Bailing Out, Under Water

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The harsh reality for as many as a quarter of American homeowners is that their houses are worth less than the outstanding mortgages.

The only thing worse than being ‘under water’ on your mortgage is not coming to grips with it. That is why recommends that all homeowners use publicly available and low-cost tools – all found at – to closely track the market value of their homes.

Nate Towne had a feeling that he was underwater on the Madison, WI, contemporary that he bought four years ago. He and his partner bought the split-level house for $250,000 and spent about $10,000 updating its bathrooms and décor.  But in mid-2011, they both took new jobs in Massachusetts and relocated. Now they are faced with the implacable gap between what they have put in to their house and what they are likely to get out of it.

Towne was one of four winners in’s “Is Your House Priced Right?” contest, which invited homeowners around the country to submit short essays explaining what they thought their houses were worth, and why. Towne’s house is currently on the market. commissioned a formal appraisal – exactly what the company recommends that all sellers do as they ready their homes for sale. Formal appraisals are the only valuation accepted by lenders; every home sale contract  price must be validated by an appraisal before the lender will issue a mortgage and the sale can be completed.
Initially, Towne put the house on the market by owner, asking $259,000. “I wanted $10,000 wiggle room to drop the price down.  I know what happens during negotiations…somebody wants to redo the deck, I can shave some off, no problem,” he said. And, with an outstanding mortgage of $251,000, the real estate commission would be “$20,000 out of my pocket. I had no choice but to sell by owner.”
But as Towne readily agrees, the amount owed the bank has nothing to do with the market value of a house. “It’s worth what a buyer says it’s worth,” he says.

And a buyer – and a lender – will agree with the opinion of a professional appraiser. The house is in move-in condition waiting for a new owner to move in. But for that to happen, the price will likely have to come down substantially – to $209,000, says Madison area appraiser Gary Gruenisen.  He was commissioned by ForSaleByOwner as part of Towne’s prize package to formally appraise the house.

Though not many homes have sold in Towne’s neighborhood, there were enough houses of the same age, size and approximate condition that have recently sold to piece together a credible market value.
At $209,000, Towne would have to pay nearly $70,000 out of pocket to cover the agent’s commission and the difference between the mortgage and the current value of the house.  “In this economy, there’s no good scenario,” notes Towne. For the time being, he will keep the house on the market, hoping that its updates, style and location will attract the right buyer for the right house.  If no buyer materializes, he will look into alternatives, including renting it. “I’d rather rent it than sell it for $209,000,” says Towne. “$70,000 is too much to lose.”
“I braced myself for the worst. And that was the worst,” said Towne. He has now relocated to Massachusetts as well, and because he has moved out, he has listed the house with an agent. The house is now listed at $230,000.