Posted by Deb M on December 09, 2003 at 04:54:04:
Couldn’t be more adamant, could you, Ron! I hear you loud and clear. We haven’t presented the idea to our friends yet, so I’ll talk about this seriously with my husband.
I appreciate your help.
Deb M
What to do with our house? - Posted by Deb M
Posted by Deb M on December 04, 2003 at 17:37:08:
My husband and I are new at real estate investing. We purchased our first duplex this year. We are getting ready to move out of town, and have been debating what to do with our personal home. We’re currently upside down on our mortgage, and would rather not sell, since we’d have to come up with about $30K at closing. My husband wants to rent the place. We own a $180K home on 1/2 acre in a nice neighborhood. We’ve been told that we probably couldn’t get more than $1200/month rent. (Our payments are $1750). I’m wondering if anyone has any ideas about other options. He recently learned about assignment for deed as an option. I suggested lease option, but he wants to hang onto the property. Anybody have any other creative options?
Re: What to do with our house? - Posted by Ron M
Posted by Ron M on December 06, 2003 at 21:28:27:
What is the balance on your loan? Would refinancing the loan to a 30 year Adjustable Rate Mortgage get the payment low enough to rent or l/o the house and cover the payment? or maybe most of it?
If you put it on the market, don’t list it with an agent, it will save you around $11,000 if you sell it yourself for Fair Market Value. I suggest having the home pre-appraised by a certified appraiser to determine true fair market value prior to selling so that your asking price is correct. Also, have the property inspected by a home inspector, complete with inspection report to satisfy your buyer or l/o buyer’s concerns with condition of the property if the home is more than 10 years old. Having these 2 things done should be able to assure you of selling the home for FMV in a reasonable amount of time if you advertise everywhere potential buyers are looking (i.e. internet, Sunday newspaper, yard signs, directional signs on busy nearby street corners).
How far away from the home are you going to be moving? If it will be too inconvenient to visit the home at lease a couple of times per month, I don’t recommend a straight rental situation. A lease/option situation is more likely to get you a better tenant. Also, consider than close to 75% of all l/o’s don’t get exercised, so your suggestion may accomodate both of your desires.
Best Wishes,
Ron M (WA)
One Question - Posted by E.Eka
Posted by E.Eka on December 05, 2003 at 09:18:37:
How did you guys end up upside down in the house?
Lease Option is one way. I think a very good way.
If you rent it and make up the difference, that’s still better than coming up with $30,000 at closing.
SELL NOW! , I can’t see the situation - Posted by David Krulac
Posted by David Krulac on December 05, 2003 at 06:25:05:
where keeping a big negative cash flow property as a rental makes any sence, especially for a beginner like yourself. Unload that sucker, asap. Long distance management doesn’t help and if you’re big negative with a tenant what will it be like when the tenant leaves in the middle of the night or there is major repair work that needs to be done?
Re: What to do with our house? - Posted by Deb M
Posted by Deb M on December 07, 2003 at 09:29:58:
Ron: We can’t refi now because we’re upside down on the mortgage (had an interesting experience with predatory lending a couple of years ago).
Good point about the realtor. My husband’s dad is a realtor, and I’m sure we could get some advice from him. Learned recently about 5-day sales, which I suppose could be an option.
I think l/o is the way to go if we don’t sell, for the very reasons you state. I’m hoping to convince my husband that just renting it out isn’t the best option. Maybe your stats will convince him.
Re: SELL NOW! , I can’t see the situation - Posted by Deb M
Posted by Deb M on December 05, 2003 at 19:38:08:
Maybe I’m a little naive, but if you have a tenant who can afford to pay $1000-$1200/month for rent, wouldn’t you expect them to be a little more responsible? Maybe my expectations are a little higher than they should be.
My husband discussed it with a mortgage broker friend of ours. The reason he’d like to hang onto it is that in a few years, if we continue to make our regular payments plus add the rent to it, we’d have it paid off in about 9 years. Then he sees it as another source of income for our retirement years. I think he likes the idea of hanging onto an appreciating asset, since we’ll be living fulltime in an RV the next few years, which depreciates.
Thanks for the input. I appreciate the comments.
Forget what I wrote first, I agree with David (nt) - Posted by E.Eka
Posted by E.Eka on December 05, 2003 at 09:19:44:
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Re: What o do with our house? - Posted by Ron M
Posted by Ron M on December 07, 2003 at 20:15:32:
Deb,
I have assisted well over 2,500 home owners sell their own properties without paying at least the listing portion of the agents’ fee. If your husband’s dad is a realtor, he may be able to put the home on the MLS for you at no charge. Additionally, just because it is on the MLS doesn’t mean you have to offer the going rate for your area (3% - 3.5%) in order to get attention. You can offer a selling commission of 1% and have an agreement with your father-in-law to release the listing if you find your own buyer.
You may not know this, but the majority of agents are a little on the lazy side when it comes to showing properties. A lot of times they will print out a spreadsheet of properties and give them to the buyers to drive around and look at from the outside. Those the buyers want to see inside will then get put on the “short-list” and the agent will set up appointment on those houses. Most of the spreadsheets the agents print, do not have the amount of selling commission listed, and the agent automatically assumes that it is the going rate.
I have studied the 5-day sale scenario and while I have had a couple of customers use it. I have never had any of them succeed at selling their home that way. In our area, I instead recommend advertising everywhere and then conducting 1 hour open houses. This allows prospective buyers to bump into one another and gives the same competitive effect as the 5 day sale without the hype and the deadline.
Frankly, if you want to do the lease/option and insure that you get to keep the Non-refundable option deposit here are a couple of things you could do: 1) Have the up-front option deposit not be too high - this keeps the t/b from having too much down payment when they go to get their financing, 2.) Set up the length of time to be a 12 month period - it usually takes more than 12 months for a t/b to straighten out their credit, 3.) Have the fixed value of the home 5% - 10% higher than current fmv - this way you get all the market appreciation over the entire time. Also, since you will be making up the difference between your payment and the monthly rent out of pocket take that amount (i.e. $500 x 12) and add that back to the price of the home and then consider giving them a small monthly credit toward purchase price for paying each month on time.
There are a lot of good books on this topic. One of the best is by Peter Conti and David Finkel called “Making Big Money Investing in Real Estate without Banks, Tenants or Rehab Projects”. In that book they go into a great amount of detail on how to acquire deals and then make them profitable. Since you already have the asset, all you have to do is figure out the best way to turn a profit.
I hope my comments are helpful to you. Let me know how things go for you.
Sincerely,
Ron McIntire
OwnerListed.com Inc.
Spokanebyowner.com Inc.
Re: SELL NOW! , I can’t see the situation - Posted by Bryan
Posted by Bryan on December 12, 2003 at 14:20:55:
Not necessarily. I know a guy here that was getting $1200 for a house (ridiculous lease fee for it), except the renter got into the place and only paid a couple of months, then stopped paying for anything. Got evicted of course, after a few months of living for free.
I still hate negative cash flow… - Posted by David Krulac
Posted by David Krulac on December 07, 2003 at 08:41:10:
vacancy in the higher rent area is all the more costly, the places are harder to rent especially with the low interest rates and no down payment loans available. Can you stand 3,4, 5, months or more of vacancy? Only you can answer that.
The potential rental market for highend properties is thin. The highend tenant expects more, and often times are more knowledgable on how to stay the longest without paying rent. Their more likely to get an attorney in a dispute and may even have a friend or relative who is an attorney who will work cheaply or free.
I don’t like negative cashflow, I didn’t like it in the 1970’s, in the 1980’s, in the 1990’s and the 2000’s. I doubt that I’ll like it in the 2010’s or beyond either. If your goal is to have an appreciating asset, then buy some property with POSITIVE cash flow that is appreciating. Dump this loser property and replace it with a winner property.
RVing and long distance rental properties are not a good mix. Throw in the negative cash flow to this cocktail and you might as well be named Molotov, because the situation you are creating is definately explosive. Some other alternatives to invest handoff long distance would be an appreciating vacant piece of land, since you don’t mind negative cash flow or better yet a triple net lease. You could have somebody manage your rental property but that would eat up another 7-10% of gross rents, which doesn’t help the negative cash flow. And remmember, nobody will manage the property as good as you will.
I still say don’t do it, you haven’t persuaded me of the merits of negative cash flow.
David Krulac
Central Pennsylvania
Re: What to do with our house? - Posted by Deb M
Posted by Deb M on December 08, 2003 at 05:44:42:
Thanks, Ron! You’ve given me some valuable insight. My husband had an idea to rent it to a couple of friends who really like it. I hate the idea of renting to friends, but he suggested signing a 5 year lease (so we have guaranteed tenancy). One of them is a handyman, so he could do any necessary repairs. They really couldn’t afford to pay more than probably $850/month, but we’d like to help them out. They take good care of the rental they’re in now, so we know they will with this house. My husband is thinking about hanging onto this house long term, so that we can sell it at some point in our retirement years (maybe 20 years from now), and have a more liquid source of cash. I don’t know if this will work, but it seems a win-win for both of us. He wants to pay off the mortgage quickly (9-10 years) so we own it free and clear.
I’ll pick up the book today. I’ve read another book by them, and was impressed by their knowledge and ideas. Thanks for your help.
Deb
Re: I still hate negative cash flow… - Posted by Deb M
Posted by Deb M on December 07, 2003 at 09:43:50:
You make a very convincing argument against renting it out. I’m leaning more towards l/o, just have to convince my husband of that. With my present salary, we can easily make up the difference until we have enough equity to refi and lower the payments. The only thing he doesn’t like is that the tenants may exercise the option, and then he’d have to sell the house. I really have no problem with that.
I appreciate your input. This will give him some things to mull over to make an educated decision that will make the most sense financially.
Don’t do it!!! - Posted by Ron M
Posted by Ron M on December 08, 2003 at 22:25:25:
Hi Deb,
I titled this message “Don’t do it” because I have done it and so have a whole lot of other people.
What is “it”? “It” is renting to a friend or relative. Especially, if you want them to stay friends.
Friends are much more important than money. You can stockpile money, but friendship has to be earned and it becomes very fragile when it comes to a landlord / tenant relationship of any kind.
It all starts out as a “good idea”, but then when they want to do something to the property and you don’t want them to do it, either you end up compromising or they end up resenting you. If they are 3 days late with the rent, because of (insert legitimate reason here) and you have to give them a 3 day notice to pay rent or vacate, it is you who turns out to be the bad guy in their minds. Or worse, you don’t give them the notice because you know that you will be the “bad guy” with them for doing it.
This is not a “win-win” it is a “win-lose” and the outcome is guaranteed. You Lose! The game is fixed by human nature. When I did it, the last time, it ended up costing my business over $4,000.00. The reason I say the last time is because like most really nice guys, I hadn’t learned from my own mistakes. I thought “this time it will be different”. But it wasn’t, and it won’t be for you either.
Odds are good that you will totally ignore this advice. I can tell from your messages and your prompt responses that you are a “nice person” too. It is going to be much easier for you to be the “bad cop” now and Not rent the home to your friends than it will be to be the “bad cop” after they are living in your property and you realize that you are paying almost as much of the mortgage as they are, and things didn’t go according to plan.
The real bonus of taking this advice is you get to keep your friends for sure.
I sincerely wish you the best and know that renting the property to friends is not the best.
Ask any other investor in the world, and I would be extremely surprised if you ever got any advice different from what I have just given you.
Please, let me know how things go for you.
Very Truly Yours,
Ron McIntire