Should We Buy Out Interest in Low-Priced Condo? Hold or Sell?

Question

After our brother died a couple of months ago, my sister and I  inherited his 2bd/1ba 885 sq. ft. condo in Stockton, CA.  Unfortunately,  it's not in the greatest of areas, and the highest sale price lately has  been $53k.  Rents in the complex generally go for $650.

My sis had rehabbed a couple of houses in Phoenix but didn't make any money.  Meantime, hubby and I have an LLC with a couple of rental properties (a condo and a house) in much higher-priced areas in OC and San Diego Counties and never have flipped before.  Honestly, the relationship my sis and I have is shaky and could be strained by working on a project together.

We have to rent it out because we're losing money on the $250 HOA fee.    It needs work (hopefully for $5k or under) even to put it on the market as a rental while it goes through probate, which can be as long as a year.  We live out-of-state, and our project manager (who also flips and rents) says that it may take 2 or 3 years for the value to rise as little as $10k.  Its original sale price was a bit over $100k.

We had planned to buy my sister's interest after it had been rehabbed and hold it as a rental, but now we're not so sure.  Figuring in the HOA, the 10% PM fee (which only might come to $65), insurance and taxes, there's not much left.  Doesn't speak highly of being a long-term rental.

Question: It could cost us over $25k to buy my sister's interest.  With figures so low, is that advisable?  Would it be better to do as little rehabbing as possible and then sell it as soon as we could?

Account Closed · Answer

A $650 rent with a $250 HOA fee really cuts into the rental return.  What do the taxes look like?

That being said, if you can get in for $25K plus repairs plus cost of probate, it might work as a low cost rental.  You'd really have to look into what else is going on with the "health" of the HOA and what the future repairs and issues look like.

The other option is buy out your sister with a small downpayment and seller carry back.  That way your cash upfront is much smaller.

There's also the issue of management if you are long distance.

Rick H. · Answer

You can borrow up to half the current appraised value (minus liens) if you are administrator with Letters now.

Try this site: closeprobate dot com

Disclosure: this is a company that I own.

Adrian Tilley · Answer

These are good points and a good suggestion.  However, as I said above, personally I don't think I'd want the headache of a long distance rehab/rental with a sibling I might not work well with for dubious returns that will be minimal at best.  If you want to do more in REI, I would take the money and invest in something else.

Yes, just holding for a while will cost a few bucks, but weigh against the hassle of landlording long distance and a tenant possibly trashing the place.

Wendy Black · Answer

Thanks, but I don't need to borrow against it.

Wendy Black · Answer

Sister would prefer cash ASAP, so to buy her interest, we'd have to outlay at least $25k.    There aren't "premium rent rates" for this area or complex.

I'm grateful for all your suggestions.  We're just into year two of holding properties.  I'd hope to expand the business with another property this year, but with the loss of my husband's job due to government sequestration and just two or three years from retirement, it hadn't been financially viable.  Due to unfortunate circumstances, this fell into our laps.  I'd hoped that between the mobile home rentals ($1350 split in half with my sister, unless we bought her out) and the condo, it could generate income through rent.  Honestly, It comes down to a question of lump sum cash or accepting a small amount of rent.

Chris Kennedy · Answer

Wendy, this sounds like a messy situation and a poor investment, I suggest selling the property.

How about selling on a lease option? Just because you can't sell today due to the probate process doesn't mean that you can't market for someone who would like to buy it. Have them sign a one or two year lease with option to purchase, collect an up front option fee and charge them a premium rent rate (a portion of which could be credited back to them toward down payment if they exercise the option). Once probate is complete you can transfer title.

Check with your attorney first, but this seems like the best way for you to get some money up front, cover your holding costs, and mitigate the risk of the condo being trashed.

Perhaps @Adrian Tilley can shed some light on this possible solution...

Wendy Black · Answer

Per flipping it and not renting it but just selling it as soon as we legally can, a realtor said that people are having trouble securing loans for condos because there are so many rentals in the complex vs. privately-owned condos.

I realize everything is profit in the end with these since they were gifted, but if I were trying to buy this property to wholesale or flip it, I'd offer somewhere about $35k.  That's not much to split between two people.

Wendy Black · Answer

My hubby is executor of the will.  Today he found out he can file the papers himself because it's under $150k.  (There's also 3 mobile homes in a nearby county, but he read they're not even considered.)  The probate papers can't be filed until a legal matter relating to my sister is complete.

Meantime, we're waiting to hear how much it would be for a good cleaning and a basic rehab.

As far as whether we would've bought it if it hadn't been my brother's, that's a very astute question.  The answer is probably no.  First, it is nearly 12 hours' away; not 6 like our other properties, and it's not in an area in which we're familiar.  Second, the potential profit margin is small.  Our condo in OC appreciated $18k over the past year.  Third, while we haven't rehabbed our other properties, the rents are high enough that--and I hate to say this--we don't worry about them being trashed.  Honestly, I feel that if this complex were kept in better shape, the renters could keep their condos in better shape, too.

Another question I've thought about is the difference between what it would be worth sold as is and with work done to it if probate were short.  I just hated having to pay $225/mo. for nothing.  (Obviously, the electricity has to remain on, too, if there are workers there.)

Since I posted this morning, the new property valuation came in from the county.  It's at $50k, half of the original purchase price.  It's owned outright.  No liens.

Rick H. · Answer

"Everybody wants to go to heaven but no one want to die to get there."

That's what you tell sister.

You don't provide info as to status of probate. Has anyone filed? Anyone appointed as PR? Once Letters are issued, property can be sold to 3rd party buyer.

If you do a summary probate, which is likely due to low (under $150k DOD value, per court referee) then there is no interim powers however the process can be completed from start to finish in 4-6 months. You'd have to wait for process but both you and sis would own.

My vote is to liquidate. Limited upside, plenty of downside. Lots can happen to sis' share due to 'pig in a poke' nature of heir's equity in an estate (unknown  creditor claims, etc.).

Q: if this were not your Brother's property, would you consider buying it? If not, there's your answer.

Should We Buy Out Interest in Low-Priced Condo? Hold or Sell?

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