent…. $500/month 15-year mortgage (a highly unlikely scenario), that would mean 50%*500*63= ~$16K
3) Add in property taxes… I’d have to imagine you paid at least $10K over the 5 years. In many part of the country you could easily pay $20-$50K, but lets go with $10K).
4) Add in home owners insurance (which is significantly more expensive than renters). Over 5 years, that’s got to be another $10K, right?
5) Subtract property taxes on 3 & 4. Even at a maximum federal & state combined rate of 45%, and assuming you would have itemized anyway so the maximum advance (pretty unlikely) that $13K saved.

So, $50K + $16K + $10K + $10K – $13K = $73K.

That’s $10K worse. And that’s using some wildly optimistic scenarios such as a 15-year mortgage that’s half the size of equivalent rent. Realistically the difference probably isn’t $10K, but morel like $25-50K or more. And that’s also not counting other factors as all, such as the opportunity cost of the downpayment.

I’m not saying you should beat yourself up, I’m not saying you should have known, and I’m not saying you should regret it. But Jeremy is right… the equation isn’t close.

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16 Ryan

Good back of the envelope analysis, Fred. We had a 15 year mortgage, and we made extra payments when possible, so we were paying quite a bit more on principal each month by the time we sold our house. Homeowner’s insurance vs. Renter’s insurance is something I didn’t consider – Renter’s insurance is substantially less expensive.

As it stands, it’s a big lesson learned on my end. We are actually buying another house, but we intend to live here for at least the next 5-10 years. Hopefully we’ll make it up with this house. Then again, you never know what will happen!

17 American Debt Project

Hi Ryan, new to your site, so sorry if you’ve answered this elsewhere..where did you guys move to? And why did you decide to leave Dayton/how did you choose your new city?

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18 K

Hi Ryan,

I’m not sure how old this post is because I don’t see a date listed, we live in the Dayton area and are very concerned about how much we stand to lose on our home. We purchased two years ago (recently married and very eager to buy a house…), but unfortunately, we bought small thinking that the market had gone as low as it was going to go and that we would just get out in five years when it was time for an upgrade. (You can’t undo the past, but we would never make the same decision twice.) Do you have any advice about selling in the Dayton market? We are north, so unfortunately we are losing out on some of the popularity of the Kettering/ Beavercreek area. We are so afraid that when the time comes and we want to get out, we won’t be able to swallow the loss that is sure to come.

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