Expert: Lori Frankfort - 11/8/2007

Question
QUESTION: I purchased a condo almost two years ago (Feb '06) in the San Diego college area and want to sell it.  I doubt it will sell for its current market value and I have zero equity in it.  I would just like to know about the financial repercussions for doing this.  Any other advice and/or information would be appreciated.


ANSWER: Hi Jason,

Are you in dire straits to sell this condo?  In order to sell your condo for less than what you owe you will have to hire an agent to contact your lender and request a "short sale".  The lender will only grant a short sale if you can prove you are in desperate need to sell it and can't afford to keep it.  You'll have to prove you're close to foreclosure.  If they agree to the short sale, your agent will sell the condo and the bank will accept less than your loan balance.  If this occurs it could potentially hurt your credit score.  Also, you will be 1099'd by your lender for the difference, as income.  Let's say you owe $500k and it sells for $450k, and there are $30k in agent fees, etc.  That means the lender is settling for $420k on a $500k loan balance.  The lender (and IRS) consider that to be income for you, and you'll have to pay taxes on $80k.

If you can swing it, you should rent your condo out until the market turns around.

Feel free to email me with other questions.

Best,
Lori Frankfort
Broker Associate
Keller Williams Realty

---------- FOLLOW-UP ----------

QUESTION: Hi Lori,

Thank you for your prompt reply and great advice.  To answer your question, no, I am not quite there yet in terms of desperation.  I feel that this investment is draining my income that would be better put towards my retirement.

I am assuming that I can put it on the market for its current appraised value, but it may sit there for awhile.  I looked at other units on zillow.com and saw that their value is lower than what I am paying for the same type of condo and square footage.

Renting it out seems to be my best option, so thanks for sugeesting it.  If you have any knowledge and experience with regards to being a landlord, I would apppreciate it.  Thanks!

Answer
Hi Jason

In the past I had great luck finding tenants on Craig's List.  I rented a house out in 7 days with about 15 inquiries.  I also had a nightmare tenant.

My first advice is to trust your instincts.  Don't rent to someone that seems a little "off" to you.  Find a rental agreement online (maybe try legalzoom?) and make sure every detail is addressed, including utilities.  Collect first and last month's rent in advance.  Also get a reference from a former landlord.  Call that person and find out if the tenant paid on time, as well the condition they left the unit in afterward.  Finally, make sure the rental agreement includes terms on paying late, as well as what happens at the end of the contract (month to month tenancy) etc.

Hang in there.... if you can swing the renting for a few years I think the market will come back.

Best,
Lori