AS CHICAGO IL REAL ESTATE MARKET SLOWS, SELLERS CONSIDER RENTING - NOT SELLING!
FORMER "LAST RESORT" NOW BEING RELUCTANTLY CONSIDERED BEST OPTION!
Over the last 18 months or so, home sellers have seemed to change their attitudes toward the Chicago Real Estate Market. As recently as mid-2006, many sellers were pricing their homes at high market levels, despite the beginnings of a sluggish real estate market here. "My neighbor down the street got a lot of money - why shouldn't I get more," many often said.
Within the last nine months, most motivated home sellers understood the market was softening, with the help of constant media coverage on the changes in the local real estate market. They got more realistic with their pricing strategy.
A bit more panic has set in since the mid-2007 sub-prime credit crunch, with the corresponding news of high home inventory, less qualified buyers, and big increases in foreclosures, Chicago and suburbs. Many, faced with the very real prospect of paying two high mortgage payments, or not moving to the larger house to accommodate family needs, have become instant, temporary landlords, keeping their old home or condo, and renting it out to tenants.
Most of these "newly-minted landlords" have little intentiion of sticking to it long term. Faced with the option of either dropping their prices further, keeping the house vacant for a while, or paying two mortgages, many feel that renting for a year or two will help them bridge the gap to perhaps a stronger real estate sales market down the road.
Here's an actual example of this from one of our Team's clients -
Our Buyer's Specialist Kathleen Weaver-Zech and I were working with a nice, young couple with a baby, plus one on the way, who lived in the Irving Park Neighborhood of Chicago. They purchased their two-bedroom high-leverage two years ago, and found it no longer was large enough, to meet the needs of their growing family.
We calculated their break-even price after all selling costs, and priced their home aggressively at this seemingly-reasonable price point. However, despite three months of strong marketing, we failed to generate a qualified buyer, and, indeed, very little interest.
Since our clients had little equity in their condo against which they could draw, and since each of them had great jobs, earned good incomes, and above-average credit, they considered renting out their present condo, and buying a roomy single-family home, in the Chicago Suburbs, closer to their jobs.
There were two issues to consider, however.
First, they had little savings. Second, it would take a high monthly rent to cover their high mortgage payments, plus condo assessments and real estate taxes.
They ended up buying the new house with very little down - and the corresponding higher monthly mortgage payment - which they could afford, based on their income. For their old condo, however, they had to accept rent far less than their monthly expenses, and have to supplement the received rent each month by about $350.
But they are in their new home today, in a neighborhood they like, with good schools and area amenities.
Keep in mind the decision to rent holds with it a lot of important things to consider.
First of all, should tenants miss a payment, it could put your monthly budget into short-term turmoil. Not to mention expenses and headache if "good" tenants turn bad, and need to be evicted. Further, in the case of condos or homeowner associations, sometimes restrictions are placed on rentals, and have serious consequences for owners whose tenants exhibit "un-neighborly behavior."
Rent is also considered income, although offset by the expenses of renting - interest, assessments, taxes, and repairs. In addition, renting your home or condo for more than two years, in most cases, might jeopardize your ability to defer capital gain when you sell. (Talk to your accountant or tax professional about your $250,000 Capital Gains Exemption ($500,000 for married couples filing jointly), and verify your potential income tax exposure here).
According to IRS Rules, owners of rental property can also depreciate the value of a property kept as investment, and can, in some cases, apply any loss if the property subsequently sells for less than you paid for it. Be very careful here, however, because the IRS may require to to repay any deducted capital depreciation when you sell (again, check with your CPA!)
The biggest concern most "temporary landlords" have is wear and tear on their homes or condos. They fear the tenant will very quickly "trash the place," and it will cost thousands of dollars to recondition it should you decide to sell once again in a year or so. Based on my personal experience, however, such fears are typically unfounded, if you screen your tenant carefully. Usually, a coat of paint and a good clean-up is all that is required.
Here in Chicago IL, the sluggishness of the real estate market has been accompanied by a parallel increase in demand - and average rents - for rental properties. From our personal experience, rentals that would sit for months awaiting a new tenant during the heart of the housing boom a couple of years ago, are now fetching considerable increased rents, and renting out much quicker.
Consider the pros and cons of the rental opition, homesellers, should your home not sell in today's Chicago Real Estate Market.
Click to review an article in the December 9th edition of The Sunday Chicago Tribune, and an article written by Marilyn Kennedy Melia, for more detail.
DEAN MOSS & DEAN'S TEAM CHICAGO
