- The Washington Times - Friday, January 11, 2008

Q:I have a three-bedroom town house in Prince George’s County that I put on the

market in 2006 after we moved into a new single-family detached home. After six months on the market, we received no offers, so we decided to rent it out last February. Our renter signed a 12-month lease and will be vacating next month because he is buying his own home.

The property appraised for $435,000 last year, but I’m not sure if it would appraise for the same amount today. In fact, I’m not sure it would appraise for much higher than the $380,000 we owe on it.

A friend of mine who’s not in real estate but a good businessman says I should continue to rent the property and hold it until property values come back. I am an active military officer and can afford to hold the property, but I would need to curtail my retirement contribution.

If I decide to sell, would you suggest that I try to arrange a short sale with my lender? This could perhaps get me out of this mess. My credit scores are well over 700 and I’d like to keep it that way. Any advice?

A: I really can’t advise that you seek a short sale with your lender. For folks who don’t know, a short sale means that the property is sold for less than what the borrower owes the lender. The lender agrees to accept this because it usually is a better alternative than foreclosure proceedings.

So why would I recommend against your seeking out some sort of agreement with your lender? Because I believe that all consumers should do their best in meeting all the obligations that they agreed upon.

There are some clear disadvantages to a short sale.

First, it is likely to negatively affect your credit. The lender must agree not to pursue a judgment for the balance of what it would be owed.

Second, the difference between the sale price and the mortgage balance is treated as taxable income to the seller. You will have a tax obligation on this amount.

You have indicated that you would be able to afford to hold the property if you continued to rent it. If you conclusively determine that a reasonable sales price falls below the balance of the mortgage, my advice would be to rent the property and wait it out.

Here are a couple of steps I might suggest.

First, interview two or three qualified real estate agents and try to get a realistic number as to what your house might sell for. Everything has its price. If you determine that you might be able to sell the house and pay off the mortgage in full with little or no cash outlay, it might make sense. If you determine that you must rent, do some research to determine how much monthly rent you can charge.

Second, compare the rent with the total payment of your mortgage. Add a reasonable figure for maintenance and utilities and determine out how much the “negative rent” will be. This will help you determine how much the property must appreciate over time for you to break even.

For example, let’s say you have to “feed” the property to the tune of $300 per month, or $3,600 annually. If the property is reasonably worth your mortgage balance of $380,000, then the property must appreciate by only about 1 percent each year ($380,000 divided by $3,600).

Over time, your property’s appreciation is likely to exceed this amount and you will make a profit at the end of the journey.

The key to successful real estate investing is being able to hold the property in the event of a market downturn. Speculators who buy real estate without any ability to withstand a temporary decline in values get burned.

It sounds to me like you have the ability to hold and eventually liquidate the property to your advantage.

Henry Savage is president of PMC Mortgage in Alexandria. Reach him by e-mail (henrysavage@pmcmortgage.com).

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