losing in the sale, gaining in the purchase

dominoswrathSeptember 1, 2010

Still debating about backing out of a home sale contingency (we are secondary) offer we made just a few days ago, we have one more day to do that.

Here's the scenario:

Our house is assessed at more than what we paid - that's a good thing. But, we put more into it than what we will sell for, not good for us, but we'll live with it. So, we want to break even - sell for at least what we owe on our mortgage. By the time we pay the prorated property taxes (if we sell by the end of the year), realtor fees, and what we can realistically get for it in this market (comps didn't come back the way we wanted), we will have to pay into it in order to get out of it - we'll have to delve into savings or more likely borrow against our 401k. We don't HAVE to sell, it's a personal choice to find a property with more land.

On the upside, the home we put an offer in has nice acreage, and a close enough commute to the city - this acreage is hard to come by, and we probably couldn't afford it if it were an up market. The home itself is nothing special, needs a lot of upgrades, but the land is prime real estate given the location, and lots of nice homes in the area. The home is priced $78k below assessed value.

Would you delve into your savings to get out of a current home, to make it up on the back end later down the road? Our mortgage in the new home will be lower, at a lower rate, but at the same time we'll be borrowing against our 401k (not cashing it in, which is a tax penalty), to get out of our current home to pay the remaining mortgage, realtor fees, etc. In other words, we'll have a mortgage with a better rate and lower monthly payments, but we'll also have a loan against our 401k to pay off at a 5% interest rate, so not sure what the better choice is. Lower utilities in the new home as well, lower taxes, lower insurance due to zip code, more lawn to mow, oil heat, well water - no water bill. But many upgrades needed - new kitchen and baths, carpeting...all down the road of course. The acreage is the biggest factor. We're worried we'll never find that again, or should I say be able to afford it in an up market close to the city.

I don't know what is the better choice.

Everyone is telling us take the loss on the house now, and make it up on the other side with more acreage, but I don't know if that means we are smart to borrow against our 401k to get out of it.

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I would hesitate to borrow against a 401k for any reason. But that's just my $.02. I'm no expert by any means.

    Bookmark   September 1, 2010 at 5:56PM
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Our house is assessed at more than what we paid - that's a good thing.

I don't know how that is a good thing. You are paying taxes on inflated valuation. I would forget about assessed values.

    Bookmark   September 1, 2010 at 8:26PM
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That's a tough decision. I feel for you. I'm not sure what I'd do. I think it would depend on how long you plan to live in the new house. If it is a long time, my gut says to go for it. I would weigh the pros and cons. If the pros of moving outweigh the cons I think I'd buy the house even with the debt.

Who knows what will happen with the market. Even if prices don't continue downward, they might just stay at this level for many years. Could you continue to live in your house for a long time without being really miserable?

Trust your instinct. I don't think there is a right answer. It is what makes you happier in the long run.

Good luck,

    Bookmark   September 2, 2010 at 12:17AM
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I think only you can evaluate how steep the debt will be and whether or not you feel secure enough (work, etc.) to carry it.

    Bookmark   September 2, 2010 at 5:57AM
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Can you buy the property for its land value? Do you have enough cash + financing to either repair the existing house or do a teardown and build new? Will the improved or new home 'fit in' to its neighborhood? Can you afford the additional utilities, maintenance, taxes, insurance, etc. on the repaired/new home?

    Bookmark   September 2, 2010 at 10:21AM
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How long is it going to take you to pay off that 401K loan? And how far away from retirement are you? Will you be willing to pay off the loan BEFORE doing any renovations on the new house? And save up for renovations before doing them?

I'm against going into unnecessary debt. This sounds like it might be worth doing, but only if the debt can be paid off quickly and if you are willing to make renovations as you can afford them as opposed to going into additional debt for them.

    Bookmark   September 2, 2010 at 11:27AM
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I did something a little similar 13+ years ago ...sold my house for $100 more than I had originally paid for it 5 years previously, and had put $20,000 into it.

But I bought a property with a house that needed work, because of the land (20 acres).

Fortunately, I didn't have to use my 401K to purchase the new one, like you do. So I think the questions about how close you are to retirement are very important.

But if you are relatively young, I say go for it.

I've been in my home now for 13+ years and will never leave it ... or only feet first! I have slowly improved the house and now it's very nice. It's the best thing I've ever done.

    Bookmark   September 2, 2010 at 12:31PM
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I totally agree with everyone who has brought up the age factor and how much you have saved to this point for your retirement. I'm in my mid 50's and there will be no borrowing against our 401k anymore (we did it once before). It would have to be a dire emergency and in your case, it's not.

However, if you are in your 30's or at the oldest early 40's, it might be a consideration if you are indeed saving responsibly and/or have a pension from another source.

    Bookmark   September 2, 2010 at 1:30PM
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In these uncertain times with the economy STILL the way it is I would be hesitant and the fact you have to get into your 401k.....I couldn't do it!! That's just me; I'm older too so your plan scares the hell out of me!!! I would go talk to a financial planner and have them crunch some numbers for you.
Good Luck!

    Bookmark   September 2, 2010 at 7:02PM
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Don't forget that you would be taking pretax money out of your 401(k) and paying it back with taxable income, so you have to figure the additional income tax on the margin into your calculations, as well as the loss of what otherwise is tax-deferred invested value of your savings inside the 401(k).

Truly, it is a bad choice at any age, unless a dire emergency leaves no other option.

    Bookmark   September 2, 2010 at 9:13PM
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I just attended a retirement seminar today at work and was told one should NEVER borrow against their 401K unless you are in dire need of it. The reasons stated are exactly what manyhosta wrote of.

    Bookmark   September 2, 2010 at 11:28PM
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On principle, I'm 100% opposed to borrowing for lifestyle debt. You say you'll "never be able to afford it again" but in reality, you really can't afford it now if you would need to cash in your 401k to buy it.

If you want to buy a larger piece of property, start cutting your current expenses and save up for a down payment. It is unfortunate, but if you have no equity in your home, you are starting from scratch and you need to behave like a first time homebuyer.

    Bookmark   September 3, 2010 at 8:37AM
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I wouldn't be borrowing from my 401 unless it was something extremely dire. Your reason imo is not. If you have to borrow from retirement funds it means you can't afford it. And who is to say that you will be making a "gain in the purchase"? You don't know what the future will bring in real estate. NancyLouise

    Bookmark   September 3, 2010 at 8:56AM
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A few things to consider - first, you say that the home is priced 78k below assessed value. In this day and age, assessed value doesn't mean a thing. Was it assessed at the peak of the market? Is it really a bargain? Only an appraisal will tell you that.

Second, you are assuming that you are going to make up the shortfall in the back end. The only way you can really do that is to sell the second house. Your equity "MAY" go up, but you are never really getting the cash unless you sell. Prices are projected to be flat for quite some time. Would you be comfortable if that happens?

Third, do you have a buyer for your house?

Honestly, I wouldn't do it.

    Bookmark   September 3, 2010 at 10:04AM
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I agree that taking the 401(k) loan is probably a bad idea but not

Don't forget that you would be taking pretax money out of your 401(k) and paying it back with taxable income, so you have to figure the additional income tax on the margin into your calculations,

If you took a regular loan (not from a 401(k) you would be paying it back with money that you pay taxes on. Borrowing from a 401(k) does not long term result in you paying any more taxes than you pay if you took a regular loan.

That said it is probably not a good idea. If you are old enough to be able to take withdrawals from a 401(k) without tax penalty then it might be OK to do this (i.e. if you are old enough to be using a 401(k) for retirement purposes).

Also with most (not all) employers, if you leave employment you must pay back the loan at that point or it becomes a taxable distribution to you (resulting in owing tax plus 10% penalty depending on your age).

Given that possibility it is unduly risky for most people.

    Bookmark   September 3, 2010 at 1:18PM
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I wouldn't do it. I think it is too risky. I would sell the house with the psycho neighbors first and then use any equity from that and go to look for the next house.

    Bookmark   September 3, 2010 at 2:14PM
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Talk to your tax person and lawyer first.

    Bookmark   September 3, 2010 at 3:19PM
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Where is the down payment for the new property coming from? 100% financing is almost non-existent. This is exactly the kind of situation that lead to the bubble; people buying something they can't afford and hoping to make it come out alright in the future.

As Dirty Harry used to say, "do you feel lucky?"

    Bookmark   September 3, 2010 at 4:31PM
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