Short Sale vs. Keep the Property? You decide!

February 5, 2011
Bryan Watkins

You have probably read articles from time to time of a person owning an investment home, and trying to decide whether to keep it or short sale the property. Well, here is a real example. You decide what to do!

An investor owns a home that was purchased in 2005 for $137,000 in a new subdivision in Southwest Phoenix. The subdivision was built in a farming area, and not in an established neighborhood.

The home is 3 beds, 2 baths with 1,500 sft of living space on a standard city lot. The property has 2 loans. The first loan is an adjustable with Bank of America for $108,000, and has a payment of $732/month. The second loan is a HELOC (Home Equity Line of Credit) in the amount of $50,000 with a payment of $47/month. It is scheduled to increase to increase in 90 days to $162/month.

$732       1st loan (interest only and includes taxes, insurance)
162       2nd loan
40       HOA
$934       Total payments

Plus repairs, vacancy, etc.

The Rental Market

Now compare the expense of owning vs. the rental income. The market price for rentals in the Phoenix area is $900-1100/month for a 3-4 bedroom home. This particular property is rented for $895/month on a 1-year lease agreement. The owners objective is to have the property rented at all times.  Therefore, the owner has decided to be at the low end of Rental pricing in order to attract continuous tenants.

$895       Rental Income
(934)      Total current payments
( 39)       monthly cash flow loss
x 12       annualize
($468)   annual cash flow loss

Now, if the property was increasing in value, the long term strategy could pay off. Even a 5% increase in the value of the home would add over $6,800 equity for the owner ($137,000 x .05 = $6,850).

However, the current economic situation for real estate is vastly different since the market crash over the past 5 years.

This particular property has dropped in value, as have all others in the valley. From an original purchase price of $137,000, the current market value is only $65,000 and may drop further.

So, from a cash flow perspective, should the investor/owner continue to pay $468 into an investment that is worth less each month?

You decide!