McClelland Minute - May 09, 2010

Exploring Options

During the last few weeks I have had a number of meetings with individuals looking to explore their options on problems they were experiencing with real estate that they owned.  This prompted further discussions with allied professionals, lawyers and appraisers, to ensure that our mutual clients were receiving accurate information.

Three different sessions were with people who had purchased a home, at or near the peak of the market in 2007 or 2008, with 5% down (or less), and now feel the need to sell for one reason or another.  The first thing I direct them to do is ask their mortgage company how much remains on the loan, and what penalty would be incurred for early repayment.

While they are doing that I undertake to develop an Opinion of Value on their home in line with sales of comparable properties, current market conditions, and trends.  We then sit down together to compile an analysis.  Almost always the prospective seller is shocked by the results.  What they owe the bank if they sold today, plus brokerage and legal fees, is often tens of thousands more than what their home is worth.  Some call this “swimming underwater”.

So now what?  The first option is not to sell but to continue to maintain the mortgage payments until such time as a) the term of their mortgage will allow them to exit without a significant penalty, b) keep the property until the market returns to a break even value, c) seek a personal loan from family or other resources to cover the difference owing at sale, d) rent some or all of the residence out to cover most of the monthly obligation, and top up the rest from personal income.

Often there is a compelling reason to sell – relationship breakdown, loss of employment, job transfer, or simply an inability to service the debt.  This can make the decision making process quite emotional.  I find that many people in this situation earnestly want to avoid a stain on their credit history but with CMHC guarantees in place, the mortgage holder often cannot accept a quit claim, a simple transfer of security, and must demonstrate that they have vigorously pursued repayment.    Unable to negotiate a better solution, the owner will simply walk away resulting in a foreclosure action.  I always recommend consulting legal counsel before taking any action.

Sales of estate properties can also trigger similar problems but for different reasons.  The family often does not live locally, or they may not be able to build a consensus around an effective strategy to liquidate Mom or Dad’s holdings.  One or more grieving members sometimes subconsciously want to be compensated for the pain they feel.  I even have had adult sons or daughters tell me that they deserve to get as much as they can from the estate in exchange for the years of difficulty they had dealing with their parent(s).  Sad as it may be, buyers don’t care.  They are buying a commodity not a heritage.  The overpriced property languishes on the market, resulting in little to no interest, and proportionate increase in tension amongst beneficiaries. 

Again, there are options in this market.  Rent the house out until the market improves.  Sell it to one family member at current fair market value and let them figure it out.  Reduce the price until the house attracts interest – “getting traction”.  If it is farmland, explore the concept of tendering.  The resulting bids, given in confidence, will educate the stakeholders on what interested buyers think market value is.  As grandfather would say “there is more than one way to skin a cat(fish)!”

Vern McClelland is associate broker with RE/MAX of Lloydminster.  If you have questions or comments on this article or other real estate matters, he can be reached at 780.808.2700 or through the McClelland Group website www.mcclelland.ca

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