Girlfriend has negative equity in condo - what to do?

Question

My girlfriend bought her condo in late 2006, putting $5k down on a price of $160k. She paid probably $5-10k more than it was worth in the context of the overinflated prices at the time.

For a little more background - I am 29, she is 28. I have never owned property before. Earlier this year, she and I decided to live together, but her condo (a studio loft) was not an option. So we are renting an apartment together, and she is renting out the condo to a tenant. She is renting it for ~$200 less than her mortgage-plus-condo-fee payment, which is in turn about $200 more than her share of the rent on our apartment - upshot is that her cashflow is increased by about $200/month in this situation.

So in the short term, things are fine - we both have good careers, combined income of about $140k with the potential to grow substantially in the next few years. We had no trouble at all renting the condo for the upper end of the range we were shooting for. We are very much in love and have discussed the possibility of marriage in the near future.

With our future in mind, I am concerned about the condo. Zillow's high estimate has it worth about $145k. This may still be on the low end, as the previous owners renovated the heck out of the place, everything is in great shape, and it shows VERY well so we should not have trouble renting it. But should she lose her job or have some other financial catastrophe, we would be sunk - she could not sell it for the amount left on the mortgage.

What can we do in the near and medium term? I think we will probably just keep renting it out - and perhaps I will look into buying a condo that we could pay for on my income alone, once the market has truly bottomed out and marriage looks like a probability - but, for my peace of mind, is there anything else we can do?

Answer 1

You’re basing your worries on Zillow? That’s like asking Astrology.com if your relationship will work out!  Zillow is not particularly reliable.  Have a real appraisal done, and then figure out where you stand.

She can keep renting it for several more years waiting for appreciation to catch up to what she owes + fees associated with selling.  If she does want to sell before that happens, I suggest she set up a savings account to start building up the cushion she’ll need to pay the balance of her loan plus the fees associated with selling. Yes, people sometimes do actually pay money to sell a property.

Neither of these options will hurt her credit in any way.

Answer 2

She may have negative cash flow as far as hard costs, but did she take into account depreciation?

As a rental, she needs to report the income and expenses on her taxes. She must also depreciate the condo over 29.5 years. The additional depreciation and expenses will offset her taxes causing her to pay less in taxes. In reality, she may not have negative cash flow.

Zillow estimates are not accurate and shouldn't be used for actual values. My neighborhood has a wide range of prices for the same home. It all depends on when the home was last sold and for how much.

I suggest she keep making the payments, waiting for the housing market to get back on its feet and then sell the unit when she gets to a point that she has positive equity.

Answer 3

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Preview the book here -- there's a lot of vital information you can't find anywhere else. I suggest too that you make a small investment on the book. It changed my total outlook on investments, mortgage, equity and personal finance.

http://www.stopsittingonyourassets.com/M...

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Answer 4

This isn't such a bad situation.  She does have negative cash flow in the short term, but over time rents will go up and the housing market will turn around (yeah this make take a while, but eventually).  Furthermore you are getting a tax break from the condo (or she is) and she is buying a place that will be all hers (or yours) someday.  Its a lousy investment and things may get worse before they get better but this could work out very nicely some day.

Anyhow, there is not real way to get rid of it without hurting her credit - definitely not worth it.  The numbers are not so bad that she can't afford this.  Also when you get married you can, together, go ahead and apply for a mortgage to buy a new place.  You will get penalized a bit for the condo since its cash flow negative, but with her salary added in I assume she will still make the amount of loan you can afford together more than you alone (may want to run this by a bank first but this sounds like the case to me).

So, I'd just stick this out.  No easy way to get rid of the place (besides just paying alot of money out of pocket to sell it) and things may get worse before they get better but down the road this may work out as a pretty good investment.

Answer 5

For peace of mind, have a few real estate agents look at the condo and see what their market appraisal of the property is.  Zillow, obviously, has no way of knowing about any upgrades, etc made to a property and goes mainly by comparables, which may or may not be advantageous.

Appraisals from three (or more ) agents will give you a better handle on where you stand in terms of potential equity in the condo and can make your decision easier.

BTW, don't forget to take the tax write-off, since your GF is actually losing money on the condo.

Answer 6

You could put it on the market in a casual manner to see if there are any bites. (By casual I mean no tours of the place unless the shopper has preapproved financing and is serious - no lookie-loos.)