My 2016 Budget Challenge: How to Decide When to Sell Your House


[Editor's Note: This is the latest episode in Max Wong's journey to find an extra $31,000 this year. Read the whole series here.]

Mr. Spendypants and I have been struggling to improve our finances by reorganizing our debt, specifically the loans on our two houses. Because banks use a stricter set of guidelines for assessing risk for rental properties, it has proved impossible for me to restructure the mortgage on my rental property that I own in my own name. So, at the beginning of the summer, we set our sights on refinancing our primary residence that is in Mr. Spendypants' name.

We've Been Underwater on Our Mortgage for Almost a Decade

Here's the back story: Mr. Spendypants bought Dinky Manor for $585,000 in 2007, literally the week before the housing market tanked. He hadn't even moved in when he discovered that the property was now underwater. We have been patiently waiting for the market to recover for nine years.

The real estate market in our neighborhood is now crazy. People are buying 400 square foot homes for $400,000 in cash, sight unseen. So, we thought, now is the time to jump at getting a better loan. Zillow appraises our house for over $740,000.

Those Two Times We Missed the Days of Sub-Prime Lending

In order to refinance, Dinky Manor has to appraise for $640,000. Alas, Zillow's appraisal of our house is wildly optimistic. Our mortgage broker had two separate appraisals done and both came in at $600,000. Although Dinky Manor measures in at just a smidgen over 1,000 square feet, we're not even the smallest house on the block. Also, our yard is large and gorgeous and has been featured in garden books and on the Sunset Magazine blog. How, in L.A.'s stupid expensive real estate market, are we missing the mark?

Some of My Best Ideas Are Really Dumb

In trying to figure out another way to lower our mortgage costs, I had a harebrained idea: I could sell my rental property, that has at least $600,000 in equity, and use the profit to buy Dinky Manor from Mr. Spendypants. We'd lose my future income generating property, but we'd end up owning Dinky Manor free and clear. Without a mortgage payment on either house, we could really start socking away the cash for early retirement.

I called my accountant/therapist to get her blessing. "That is a harebrained idea for a couple of reasons," she stated, flatly. "You guys should come into my office for a financial tuneup."

When we arrived at my accountant's office she delivered the bad news: If I sell my rental house, I will have to pay between $200,000 to $300,000 in capital gains taxes. Also, even though my name is not on Dinky Manor's deed, I would not be able to buy it from my husband since we file our taxes as a married couple, so in the eyes of the IRS it's my house too.

This is why I will never be successful as a master criminal. All the good financial loopholes have already been taken.

When Faced With a Financial Decision, Do the Math

My accountant had another scenario to pitch us: Sell Dinky Manor and move into my rental property as our primary residence. Even if we take a financial hit on the sale of Dinky Manor, the loan on my rental is half that of Dinky Manor. If we continue to live frugally like we've been living this year for My 2016 Budget Challenge, we could pay off my house in six years.

Another bonus of this plan: If I sell my rental property, I have to pay capital gains taxes. But in California, when you sell your primary residence, you don't have to pay capital gains on the first $500,000. So, if I move back into my rental house and use it as my primary residence for 24 months, I could then sell it and walk away with a $500,000+ profit.

Mr. Spendypants was shocked by this idea. He had hoped that we could wait out the housing market and flip Dinky Manor for a profit. But when my accountant did the math for him, he realized that we could be debt free and own a house outright in as little as six years, an impossible goal if we keep both houses. While the prospect of financial sustainability in six years is thrilling, the disappointment of only breaking even or even losing money on the sale of Dinky Manor hurt his brain.

How Do We Add Value to Our House?

I called my friend Andrew, a real estate agent who specializes in our neighborhood, and explained our situation. He agreed with our accountant's plan to sell Dinky Manor. Even if we lost money on the Dinky Manor sale, the amount we'd save by paying down the mortgage on my house early would more than offset that. Although we probably won't be able to buy another house, ever again, in L.A.'s inflated market, if we wanted another rental property down the road, we could use the equity in my house to buy property in another area.

I asked Andrew if I could hire him to come over and do his own audit of Dinky Manor. Zillow values Dinky Manor at over $740,000. Why did our appraisals come up so short? If we couldn't get our house value up enough for a re-Fi, how would we ever get the value up enough to get the $60,000 down payment back if we sell it?

Andrew spent over two hours looking at our house and yard. He also brought over some comps of similar homes that had sold in a one-mile radius of our house. His assessment: Dinky Manor is a dump. (Yes. Only in Los Angeles can a 1,000 square foot dump appraise for only $600,000). The appraisers had negatively compared our 1937 bungalow as a fixer-upper to new homes with Ikea kitchen cabinets and freshly installed privacy fencing. He gave me an extensive To Do list of home projects that would improve the house's value. If we fixed everything on his list, he would be able to put the house on the market with a starting price of $699,000.

In order to get to this $699,000 price, we are going to have to repaint the house, build a deck, and do a complete redo of the kitchen, bathroom, and roof. This will cost between $40,000 and $60,000 depending on how lucky we get with sourcing the building materials. The renovation will be much more efficient and less stressful if we are not living in a house without a working kitchen and bathroom. If we empty out Dinky Manor before construction, we could possibly finish all the projects on the To Do list in one month (but I'm scheduling for two months).

It's only October, and already I have My 2017 Budget Challenge in place. If we want to be mortgage free ASAP then here's our agenda for the next year:

  1. Save up at least six months of living expenses, because we will have to carry the mortgage of both homes during this process.
  2. Give my amazing renters, who have lovingly cared for my house for the past five years, 90 days notice so they have ample time to find a new pad.
  3. Move into my house the second the renters move out.
  4. Because we don't have the savings to pay for the renovations and pay two mortgages simultaneously, we will have to take out a $60,000 Home Equity Line of Credit on my house (based on its insane amount of equity).
  5. Renovate Dinky Manor.
  6. Put Dinky Manor on the Market.
  7. Sell Dinky Manor. If there is any profit at all (fingers crossed) from the sale, it will be used to pay down the Home Equity Line of Credit.
  8. Refinance my house (now our primary residence) to get a better interest rate.
  9. Aggressively work toward paying down the Home Equity Line of Credit and the mortgage of our one house.

Looking at this list of things to accomplish is heart attack inducing. And, if it were up to only me, I'd probably have Andrew sell Dinky Manor as-is and eat the cost of the down payment just to avoid a year's worth of hassle and stress. But, Dinky Manor is Mr. Spendypants' asset, so he ultimately gets to call the shots on this one. This is financially risky. Worst-case scenario, we could lose $120,000 and a year of our life to this project. Best-case scenario, we could make $200,000 and lose a year of our life to this project. Either way, we will no longer have a $585,000 loan to pay down. We might lose a real estate battle, but could still win the war.

A few days after giving me his advice (for free), Andrew called me with a job offer. He just started his own boutique real estate brokerage. Would I be interested in working a few hours a week, helping him set up his new company? Of course I said yes. Now I am getting paid to learn about real estate so I can be that much more prepared when it comes time to sell Dinky Manor.

Progress So Far

My mechanic just called me. "I have good news and bad news to tell you," he said in that Swedish accent that sounds like lingonberry jam smells. "The good news is that you passed your smog test. The bad news is that you can drive your car for another two years."

Ha ha.

Even though Mr. Spendypants earned an extra $800 this month DJing a party, the car repairs involved in getting my car to pass the smog test cost $700. So at the end of the month, he only came out $100 ahead on additional earnings. Boo.

I made $375 this month working for Andrew, $450 for writing, and $630 selling jam and honey at a local craft and food fair for a total of $1,455 extra.

Even with the additional earnings, as of today we have only have $10,741.51 in our savings account out of the $31,000 that we want to have by the end of the year.

Will we make our goal?

Goal: $31,000

Amount Raised: $23,595.17

Amount Spent: $12,853.66

Amount Left to Go: $20,258.49

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