Expert: Dick Dennis - 1/24/2010

Question
Hi Dick,

Scenario:
I own a townhome in Issaquah, WA that I bought back 2006 for $377K and it's been an investment property of mine.  Now it's worth between $300K-325K and it is tenant occupied until AUG, however, I've been down about $9-10K/year out of pocket cash to maintain it.  

This neighborhood is a newer development and is saturated with many homes for sales.  

If I sell now, I've calculated the fact that I might be walking away from a ~$140K loss after depreciation, closing cost, agent fees, etc...and potentially more depending on other factors.  

Question:
1. Should I sell now and cut my losses which is potentially $140K?
2. Should I ride it out for a couple years more and continue to lose ~$10K a yr
3. Should I refinance, pay down the rate, hold on long term and wait hope for a recovery?

Thanks!!

Answer
Using the first option may be the best, Machi, since it is an investment and not your residence. However, I presume you have good credit and your mortgage balance, if you have any, is way down. Therefore, you can refinance it. Banks are reluctant to make refinance loans these days, especially on investment properties. I also assume that you do have equity in the property.

It is my belief that your present value is more closer to $250,000 and values will continue to fall. So, if somebody does buy it from you, they may realize that and would probably make an offer just south of that value. You should talk to a good local and knowledge Realtor or two and see what they could sell the townhouse for.

The market will not get back to the level at which you bought the property for at least five to seven years. If you are willing to wait, then fine. Do it. If you have a good income and you can use the tax write off, then do it. Keep it.

If you let the property go into foreclosure, it will ruin you credit, no doubt. That has happened to many good-credit people these days. I would recommend you consult with a Certified Public Accountant or Tax Attorney to know what is the best way to use these yearly losses on your income. There is one other suggestion, unless your tenant is moving out of town or has bought a house, I would recommend lowering your rent to the tenant to encourage him to stay. You're going to have to do it with the next tenant anyway. Many apartment owners are losing money these days . . . besides letting their properties fall into foreclosure . . . and you may find many of them keeping their rents for as long as they can without paying their mortgage obligations. Yes, it is rough, all right.

To summarize, I can only be vague with my answers to you, Machi, because I do not know your financial situation the way I should before I give advice in this case. Finally, you are the one that is going to make the decision and you definitely should consult with a tax expert. I do wish you well.

Dick Dennis
dixiedee13@aol.com