Our company receives many calls from reluctant condominium investors and pre-construction contract owners looking to cash in on what seemed like easy money. The customer wants to know “What should I do?”
Although each situation is unique, in general the decision can be crystallized down to the present value of future cash flows. In other words, translate each strategy into a series of inputs and outputs today and in the future and discount each cash flow to the present using an appropriate discount rate to obtain a net present value for each scenario . It combines time value of money and decision tree concepts and helps convert an emotional decision into a rational financial decision.
Let’s look at the easiest strategy to analyze – Walk Away. You’re essentially locking in a loss of your initial investment, not to mention the possibility of the mortgage company suing you anyway if the sale of the property doesn’t cover their mortgage balance. This is an undesirable strategy to say the least and the absolute choice of last resort.
Without knowing your personal situation, I can tell you that there are far more effective options that should be explored to help alleviate your situation. Please contact us for a no obligation consultation and we will be happy to explore the best options with you.
2. Sell the property – You may think you need to sell today. Negative media and the overhyped housing bubble are powerful contributors to investor psychology today. Not to mention the hassle of owning it. Or rent the unit while you take care of your millions of other chores and work.
Perhaps the property has a significantly negative cash flow and the monthly loss is draining your finances and savings. You feel like you’re falling into a money pit and your net worth is plummeting. Here’s how your cash flow lines up – if you’re in a hot market, expect to take a significant discount from fair market value in the price you get. In other words, lock in a 10-20% reduction in the price you could get if you decide to ride out this correction.
A word about cycles. At the top of a cycle, things are rosy and the projections indicate that prices will continue to rise indefinitely. We saw it last year. Likewise, today, it is difficult to imagine that prices will go up again and that real estate may remain depressed for many years to come. The reality is somewhere in between. Prices will rebound, it’s a matter of when, not if. Given the negative sentiment, we would venture to say that we have already seen the worst of the correction.
The Sell Your Property strategy also has an element of hope. There is no guarantee that you can sell even if you desperately want to. The reality of the sell has to do with the price level you are willing to lower. But also think about this, during the last correction, Californians who sold their properties near the bottom lived to the end as property values exploded over the last 10 years, increasing by about 2 to 3 times during this period.
3. Final Option – Hold & Maximize – When considering a hold strategy, the investor makes the assumption that the market will improve soon. Most experts predict that the current inventory glut will take until the fourth quarter of 2007 to return to a normal market.
How long you will have to last will depend on the quality of your purchase. The old adage in real estate is that profit is made on buying, not selling.
Along with the retention option, you should have a financial professional review your financing for the property. Can you withdraw equity, lower your interest rate, defer interest on your mortgage? Each would help reduce your monthly expenses. Our company has investor programs that very few other companies can offer. And if we can’t help you, we’re linked to a nationwide network of investor loan advisers who we’re sure can.
Second, your decision to hold depends on the demand for real estate in the location you purchased and the inventory situation. Are buyers moving to the area, are incomes increasing, is the rental market strong, is there job growth, and what are the rational expectations for the market?
If you would like a thorough and honest review of your particular situation, contact us. We can help you make a rational decision and improve your financial situation. If you are in a difficult financial situation, contact us immediately. We can help you design a strategy that will not only protect your investment, but also position you for a better financial future.
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