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Real Estate What would you do?

Discussion in 'Real Estate Investing' started by GettingThere, Dec 3, 2007.

  1. GettingThere
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    GettingThere New Contributor

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    My wife and I recently moved out of our first home into a second due to a career change for my wife. We occupied the first home for slightly more than one year, and have had it on the market for sale since August. Market is stagnant, so we are deciding to rent it for now. The issue for me is that we will only be able to get about 67% of our PITI monthly from a tenant, leaving the rest up to us. This amount (33%) right now is about 9% of our take-home income.

    The question is, would you keep it on the market and try to sell it (at this point we would break even + about 1-3k if we're lucky)...or would you tough out the monthly hit, keep it until the market begins to take an up-swing and re-enter it into the market?

    We are new at this, and it is scary thinking about having to fork out two full mortgage payments in the event that there is no tenant.

    Any other options I'm missing?

    Thanks in advance,

    John
     
  2. thecoach
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    thecoach Contributor

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    You might get some better advice from some of the other more experienced people on the board, but if it's been sitting there since August, you're losing money every month that goes by when that mortgage payment comes out. Can you find someone to rent the place while you are selling it, even at a lower rent?

    At least by renting it, you'll recoup some of the loss until you find a way to either sell it or come up with a better idea to get more revenue from it. 67% (or even 50%) of something is better than 100% of nothing.
     
  3. phlgirl
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    phlgirl Bronze Contributor Read Millionaire Fastlane

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    It’s a tough market right now – particularly in Central Florida, at this time of year. One option is to make the decision to rent – in which case, as you said, you will have to supplement the payment, over the term of the lease and then likely have to do some repairs/cleanup, after the tenant(s) has left, before putting it back on the market.

    Another option is to get aggressive about the sales price and take the hit now as opposed to over time. You should price yourself at least 5-10% under similar listings and you may want to offer something ‘extra’ as a bonus, to make yourself stand out. Realtors would know more about what people in your price range would be attracted to but I have seen things like a new TV, mountain bikes, gift cards, etc.

    It depends on your situation. Would making the supplemental payment each month make things uncomfortable, financially, for your family? Would the damage be less if you carried it a few years, as a rental property (might want to consider some of the tax benefits this could provide), or if you dropped the price now?

    Just some things to consider. Best of luck.
     
  4. GettingThere
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    GettingThere New Contributor

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    Thanks for the responses. For right now, our price is as low as we can go, considering the realtor's 6% take. If we didn't have that to pay out, I could move the price to be pretty well under the comparable properties in the area. We are including a nice whirlpool washer/dryer set, as well as a home warranty.

    We will see how the renting goes for now.

    Thanks again
     
  5. phlgirl
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    phlgirl Bronze Contributor Read Millionaire Fastlane

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    I don’t mean to push you here but may I ask why your current listing price is ‘as low as we can go’?

    You may have other reasons, but just incase it is due to the ‘refusing to take a loss’ concept, you may wish to rethink that one a bit. Consider that, with every mortgage payment you make, you are taking that loss. Even once you get it rented, you will continue to take a loss, every month. When the tenant moves out and you have to clean/repaint, etc. – another, potentially several thousand dollar, loss.

    I am not saying this to be a downer….. but it sounds like you and your wife are trying to make your way into the fastlane and holding a bleeding asset may not be a great way to start. Think about what else you could be doing with the money which would otherwise be used to feed this property – namely pointing it towards activities which generate income.

    It may turn out that renting it is the way to go…. After research, you may conclude, based on your market, that it is going to be a quick rebound and you will soon be able to sell at a profit. If this is the case, perhaps, you should keep it. My point is just be careful that you are not holding onto this place, based on some principal in your head that says ‘I will not take a loss on paper’. You will be taking the loss either way, if the market does not shift fairly quickly.

    A wise mentor of mine once said to me…… “If you HAD to cut off your arm, would you want to do it with amachete or a butter knife?â€
     
  6. GettingThere
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    GettingThere New Contributor

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    I agree with what you are saying...and push away. We are still pretty new to the RE game.

    The reason I mentioned we are as low as we can go is that we have no capital to make up for a loss at the closing table...much attributed to the fact that we have a 2nd mortgage on it, which now presents an amount owed in excess of the current perceived value...yay. After only being in the house a year, I had no delusions that we would profit from selling.

    I'm kicking myself for taking out the 2nd mortgage, but we had some high-interest debts from college that I wanted to eliminate. Definitely didn't anticipate moving again so quickly, but here we are.

    Thanks for the response.
     
  7. EasyMoney_in_NC
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    EasyMoney_in_NC Contributor

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    Why not rent (short term) while trying to sell? Why not get the agent to reduce the commish and lower the price. Sell it to them as 4 or 5% of something is better than 100% of nothing! Bargain basement price it and go. If you loose a bit, that the price of your education. If you sit on it the price could be much higher. If you rent for negative money, same comment applies. Dump the agent all together and go FSBO (while renting or otherwise).

    You have options, better get picking one. From what I hear of Florida right now..........mmm
     
  8. phlgirl
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    phlgirl Bronze Contributor Read Millionaire Fastlane

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    In this situation, you would want to be careful before attempting to sell while renting at the same time. You run the risk of seriously decreasing the size of your already limited buyer pool.

    People who are shopping for a house as their primary residence typically do not want to buy something which is currently tenant occupied (unless it is at a severe discount) and investors (smart ones) will not purchase an occupied property, which does not cash flow.

    If you were to rent and sell, as Easy mentioned, it would have to be short term lease. So you would have to find a tenant who was willing to be month-to-month and you would have to give a buyer a reason to choose your occupied home over the other, freshly painted, move-in ready, homes, which are surely for sale in your area.

    GettingThere - I agree - there is very little chance of your making a profit on this property - now or anytime soon. That said, you need to cut your losses. Consider borrowing the money you would have to bring to closing. Perhaps from a family member or there are often some good (lower interest) options availabe for taking a loan on a 401k, etc.

    I know it must be painful right now but once you are free of the place, you can focus on moving forward. Stick around and listen to some of the ideas here - you will be surprised how fast you and your wife can make that money back!

    Good luck.
     
  9. andviv
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    andviv Gold Contributor Read Millionaire Fastlane FASTLANE INSIDER Speedway Pass Summit Attendee

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    First, stop kicking yourself... not healthy and makes no positive difference.
    Second, let me ask you how much were you paying monthly for that college debt?

    Let's assume you rent the place and you have to cover extra $600 each month. If your college debt payments were $600 before then it is just like you had transfered the debt from one vehicle (college loan) to another one (second mortgage). I know, I know, that is an over-simplified way of looking at things, but this could give you a different perspective. If that is the case then you are not really 'losing money', you are making a different type of payments, probably at a lower rate than the college loan and longer amortization.

    How does it look now from this other perspective?

    Also, another way of making this loser a better property, you could create an LLC and transfer the property from your personal assets to that entity, and take the loses differently, but here you need a tax expert... hopefully Diane could visit this thread and provide her comments.
     
    Last edited: Dec 4, 2007
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  10. phlgirl
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    phlgirl Bronze Contributor Read Millionaire Fastlane

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    Excellent point, andviv. Any portion of the loan, which represents debt consolidation, should be removed from the equation altogether.

    If the property cash flows after this modification, then you may have a much easier decision.

    If not, my recommendation stands. If the asset does not perform (and there is no clear path to making it perform), cut your losses and move on.
     
  11. EasyMoney_in_NC
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    EasyMoney_in_NC Contributor

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    this may have some truth to it, but a student loan is usually deferred and is short term debit that's actually getting paid down. 600 now is going towards a 30 year mort. payment. Does it pay down principle or is it just interest. To simplify it to "600 is 600" standpoint, I don't think really does the problem justice.

    just my .0002 cents
     
  12. andviv
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    andviv Gold Contributor Read Millionaire Fastlane FASTLANE INSIDER Speedway Pass Summit Attendee

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    Yes Easy, you are correct. Like I mentioned in my post, it is an over-simplified way of looking at things. I think looking at the numbers and understanding what the second is and how it compares to the loan we could get a better picture of the real situation. Problem is IF the second was used to pay the loan AND buy a brand-new 100K car or something like that, then the situation is def. more complicated. But yes, bottom line, sometimes is the right move to cut your loses, lick your wounds, and move on.
     
  13. GettingThere
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    GettingThere New Contributor

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    Wow, you all are great...more feedback than I expected.

    I am prepared to cut losses...The realtor is set on her 6%. Looks like I need to withdraw the listing from her and go with a by-owner sale, or with someone who can drop the commission a couple of points to attract buyers. Trust me, renting isn't something I want to deal with right now, and I understand the negative affects of renting while trying to sell.

    The debts we decided to consolidate into the equity loan were credit card debts. They accrued pretty quickly due to a couple things, including an unfortunate job mishap for my wife. Long story short, we moved her to NY for job A...They say no, you were meant for job B, which happened to be a kick in the pants. The old "bait 'n switch" as they call it in the TV biz. Bottom line, we moved her back two weeks later...all the while I was still in school working at an auto parts store part-time. Moving across the country twice within three weeks is not cheap (for a part-timer). lol.

    Again, I appreciate all of the input. Will update as things progress...

    - John
     
  14. EasyMoney_in_NC
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    GL with it John
     
  15. Reisteve
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    Reisteve New Contributor

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    John:

    Have you considered a lease option? Many times the rent that is charged is a little higher and or you get a larger amount up front to help offset you carrying costs..

    Just a thought

    Steve
     
  16. GettingThere
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    GettingThere New Contributor

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    Yes, I am considering that as well and will offer it as an option.

    Thanks.
     
  17. asiamj
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    asiamj PARKED

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    I think Steve's idea.. lease options is a good strategy for you.
     

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