If you can’t sell your house for what you owe, what are your options? If the mortgage on your house is more that what it’s worth, this is whats’s called negative equity.
What if you can’t sell your house for what you owe?
- Wait for the property market to pick up.
- Make cheap improvements to increase your home’s value.
- Speak with another estate agent to get a second opinion.
- Become a landlord and rent your house.
- ‘Short sale’ your house.
- Use savings to pay down the balance of your mortgage.
- Sell to a Home Buying Company.
Let’s now look at each of these solutions in more detail.
What happens when you sell a house for less than you owe?
If you have the dilemma where you can’t sell your house for what you owe on the mortgage, let’s take a look at what your options are. Whether all of these options apply to you will of course depend on your personal circumstances.
For example, if you need to sell because you are relocating with your job, some of these solutions won’t work. This is the same if you are moving abroad and emigrating from the UK.
Many people who owe more than their home is worth list their house for more than its current valuation. But this rarely works.
People don’t care about how much you owe on your mortgage. They care about what your house is worth compared to similar properties in your road or immediate area.
What about the other loans secured on your house?
Another reason why your house will sell for less than you owe is because you have other loans secured on it. Secured loans don’t only include mortgages. They include other types of loan where the lender takes a second charge on your house.
If you have a second or even a third loan secured against your house, which is in addition to your mortgage, you may find selling your house a challenge.
What are the solutions to your dilemma of owing more than your home is worth?
So what are your solutions to this scenario?
The answer to this question depends on your personal circumstances. You may need to carefully choose which one of the following solutions apply to you. Some will and some won’t.
Can’t sell house for what I owe – Solution #1: Wait for the property market to pick up before you sell
If waiting is an option, you may need to be patient. This may not be what you were hoping to read. But this may be your only option.
If you are selling your house using an estate agent, you may need to ask them to de-list it for the time being.
Wait for the property market to pick up
Waiting for the property market to pick up may be painful for you. It may also not be an option if you are either relocating or moving abroad. But it’s one option to consider. For example, the London property market is depressed as I write this article. This is making it more difficult for home owners to sell.
The property market has always gone through the ups and downs of a cycle. It you find right now that the market in your area is depressed, at some point this will change for the better.
Selling when it’s a buyers market is tough on sellers. You are more likely to have to settle for a lower offer when it is a buyers market.
But there is a silver lining in this cloud. The silver lining is that maybe the house you are looking to buy will also be depressed in value. This means that you too will be able do a deal with the owners of the house you are buying.
Of course if you are moving out of area because of job relocation, the new area you are moving to may not be a buyers market. If this is the case, you may need to consider some of the other options available to you in this article.
The ‘what’s wrong with this house‘ trap
Be careful about leaving your house on the market whilst waiting for the market to pickup.
If your house has been on the market for a few months, people begin to worry that there must be something wrong with it. They may end up discounting it altogether.
This is a trap that many sellers fall into when they insist on listing their house at a higher price that recommended by the estate agents.
Can’t sell house for what I owe – Solution #2: Make cheap improvements to increase your home’s value
Many times a simple makeover can make all the difference to how your house looks to potential buyers. First impressions count! Not only that, home improvements can increase a property’s value too.
Cheap makeovers would include painting your home both inside and outside. Your walls may be looking tired or the paint may be scuffed and chipped.
But also the colours might not be the modern day look or better still in neutral colours. Neutral colour schemes are probably the best option. Potential buyers will see that your house looks clean and they can then choose their own colour design once they move in. It’ll be like a blank canvass if you like.
If the colour is too garish or dark, potential buyers will be put off. What goes through their mind is the number of coats of ‘neutral coloured’ paint it will need to mask the dark or garish colour that’s on your walls now!
Even if you house is a large one, buying paint to paint the walls isn’t usually too expensive. Plus if you do the work yourself, you won’t have a expense of hiring a decorator. DIY is a cheaper option!
Kitchens and bathrooms sell homes
It’s so true that kitchens and bathrooms sell homes. If your kitchen is looking tired and out-dated, it may be time to improve its look.
If your kitchen cupboards have old fashioned wood grain doors, there are companies that will simply help you replace the doors. This is a much cheaper option to replacing the whole kitchen.
The other easier and cheaper option is to simply paint or spray your kitchen cabinet doors. But be careful to make sure they look good once you’ve done them. Paint runs will destroy the look and put people off from buying your house.
Similar to kitchens, bathrooms sell houses too. If your old suite in your bathroom is an old fashioned green or peach colour, it’s time to change them. A new white bathroom suite can make all the difference to how easily your house will sell.
But more importantly, if you put a fresh new looking kitchen and bathroom in your house, this may be enough to increase the price. This may be enough to sell your house for more than what you owe instead of for less than what you owe.
Don’t forget the outside room of your house – The garden and landscaping
People forget that the garden of a house represents another room. But also, it’s the front garden that’s the first thing buyers see, followed by the house frontage, paint-work and pointing.
If you’ve followed my advice to repaint your house to make the house look good,but your garden doesn’t, first impressions will be disappointing.
This is all about curb appeal, and if your house lacks curb appeal you may even find they won’t even both looking inside. It could be that you’ve done all the work I’ve suggest so far and your house looks immaculate on the inside, but the outside lets it down.
A simple makeover of your garden will not cost too much. Make sure any grass is cut. Cut back any hedges and bushes and tidy up the borders and edges around gardens.
Ask for feedback from estate agents
If you’ve already listed your house with estate agents and you are receiving feedback about your house, you may want to take it off the market for a while whilst you do the renovations.
The feedback I talking about is where people comment on the current state of your house, it’s decorative state, the garden, the kitchen etc.
As already mentioned about, you don’t want people to strike your property of their search list simply because it’s been on the market for too long. People do this, as they worry that something may be wrong with it.
Can’t sell house for what I owe – Solution #3: Speak with another estate agent to get a second opinion
The reason why you can’t sell your house for what you owe may be down to the estate agent you are using. Seek another opinion from another agent. Have them give you a valuation and ask them why they think it’s value is as low as it is.
The low value may be for a number of reasons, one of which might be its state of repair, but it might be due to its locations, the market is down or an number of things. Take their advice and if they suggest doing a makeover, as discussed above, you’d be right to follow this advice.
Can’t sell house for what I owe – Solution #4: Become a landlord and rent your house
Depending on your reason for selling, renting your house instead is an option. But having said that, the current UK government seems to dislike property developers and landlords.
The number of taxes and increased barriers they’ve brought in are all against getting ahead in the property game. For landlords who rent their house in their personal name, the mortgage interest is no longer an allowable deduction.
Section 24 or Tenant Tax – what does this mean for landlords
What does that mean you may ask? It means that you will have to pay tax on your gross rents after deducting things like repairs, letting fees insurance and other costs relating to the house rental. But then after you’ve deducted these and calculated the tax, you pay your mortgage interest out of the balance.
This is Section 24 tax or more commonly referred to as The Tenant Tax’. Reason being is that ultimately rents will increase. Landlords have to make a profit to survive, as no business can survive otherwise. In order to survive, rents will ultimately go up, I know my rents are increasing more now than before.
Many landlords will sell up and leave the industry all together. This will cause there to be less rental properties for tenants, pushing up demand and therefore rents.
Coming back to you becoming a landlord, and depending on your level of mortgage interest, it’s quite likely this could be higher than your after-tax rent.
Rent through a limited company
The only easy way around this is to rent your house from within a limited company. but of course, you first need to get your house into the limited company. This will cost legal fees and stamp duty.
But then you now have a limited company to run. You’ll become a company director and a shareholder and you’ll need to engage the services of an accountant and tax adviser.
Tax is not the only dig the UK government has taken at UK landlords. More recently, they are making it more difficult to remove problem tenants. But also, they’ve hit letting agents by legislating against them charging tenants for searches etc. Of course these costs will all be lumped onto landlords.
If you’re not discourage from becoming a landlord
If you’re not put off by the UK government tactics to run landlords into the ground or bankruptcy, and you are okay with the idea of becoming a landlord, why not rent your house.
But beware, tenants won’t look after your house like you do. But also, if you intend to move to more than an hour away from your house, you will need to factor in the cost of a letting agent.
You may choose to use a letting agent in any case, as they know the law when it comes to creating tenancy agreement, the tenancy deposit scheme rules and checking on the tenant on a regular basis.
But also, you will need to inform your mortgage company about your intention to let you house. Most mortgage lenders are okay with this. Some will change the interest rate, so will leave it the same. Some will charge an administration fee for the change over.
Your alternative would be to take out a buy to let mortgage instead. Buy to let mortgages are designed for landlords to buy houses that are let out to tenants.
Solution #5: ‘Short sale‘ your house
If you are faced with the dilemma of having a shortfall between what your house is with and what you owe on it, you may struggle to pay back the loans after you sell it.
It may also be that you’re in financial difficulty and you are desperate to avoid being repossessed. This may be your reason for selling up. but if you owe more than you can get from selling your house, this is when a ‘short sale‘ may work for you. is often the last resort, but it may be wiser decision to consider a ‘short sale’.
What is a short sale?
A short sale is when you sell your house and the net proceeds from selling your home falls short of the debts secured on it. If the holders of the security on your house agree to accept less than the amount owed on the debt, the ‘short sale‘ of the property can go ahead.
At the end of the short sale, the proceeds of the sale are passed directly onto your lender(s).
This will result with a shortfall (or ‘deficiency’). The net proceeds after estate agency fees will not equal is owed.
Generally speaking short sale homes and their owners have less negative repercussions on their credit report vs going through a repossession. This may mean you might be able to get another mortgage sooner. You also avoid the long, drawn out and stressful repossession process.
However, having said this your credit report will be affected and you may struggle for some time to obtain credit. If you can avoid a short sale, then do so.
Not all lenders in the UK will agree to a short sale, but if they do the loan is treated as if paid off in full. It is the lender that ‘forgives the rest of the outstanding loan‘.
But some lenders would prefer to a short sale rather than be left with a repossessed house. At the end of a repossession they will have to sell it themselves. This will usually be for even less than what you sell it for in a short sale.
Solution # 6 to owing more than your house is worth: Use savings or take out another loan to pay down the balance of your mortgage
There are other ways in which to cover your shortfall between what your home is worth and what you owe. The first of these is f you are fortunate to have savings, you can use these to clear the balance.
But if you don’t have any savings. Or if your savings fall short of the shortfall. You could borrow the balance from another credit provider.
However, be prepared to pay a slightly higher interest rate, as this new loan will not be secured on your house.
Solution #7: Sell to a Home Buying Company
As an investor myself I like to be creative with properties owned by people who are in difficulty. There are ways to resolve your problem if you owe more than you’ll get by selling your house.
By doing so you’ll avoid a short sale and being repossessed.
The solution I’m talking about is where we takeover your mortgage payments for you. This needs to be agreed with your mortgage lender of course. But generally they will agree to this arrangement. They’d prefer to be paid than not.
We would become the landlord of your property and let it to tenants. The rent we receive would be enough to cover the mortgage payments.
Despite what the UK government has done to make it difficult for landlords, we are still happy to continue to act as landlords.
As part of this arrangement, we would enter into a long term agreement with you to buy your house at a future date. This will be a future date we agree with you. But it will be at a time when it is likely that house prices in your area have recovered.
There are benefits to this solution, which we can discuss with you. One such benefit is there are no estate agents fees, assuming you’ve not already signed an agreement with an estate agent.
You won’t receive any adverse credit. Unless of course you are behind on your mortgage payments.
We can even agree to an upfront payment to help you with your current situation.
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