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Homeowners Looking to Rent Out Their Houses May Have Help

Written by Ilyce Glink on March 12, 2013 in Real Estate  |   6 comments

Many homeowners were left in a bind after the housing market crash, unable to sell their homes or relocate. But with the rental market heating up in many areas of the country, some companies are offering a new program that could be a help to some of these struggling homeowners. Ilyce Glink, Managing Editor of the Equifax Finance Blog, explains the details.

real estate rental marketThe housing market crash has left many homeowners stuck in their homes, unable to sell or relocate. Without any equity and an underwater mortgage, these homeowners have been desperately searching for relief.

Recently, several companies have been seen advertising what seems like a potential lifesaver for these folks. If you are stuck in your home, but want or need to move, they will rent out your home for a set period of time. In exchange, you agree to purchase one of the company’s new homes.

The program is frequently offered by homebuilders who have had their own struggles moving their inventory since the housing bubble burst or by organizations working in partnership with the homebuilders.

The deal initially looks pretty great. For a couple of years, and without any risk on your part, the mortgage, taxes, and insurance on your old home could be completely covered, while you are free to move on with your life in a new home. The builders who are trying to sell homes nobody is buying get a sale in exchange for a small investment. And, hopefully, the builders find a renter that covers most of that investment.

In the best-case scenario, you’d buy a new home and sell your home down the line after receiving rent payments during the guaranteed time—let’s say it’s three years. The home would stay in great shape and a buyer would walk through the door and take the home off your hands at a price that pays off all your debts. But that might not always be the case.

Consider the risks

The first question to ask yourself is whether you will be prepared to take over this property again and what that will mean to you. Will three years buy you the time for local market conditions to improve enough that you will have an easier time selling your home at the price you want?

Before you even consider this kind of deal, you should know exactly what is happening in your local market—not just in the headlines that say prices are going up nationally. You need to know what home prices are at the moment and what they are projected to do in the future. You also need to know what the demographics of the area are and how they are changing. Three years’ time may make all the difference in selling your home or it may make no difference at all.

Here’s another issue to consider: Let’s say you do this deal, and your home gets rented to a tenant. Those three years could take a toll on the home, which then might require substantial repairs to bring it up to selling condition.

And what if you can’t sell? What if you can’t get enough from a sale to pay off your mortgage? You’ll be stuck with the cost of your new home and the cost of maintaining the old home. You will either have to become a landlord outright or you might have to try a short sale.

If you tried a short sale, this might not be so bad, except now the home may not be considered your primary residence (according to the IRS). Depending on where tax rules sit, you may have to pay taxes on the amount of debt the lender forgives in the short sale. That could be tens of thousands of dollars alone.

What does this mean for homeowners? Renting out your home could be a good option for those who need to move, and these deals can make that easier. But homeowners need to evaluate their circumstances and the possible effects of a rental situation. If you are an underwater homeowner, you may feel trapped and desperate for options, but it’s just as important to make sure you’re not causing more problems in the long run.

Ilyce R. Glink is the author of several books, including 100 Questions Every First-Time Home Buyer Should Ask and Buy, Close, Move In!. She blogs about money and real estate at ThinkGlink.com and at the Home Equity blog for CBS MoneyWatch.

6 comments

  1. kathleen says:

    Another thing to consider is capital gains on the home you have rented. Since the new home is now your primary residence, you must have lived in the home you are now renting for 2 of the last 5 years to qualify for a capital gains exemption.

    I would like to know if one would still qualify for this exemption after moving to new home when previous primary residence had NOT been rented, but was unable to be sold for 4 years. This is my predicament after living in my old home for 40 years!

  2. Ilyce Glink, Managing Editor, Equifax Finance Blog says:

    Kathleen:

    Great point on the capital gains tax you might owe if you rent out the property for more than three of the last five years. The first $250,000 in capital gains (up to $500,000 if you’re married) is tax-free as long as you’ve lived in your home for two of the last five years.

    You also have to pay the recapture of any depreciation you might have claimed (and the IRS requires that you claim it)if you rent the property. This could be quite the kick-up in terms of how much tax you’d pay the April 15, after you’ve sold.

    I don’t believe you would qualify for the tax-free capital gain treatment if you have not lived in your home for two of the past five years, even if you wanted to sell but couldn’t. Whether the property was rented is irrelevant to the IRS (though not to you, I know!). To be sure, please consult with your tax preparer.

    Thanks for your comment and question.

  3. Anonymous says:

    Does anyone know of any companies that do this?

  4. William Bruket says:

    A great company that we used in Atlanta, GA and the surrounding areas is JD Homes. They are great at finding qualified renters.

  5. J. Hooper says:

    Pardee Homes has introduced Smart Move Advantage for home buyers. They will rent your home for up to three years.

  6. Anonymous says:

    Anyone know of someone in Atlanta who will do the “buy ours, we will rent yours” program?


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