Our fully inclusive guide on what to do if end up selling a property for less than you owe.
All over the country, every single day, home owners sell their properties before they’ve fully repaid their mortgage – and this is completely normal.
However, this can become problematic if you can’t sell the property for as much as you owe on it. this is often referred to as negative equity.
This can happen for a multitude of reasons. The house itself may have decreased in value because of needing updates or repairs, or it could be that due to the state of the market itself in the current climate, you are now unable to sell your property for as much as the sum of the mortgage that you secured on it.
So what can you do if this happens to you?
Well, the good news is, all hope is not lost! Read on to find out more.
What Will Happen if my House Sells for Less Money that I Owe?
Okay, so you’ve found yourself in this dilemma where you can’t sell your property for as much as you still currently owe on its’ mortgage amount. What will happen, and what can you do? The option that is viable for you will, of course, entirely depend on what your personal circumstances are at the given time.
So, in some cases, for example, people may need to sell their property due to needing to relocate for work, or if they’re planning on emigrating and moving out of the UK permanently. If this is the case, then some of the options we list below may not be viable for you.
When some home owners find their valuation is lower than what they owe on the mortgage, they simply choose to ignore the valuation and put it on the market for above the recommended price. The bad news here, however, is that this is more than likely not going to work.
The truth of this? People really don’t care about how much you personally owe on your mortgage. All they really care about is how much your property is on the market for, in comparison to other similar properties up for sale in the immediate area.
So, let’s say for example that your property is up for sale at £250,000, but a similar property down the road is on the market for £220,000. The chances are, it won’t sell, and it’s transparent you’ve done this to make up for what you owe on the mortgage.
What About Other Loans Secured on the Property?
Another one of the reasons why your property may not sell for as much as you owe, is because you have other loans secured on your property.
Secured loans don’t only mean mortgages. Other types of loan may include when a lender takes a secondary charge on your home.
So, if you have a second or third loan secured against your property – in addition to your mortgage – then it’s likely that selling your home is going to be difficult.
What Do I Do?!
Okay, so you’re in this sticky situation. What do you do next?
Of course, as mentioned above, the answer to this will differ depending entirely on your individual circumstances. You need to be careful in choosing the right solution for yourself.
Read on to discover our top seven solutions to finding yourself in this particular situation.
SOLUTION NUMBER ONE: Wait for the Market to Pick Up
The first solution is one that will only really work if you have the luxury of time, but if you can wait, then being patient might be the most viable solution for you.
If your property is currently on the market through an agency, then you might have to ask them to de – list it.
We’re not going to lie, waiting for the property market to pick up can be a painful process, and it won’t be an option if you’re in a time – sensitive scenario, such as needing to relocate to start a new job. The property market goes through periods of difficult, as any other market does, and sometimes the only real solution is to wait it out.
- The property market flows through an ever – repeating cycle of ups and downs.
- Do some research into the market in your area right now. How is it looking? If it’s looking a little cold, you might want to wait it out. The market will change for the better, it just takes time!
- A buyer’s market makes for a difficult time for sellers. That sort of goes without saying.
- In the period of a “buyer’s market”, you’re far more likely to have to settle for a lower offer than if your home was on the market in a hot selling time period.
- The good news here, however, is that although your property will sell for less – the property you’re looking to buy will also be cheaper, or at the very least, you’ll be able to do a deal with the owners attempting to sell.
- The issue with moving to a new area, is that their market may not reflect the market you’re currently selling in. If you’re in this situation, then it’s likely one of our other solutions will be more viable to you.
What Could Go Wrong?
We would recommend being careful about leaving your property on the market whilst waiting for the market itself to pick up.
The issue with doing this, is that if your property is on the market for several month or more, potential buyers will begin to assume that there’s something wrong with it. In many cases, they’ll even disregard it altogether.
The unfortunate truth, is that many sellers will fall into this trap – especially those who choose to list their property at a higher price.
SOLUTION NUMBER TWO: Make Simple Home Improvements
Solution number two is likely to become relevant when the market itself is not the main reason for your property not selling – or not selling for a good price.
If your home needs some improvement, making simple ones can actually make a significant difference.
Chances are you’ll have been told at some point in your life, that “first impressions count”. This is no more true than in the property world.
With this in mind, some home improvements and decorating updates could make all the difference!
- Remember this counts for both the interior and the exterior of your home.
- In some cases, your walls and painting might just look chipped and a little tired. A fresh coat will solve that!
- However, it might even be the case that you need to rethink your colour scheme. Bold and brash colours are a no – no when it comes to selling your home, so consider replacing these with neutral colours and tones.
- Neutral, lighter colours will not only make the room look bigger and brighter, but will also provide potential buyers with a “blank canvas”, on which they can imagine their own décor taking place.
- Dark and “out there” colours will put buyers off. If they don’t like them, imagine how many coats of paint it’s going to take to cover that…
- Buying paint to cover the walls won’t be expensive, or difficult, so consider doing it yourself. You don’t need the expenses of paying a decorator to simply paint the walls, after all!
Remember This – Kitchens and Bathrooms Can Make or Break the Sale of Your Home!
When prioritising which rooms to redecorate or improve, remember that it tends to be kitchens and bathrooms which can either make or break the sale of your property.
- If your kitchen is tired, or out – dated, now is the time to consider improving it.
- Now, replacing a kitchen in its’ entirety is expensive. There are ways of doing it yourself, for example, by painting or covering old – looking cabinets and doors, and so on.
- Spray painting is a great way of doing this!
- If your bathroom is old fashioned, then it might be worth replacing baths and so on. if they’re an old fashioned and unappealing colour, then white will make the property far more sellable.
One of the most important things to remember, is that improving your bathroom and kitchen may not only make your home more sellable, but could help it to increase in value too.
The good news here, is that by investing in these rooms, you could entirely tackle the issue of selling your property for less than you owe, by increasing its’ value entirely. Talk about two birds, one stone!
Don’t Forget the Exterior!
It’s a fairly common mistake amongst home owners putting their properties on the market, to forget that the garden is just as important. It’s basically an additional room, or space, after all.
Furthermore, remember that the front garden / entrance way to your property is the first thing that potential buyers are likely to see upon entering your home. This includes the front door, front of the house, and even pointing on brickwork.
Even if the interior of your property looks great, if you ignore the exterior, then the first impression buyers will get of your property will be disappointing.
If you’ve ever heard of the expression curb appeal, then this is very simply what it’s about. A property which lacks exterior curb appeal might even result in buyers not wanting to go any further, and not bothering to look inside. If they’ve seen this online, they may not even request a viewing in the first place.
A simply garden makeover is not costly in the slightest. Maintenance and upkeep is the most important part. It’s all about simply cutting the grass, cutting back plants, and clearing path ways. If you want to go the extra mile, you could consider replacing your door mat and painting your front door, for those finishing touches.
Acknowledge Feedback from Your Estate Agent
If you’re in a scenario where you’ve already listed your home and agents have showed potential buyers around, and the feedback brings you to the conclusion that you need to make some home improvements, then we would recommend taking your property off the market whilst you make these simple renovations.
The kind of feedback you should be looking for is feedback on the state of the kitchen, the garden, the overall property and so on.
Above all else, remember that you don’t want to put yourself in a worse situation by leaving your property on the market for several months, and its’ listing becoming stale. Remember – the longer it sits on the market, the more likely potential buyers are to think that there’s something wrong with it.
SOLUTION NUMBER THREE: Discuss Things with a Different Estate Agent
Believe it or not, the estate agent you’re using can have a direct impact on how quickly your property sells, and how much it actually sells for. They could also be the reason why your property is not selling for the amount that you owe.
If you have a feeling this may be the case, then very simply, we’d recommend seeking an opinion from another estate agent. You could ask them to give you a valuation, and if you still feel it’s low, ask them exactly why they think this is the case.
Remember that the low value of property can be apparent for a multitude of reasons. One of the most common of these tends to be the state of repair the house in question is in.
In some cases, it could very simply be to do with the location of the property itself not being appealing, or that the market is in a negative state at the current time.
We would recommend taking the advice of a well – reputed and reliable estate agency in these circumstances, and if they recommend a “make – over” or improvements of sorts, then consider the steps we’ve suggested taking in solution number two.
SOLUTION NUMBER FOUR: Become a Landlord, and Rent Out Your Home
Okay, so this might sound like an extreme measure – and it’s certainly not the right solution for everyone – but for many, it could be the answer to their dilemma of their property selling for less than they owe on it.
Of course, whether or not this is viable for you will entirely depend on the reasons behind why you’re selling your home in the first place. It is worth considering, however, that the current government have really come down on property developers and landlords in recent years.
There are a number of barriers – particularly surrounding tax – which have been brought in. For example, for landlords who rent out their house in their own personal name, mortgage interest is no longer considered a deduction that’s allowed.
What Does Section Twenty – Four and Tenant Tax Mean for Landlords?
It’s important before going any further that you thoroughly understand what tenant tax and section twenty – four means for landlords.
Very simply, this means that you’ll have to pay tax on your gross rents, after deducting costs such as repairs, letting fees insurance, and other costs you encounter as a landlord, so long as they are relevant to house rental. After these have been deducted and you’re figured out the tax, the mortgage interest will be paid out of their balance.
Section twenty – four is now commonly referred to the “tenant tax”. The reason behind this is that in the long run, rents will increase. Landlords must make a profit in order to survive – remember that no business can survive without one, and being a landlord effectively means you run a business or sorts. In order to survive as a landlord, rent costs must go up. it’s as simple as that.
Many landlords who have found themselves in this situation have actually sold their properties and left the industry in its’ entirety. This means that there will be less rental properties for tenants, and that ultimately there will be less rental accommodation available for tenants, increasing the demand for rental properties.
Becoming a landlord, depending on your level of mortgage interest, it’s likely that after tax rent, this will be higher.
Renting Through a Limited Company
There is one simple way of avoiding this, and it’s by renting your property out from within a limited company. Of course, before doing this, you have to get your house into a limited company, which will cost stamp duty and legal fees to do.
The other issue comes in you needing a limited property to run. In doing this, you become a company director, as well as a shareholder. In doing this, it’s likely you’ll have to enlist the help of an accountant and tax advisor, and of course pay them for the service.
However, tax isn’t the beginning and the end of the difficulty that landlords have faced at the hands of this government. More recently, they’ve actually made it more difficult by law to remove problem tenants from the property.
As well as this, they’ve also hit out at letting agents in legislating against them charging tenants for searches and so on. All of these costs will be transferred onto landlords.
Don’t Let it Put You Off!
If all of the above implications don’t sound like too much of an issue to you personally, then don’t let the UK government put you off becoming a landlord – particularly if the notion of renting out your property is actually appealing.
Remember this one thing, however: tenants are not likely to look after the property like you would. Plus, if you’re considering moving more than an hour away from your home and it’s not hugely accessible, you’ll have to employ a letting agent.
Many landlords actually choose to employ a letting agent anyway. This is because they know the ins and outs of the laws when it comes to drawing up a tenancy agreement, as well as the tenancy deposit scheme rules. They also take on the responsibility of checking in on the tenant on a regular basis.
You should also be sure to inform your mortgage company about your intentions to let your home out. The vast majority of mortgage lenders are likely to be fine in doing this. Some of them will actually change the interest rate, whereas some may leave it the same. In some cases, you may be charged an administration fee for the change – over.
The alternative to doing this would be taking out a buy – to – let mortgage instead. Remember that buy – to – let mortgages are entirely designed for landlords who buy houses to let out to tenants.
SOLUTION NUMBER FIVE: Complete a “Short Sale” of Your House
Our fifth solution suggestion would be to complete a short sale of your property.
Remember, that if you’re struggling with having a shortfall between what you owe and what your house is currently worth, then it’s likely you’ll struggle to pay back loans after you’ve sold it.
In some cases, home owners may find themselves in some financial difficulty, and in a worst case scenario are desperately trying to avoid their homes being repossessed. This could be the reason you are selling in the first place.
If you personally owe more than you can get from selling your property, then a short sale could be the solution for you. This is often a last resort, but if you’re at that point then there’s no harm at all in considering it.
What Actually is a “Short Sale”?
Very simply, a “short sale” is when you sell your property, and then the net proceedings fall short of the debts you have secured on it. This means that if the holders of the security on the house will agree to accept less than the amount owed in debt, then the short sale can ultimately go ahead. At the end of the completion of a short sale, any sales proceedings are passed onto the lender.
This tends to result in a shortfall, meaning that the net proceeds after estate agency fees will not be equal to what is owed.
As we mentioned above, this tends to be a “last resort” often turned to by those avoiding repossession. Realistically, a short sale will have less of a negative impact on your credit score. This is good, because it means that you’re more likely to get another mortgage sooner, rather than later. Plus you avoid the mental and financial difficulties found in the process of repossession.
Do remember, however, that a short sale will affect your credit score for a while, meaning you’re likely to struggle obtaining credit. If you can avoid turning to a short sale, then please do so.
Furthermore, remember that not all UK lenders will actually agree to a short sale. If they do, however, then the loan is treated as having been paid off in its entirety. The lender will ultimately forgive the rest of the outstanding loan.
Many lenders will prefer to go through with a short sale, than end up having to repossess a property. Remember that at the end of repossession, the lender has to sell the property themselves – usually for even less than they’ll get for a short sale.
SOLUTION NUMBER SIX: Use Your Savings, or Take Out a Loan to Pay the Balance Remaining on Your Mortgage
The sixth solution we are suggesting today, is that if you have the capacity too, you could use your savings or take out a loan in order to pay the remaining balance on your mortgage.
If you are fortunate enough to have enough in your savings, then you could use this money to bridge the gap between the current value of your property, and how much you still owe on your mortgage.
If your savings, however, don’t add up to a sufficient amount, you could consider taking out a further loan to pay off the difference. This will have to be off another credit provider.
Bear in mind that:
- You’ll ultimately have to pay this off in the long run.
- You’ll have to be prepared to pay a higher interest rate, because the new loan won’t be fully secured on your house.
Be sure to do your research and thoroughly assess your finances before opting for this.
SOLUTION NUMBER SEVEN: Sell your Property to a Creative Investor
Last of all, but by no means least, we come to solution number seven, which is to sell your property onto a creative investor.
This is an option that will ensure you avoid a short sale, as well as being repossessed.
Some investors – creative investors, we’re referring to them as today – will agree to take over the mortgage payments for you. Of course you’ll have to have this agreed by your mortgage lender, but generally speaking they’ll be fine with this option. After all, they’d rather get paid than not, wouldn’t they?
Very basically, they would become the landlord of your property, and would then let it out to tenants. The rent they received will be enough to cover the mortgage payments.
We know we mentioned ways in which the UK government have made things more difficult for landlords, but much of the time they’re still happy to take on this responsibility.
The arrangement tends to include entering into a long term agreement with the creative investor, which will result in them buying your property in full at a future date. This is a date which will be agreed by the both of you. This is likely to be at a time when the housing market and prices of property in the areas in question are fully recovered, and the market is thriving again.
There are many benefits to this solution. One of the biggest ones is that there are likely to be no estate agent fees at all – unless, of course, you’ve already entered into an agreement with an estate agency.
Furthermore, it’s very unlikely that you’ll receive any further adverse credit. This will only happen if you are already behind your mortgage payments, or are in mortgage arears.
We hope that today, we have helped you to better understand what your options are when your property is no longer selling for as much as you – or you’ve found yourself in “negative equity”, and still need to sell your property on.
Remember, that there is always help and advice out there, and if you have any further questions about the above content, do not hesitate to get in touch.
Thanks for reading!