RISMEDIA, Oct. 29, 2008-It isn’t unusual to see a home for sale linger on the market for months, and if that situation continues long enough, many sellers wonder whether renting the property is a sensible alternative.
In the Chicago area, homes that sold during the third quarter of this year were on the market for an average of 153 days, or about five months. However, a substantial number of homes take even longer to sell, according to Jim Merrion, regional director of the RE/MAX network in northern Illinois.
“When homeowners must move out of a home, whether the reason is a job transfer, a financial problem or something else, a growing number are choosing to rent rather than continue reducing the price of the property until it sells,” said Merrion. “It is not a risk-free strategy, but if a seller thinks it is likely that home prices will rebound in the next year or two, it can be an effective way to deal with a difficult situation even if the monthly costs of continued ownership (mortgage, taxes and insurance) are more than the rent received. One caveat, however, applies to condominium units. Approval from the condo association may be needed in order to rent any condo, so check the association bylaws first.”
As an example of how a rental might work, assume a home purchased three years ago for $460,000 has a current market value of $410,000, and the homeowner’s monthly cost is $3,300. If the home can command just $2,200 a month in rent, the owner would have to pay $26,400 out of his or her own pocket over a 24-month rental period.
However, if the homeowner believes the market will rebound so that the home will be worth at least $440,000 in two years, the out-of-pocket costs of renting can be recaptured when the home is sold. Moreover, because the mortgage principal will continue to be paid down while the house is rented, the balance due to the mortgage lender will decrease meaningfully over the rental period, allowing the seller to keep more of the sale proceeds.
“If monthly rent covers the cost of the real estate taxes, insurance and mortgage interest, and the seller is just chipping in the monthly mortgage principal payment, that seller is well positioned,” said Merrion. “If the seller has to spend more than that to make a rental work, it is certainly possible that a modest improvement in home prices will allow for eventual recovery of the added costs. So renting can be an excellent alternative, which is why many RE/MAX agents are actively working with owners to rent properties, as well as with those seeking a home to rent.”
Another good reason to consider renting, according to Carol Ficarra-Harczak of RE/MAX All Stars in Niles, Ill., is that leaving a home unoccupied, especially in winter, can be expensive and risky.
“Energy costs are up substantially this year, and even a vacant home must be heated in winter,” she points out. “However, if you rent the home, the tenant pays the heat. Plus, there is the security of knowing someone is in the home looking after things. Unoccupied homes are a risk in cold weather. If the furnace fails and the pipes freeze, it can be extremely costly. It happened to one of my neighbors, and repairs were $50,000.”
Renting your home can also be a way to get it sold, reports Alisha Raudonis of RE/MAX Professional Advantage in Byron, Ill.
“In the last year, we’ve seen an increase in the number of folks who want to buy but aren’t prepared to do so right now because they don’t have the needed down payment or need to improve their credit score,” she said. “So they are looking for homes they can rent immediately and then purchase in a year. Agreeing to a lease with an option to purchase can be a good alternative for sellers who have listed their home for six months or so and find it hasn’t sold.” Such agreements typically provide that some portion of the rent will be applied to the purchase price, which helps the buyer build up the required down payment.
Raudonis recommends that in such situations the seller negotiate for a non-refundable down payment of at least 5 percent of the purchase price, which the buyer will forfeit if the sale isn’t completed at the end of the rental period. At the same time, she urges sellers considering a “lease to own” agreement to check with the renter/buyer’s lender to make sure the eventual purchase is feasible.
“The lease-to-own arrangement is much less complicated than the traditional contract sale, which most mortgages don’t allow,” noted Jose Molina of RE/MAX In Motion in Chicago’s Hermosa neighborhood. “I’ll advise a client who wants to sell on a lease-to-own basis to credit as much as $500 a month toward the purchase, but I don’t want them to go higher than that. They still have to cover their costs of ownership.”
Molina also recommends that sellers who want to rent their vacated home but have moved a significant distance away from it should retain the services of a property manager to look after things.
“Especially if you are living in another state, the smallest things quickly become big problems. Let the professionals screen the tenants and take care of the maintenance. Just make sure they rent it at a realistic price,” he advises. “Professional management of that type usually costs 10 percent of the rent, and the owner also must cover any repairs or other expenses.”
A major reason many owners don’t try to rent the home they can’t seem to sell, according to Kathy Knoll of RE/MAX Advisors in Deer Park, Ill., is that they are afraid of renters.
“They really shouldn’t be,” says Knoll. “Especially today, many renters are folks who own a home in another market that they haven’t been able to sell, so they can’t buy here and need to rent. But even if someone has been through bankruptcy, it doesn’t make sense to just eliminate them as potential renters arbitrarily. Many bankruptcies are cause by extraordinary circumstances, such as excessive medical bills. I feel strongly that an owner should evaluate every renter individually.”
Knoll also urges those who are considering turning their home into a rental to be realistic about the amount they can charge.
“In these situations, owners often insist that the rent covers all their out-of-pocket costs, but that isn’t always possible. It is important to understand the local market before determining the appropriate rent,” she said. “Remember, half a loaf usually is better than none.”
For more information, visit www.illinoisproperty.com.