Now that we’re nearing the (knock on wood) end of the process of selling Colin’s house, I thought I’d write a little bit about the process of selling it.

Step 1 was clearing the house of stuff, dividing all worldly items into the 3 timeless categories of 1) keep (and move to new house), 2) throw away, and 3) Goodwill. I’ve written a bunch about that. So glad it’s over and we’re both happily living in our brown house on Creston.

Step 2 was deciding whether to sell or rent the house. The main point of getting Colin really moved out was that we could be doing so much better financially (i.e. saving tons more money for retirement) if we weren’t paying 2 significant Seattle mortgages. But does it make more sense to keep the real estate investment and rent out the house to pay the mortgage, or to just sell the house?

We don’t really have any desire to add being landlords to the insanely-long list of activities competing for our time. That made us want to sell. But our gut instincts based on everything we’d ever been taught said that real estate was the god of investments, so that it would probably make more economic sense to rent.

But then, our gut instincts about real estate investments had recently been challenged by our financial advisor. We had both been significantly over-paying on our mortgages for a while, under the rationale that the faster we get our mortgage balance down, the less insane an amount of money we have to pay in interest over the years. But our advisor pointed out the following point: Say you’re paying $500 extra on your mortgage a month. You’re doing this to avoid paying 6% interest on the $500. But if you _invest_ that $500, you’re likely to get _more_ than 6% return on it. So it actually makes more sense to pay the 6% interest and put your $500 in the market! This never would have occurred to us.

Because we didn’t _want_ to be landlords, we wanted to see for sure what made the most economic sense.
So, we did a spreadsheet. First of all, we calculated what kind of return Colin was likely to get on his house if he sold it.

We took into account what costs Colin had over the time that he had been in his house, plus costs involved with selling the house:

  • principle paid
  • interest paid
  • mortgage insurance paid
  • property taxes paid
  • cost of major improvements
  • closing costs
  • payment of remaining principle

We also took into account any income Colin got from the house or would get from the selling of the house:

  • sale price
  • rent from renters

When we first calculated this out, we were shocked to see that the return on Colin’s investment was basically at the break even point or 0%! After 8 years of home ownership in one of the hottest areas of the country for housing, no return!

Then we realized that we hadn’t taken into account perhaps one of the most critical pieces of the equation:

  • rent that Colin would have had to pay if he had not owned a house

Completely valid, and sure enough this made all of the difference. After taking that item into account the investment came out to be a very reasonable (approximately) 14% per year. Not bad. The whole thing also emphasized not having to pay rent was what tipped it over, this made us realize exactly what we were doing by paying a mortgage on a house that nobody was living in.

The next equation was the option of renting the house out. Some problem with renting the house out are:

  • the amount of rent we can collect won’t even equal the amount of the mortgage, when you take into account that we would have to pay tax on the income
  • there would be continued maintenance costs
  • when we eventually sold the house, we’d have to pay capital gains on the sale, which would of course be huge

Despite all this, if the house continues to increase in value as it has been, we would end up with about a 10% annual rate of return on the investment. This isn’t too bad. But not good enough that we felt like we had to do it when we didn’t even want to.

So, we decided to sell the house, and we should definitely be able to do better than 10% by investing our money (at least if things don’t continue as they have the last few months). Also, our shared finances will be a lot simpler if Colin buys into my house than if we each owned our own and lived in one but rented the other. Furthermore, no hassle of being landlords! Lastly, we would always have the out that we could rent if the house didn’t sell on the terms we wanted.

We came to the conclusion to sell last summer when we finally finished clearing the stuff out of the house, but because of the housing slump, waited until September to put the house on the market.

Step 3 was to actually sell the house!

September came, the house went on the market. We put it on at a price about $15,000 lower than the price for which we had originally wanted to sell it. The house stayed on the market. Reports from our real-estate agent were that our house was getting many more viewing than any other house she was handling. Since the other houses were basically getting 0 viewings, this seemed pretty hopeful. A couple of people had even been buy to view it more than once.

We had set November as the deadline for selling the house. If it didn’t sell at our desired price, we would rent it until the market improved and then try to sell again. Not the greatest situation, but it could be a lot worse. November came, and no offers.

We had an almost-offer, someone who’s agent was talking to our agent, saying that they wanted to place an offer but were just trying to get their pre-approval together (as you can imagine, this is a lot harder in today’s world). After a week or so of waiting, the offer still hadn’t come, and we told them that we wanted to take the house off the market. They asked us to wait, but a couple of days later found that they could not get the pre-approval.

Instead, they started a negotiation of the possibility to lease-to-own. This is an interesting possibility that is a very strange mix between renting the house and selling it. You set an amount of time for the lease, and the people pay you rent, and they pay additional money on top of that that goes into escrow toward the sale. The sale price is negotiated at the time of the lease-to-own agreement. When the lease period is up, the people renting the house can choose not to buy it (say if the price is now out of sync with the market at that time). The advantage to us is that we wouldn’t have to go through a set of renters, kick them out, re-fix the house up, and then sell. It would mostly be settled. But it was complicated.

Then, last week, when we were in the middle of figuring out our terms of the lease-to-own, a real bid came in! The person bid our asking price, contingent on the inspection, and she wants to move in by the end of the month! The only thing we hadn’t been prepared for was that she wants us to pay the closing costs for both agents. But then we got the other agent to lower her closing costs, because the person buying has apparently been looking around for houses for a long time, and she really loves this one, and they both really want it to close. So, things are looking good!

The inspection is Sunday. Tonight we’re going to go over and run some water in the pipes and do a couple of other things, then just hope the inspection goes well.

There you have it! A pretty interesting experience overall, but we’ll both be glad when it’s in the past.