Sell Your House Or Rent It

Sell Your House Or Rent It

Is it smarter to become a landlord than pay a big, fat capital gains tax? Here are the pros and cons of renting and selling your house.

Before we spin the wheel of house selling, answer this one question: Have you lived in the house you intend to sell at least two of the past five years? If not, you might incur early mortgage payoff penalties and capital gains tax — two very hefty bills that may make it financially unwise to sell your home. There are ways to avoid capital gains tax — job change, divorce, the death of a spouse, etc., so check with your accountant if you think you might be the exception to this firm rule.

If you have not lived in your home for two of the last five years, or you have the capital to finance another move without selling your home, or if the market is slow in your area, you might want to consider renting. When budgeting for a renter, be sure to include the following costs:

• Mortgage payment

• Property tax

• Homeowner insurance

• Homeowner association dues (if applicable)

• Property management company (if applicable)

• House maintenance

Also, check to be sure your property insurance premiums won’t change if you convert your residence into a rental property. Above all, prepare yourself mentally: Realize this house is no longer your home but your rental property.

SCENARIO ONE: I’m flexible.

If you are truly flexible in your timing, consider yourself fortunate. Say you are now renting, only encumbered with a need to give a 30-day notice. Things become fairly straightforward. Once your offer is accepted, a 30- to 45-day contract period is usually typical, which will give you time for inspections and other due diligence activities before pulling the plug on your current living arrangements. If you are in a position to enjoy some overlap (you close on your new home a few days or weeks before your lease terminates), even better. It will give you some breathing room.

In our current market, however, there is a catch. You may be looking at many homes which are what we call “lender controlled.” These may be either homes on which the bank has foreclosed and now owns or homes in which the seller is dependent on the bank to forgive some debt (short sales). In either case, lenders are not known for their cat-like quickness in responding to offers. And many of these properties may carry compelling price tags which result in competing offers being submitted. In short, you could submit an offer on a lender controlled sale and find yourself two or three months later either still waiting for an answer or worse — looking at a rejection letter and starting over.

SCENARIO TWO: I need to move by Thursday at sundown.

If you are operating under prescribed time frames, things get a little stickier. Say you are now renting, but your lease is up in 60 days. Or maybe you have to report to the West Wing by Thursday to join the rest of the new administration for an important State dinner, and you would kind of like a place to sleep that night. The seamless transaction is still within reach, but you have effectively eliminated a potentially large number of homes which would otherwise be available to you. Remember those lender-controlled sales? You don’t have the luxury of waiting months for the busy bank to find your offer, the one your agent has resubmitted three times because they lost it. And you certainly can’t afford any misfires. Try explaining that you missed dessert because you were outbid in multiple offers to the President of Dubai.

SCENARIO THREE: I need to sell my current home before I can buy another.

Assuming again that it is the seamless transaction you are after and not an extended stay at the Residence Inn, this is the scenario that keeps your agent up nights. Do you list first or shop first? The answer will depend on your local market conditions, but usually, it is best to get your home on the market. Even in a “buyer’s market,” many sellers will not want to accept an offer which is contingent on the sale of your home. If they do, you will likely be facing a backup offer clause which allows them to cancel the contract if they get a better, non-contingent offer. And as for those lender-controlled homes, they will be unavailable to you; an offer contingent on the sale of your home is completely out of the question where lenders are concerned.

A savvy agent, however, can protect you from a double-move situation. This may involve a rent-back provision which allows you to remain in the property for a period of time while you secure your new home, or it may involve a longer transaction period. In either case, there is always some risk that the moving truck won’t be heading directly to your new home after leaving your driveway.

Regardless of your particular circumstances, once you have determined that a home purchase is in your future it is important to be aware of all possible timing issues early in the process. Your agent can advise you on all of the moving parts of the home buying transaction so you are best protected. No one likes to pack twice.

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