Coping with Real Estate's New Reality

Last Updated Sep 8, 2009 11:54 AM EDT

The Kazanjian Family

John and Michelle Kazanjian of Ann Arbor, Michigan, bought property and built their second home on Florida's Space Coast in 2006 as an investment for $650,000, with $250,000 down. They designed and decorated the Vero Beach house as a labor of love. "At the time, I thought [building a house] was a lot more interesting than mutual funds," says John, 48. But then rents plummeted, and it took half a year for the Kazanjians to find a tenant, who paid just $2,500 a month for 18 months. The house is now vacant because rents are at a level that John finds unacceptable. And a comparison of home sales in the subdivision showed that prices have skidded to the $425,000 range. Meanwhile John finds the $5,000 monthly upkeep daunting: "How does all that figure in the investment equation? I really don't know."

The short answer: It doesn’t. While there are a lot of wonderful reasons to buy a house, investing isn’t one of them. Real estate is illiquid, and unlike a stock and bond portfolio, which can be sold piecemeal to raise a little cash, you can’t sell half a house. Historically, real estate was an income generator — if the rental revenue exceeded the carrying cost, it was a good investment; if not, it wasn’t. Once prices started rising 20 percent a year, the old rules were forgotten, and it seemed as if capital gains would go on forever.

Indeed, when the Kazanjians closed on their Florida property, it looked like a sure thing. As so many Americans have learned over the past few years, it wasn’t. So they face a question that you may also be asking: Do you hang in there and wait for prices to climb again, or should you cut your losses?

In the Kazanjians’ case, it’s time to sell, says Jill Schlesinger, CFP and Moneywatch.com editor at large. The property has $365,000 left on its 30-year, 5-percent mortgage. “Given the state of the real estate market, patience will be required,” says Schlesinger, “but that $5,000 a month could be used for other needs, such as funding their retirement plans and assisting with education costs for their five daughters.” Schlesinger notes that only $85,000 of the Kazanjians’ $1.4 million net worth is liquid; the bulk of their assets are tied up in the houses and John’s businesses, a student laundry service and a packing and shipping firm. “They’ll need to convert illiquid into liquid assets as they approach retirement,” she says.

Quick Fixes:

  • Adjust your attitude. Although it will be painful for the Kazanjians to break the emotional connection to the Florida house and acknowledge its loss in value, selling the place will free up cash and pay immediate benefits. We asked Venice, Florida-based real estate agent Laura B. Kopple to recommend a strategy for selling in a tough market; some way the Kazanjians could differentiate their property from all the others being offered at fire-sale prices. She recommended they offer a home warranty, which provides protection for mechanical systems and certain appliances against unexpected repairs in the first year. “It’s a nice bonus for the buyer, and the cost is only around $400 a year,” says Kopple. “A lot of warranties will cover items while a property is listed and then convert to the buyer. We use them quite a bit.” She also notes that houses in this area are beginning to sell again — though it takes between six months to a year — but at least they are no longer “just sitting on inventory.”

    “Buyers know there are a lot of good deals out there,” she notes. “You have to set the right price. If this family bought at the peak, they may be looking at half that price now.”

  • Rent for what you can. While they’re trying to sell the house, the Kazanjians should bring in whatever rent they can to defray its expenses. Local real estate agents say furnished houses in their subdivision might fetch $2,100 to $2,600 a month, covering about half the house’s $60,000 annual cost.
  • Delegate a portion of any house proceeds for an emergency fund. The Kazanjians should keep six to 12 months of living expenses in bank accounts, CDs, or money-market mutual funds. “I would err on the higher side because they are self-employed, so that would mean an emergency fund of approximately $50,000,” says Schlesinger.

John’s Response:

“I should prepare the groundwork for selling the house. And I can put it up for rent right away. I’ll have to broach the subject with my wife; she’s very attached to that house.” says John. He had been tempted to buy a neighbor’s house in Ann Arbor and rent it to his daughter who got married this summer. But “we shouldn’t be extending ourselves anymore. We need to start building liquidity.”

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