Selling my first property, what to do?

Question

Hi BP community, I’m somewhat new to real estate investing so I’m looking to get your expert opinion. I own a single family home in Livermore, CA that I have up for sale with the idea of doing a 1031 exchange into a 3 or 4 plex. It is listed for $595K, during the open house there was a good amount of traffic but we didn’t get any offers. A couple of issues are that it is a 2 BR/1 BATH but the 2nd bedroom doesn’t actually have a closet and there is a family room that was built without permits prior to me buying it. I owe $175K and I was renting it for $2,095mo.

I’m considering the following options:

Opt 1 – Wait for one more month to see if a buyer comes

Opt 2 – Drop price to $550K

Opt 3 – Refi then use the funds to convert to true 2/1, then re-list for $630-$650

Opt 4 - Keep original house layout, refi to add an ADU and rent both units ($3,200 mo)

Opt 5 – Hold as is, re-rent and refi to get fund for down payment

Opt 6 – Convert it into a nursing home (My wife doesn’t like this option)

What would you suggest?

Thanks for reading, looking forward to your input… Cheers

Dan H. · Answer

Even though a bedroom does not require a closet to be a bedroom, buyer expect a bedroom to have a closet. This problem and the family room without permits is not going to go away by itself in a month. So Option 1 is unlikely.Option 2 is an expensive option. $45K is a fair amount of money to reduce the cost for issues that I believe should be able to be addressed for far less than $45K. See my option 7 below.Option 3 depends on zoning but is probably not a real option unless you happen to be zoned in an area that allows true duplex to quad.Option 4 is a protected option in CA and likely possible. It still would not be a good return on the equity or value but much better than what you are getting today.Option 5 you currently have a terrible rental in terms of cash flow in terms of value and equity. Even if I use $550K as the value, your rent to value ratio is 0.38%. You likely need near 0.7% ratio to be cash neutral if you held at 80 LTV. The rent may work for you because your current LTV (again using the $550K value) is 32% but your return on your equity is pathetic.Option 6 your wife is against and happy wife, happy life. It also seems like it requires expertise and may require a lot of work.So that leaves option 4 of the options you proposed as the viable/best option but I will propose an option 7. Option 7: Address the permit issue and closet issues if you believe it can get you a sell at close to $495K. I suspect you should be able to do this easily for less than $45K, probably less than half of $45K.I believe option 7 is your best option. I believe the property is not a good rent and will not be a good rental due to value versus rent ratios being so poor. I say this but I keep one that is even worst (about the same rent but worth ~$620K and similarly the LTV is real low so it has positive cash flow at its pathetically low LTV). I also should sell mine but it used to be my home and I do not sell it. Do as I say and not as I do ...Good luck

Juan Catano · Answer

Part of the problem is that the second bedroom is too small to add a closet so we were thinking on making the family room into a master bedroom and converting the small second bedroom into a laundry/storage area.I'm leaning toward either dropping the price or converting it into a true 2/1 and permitting the family room.I really appreciate everyone's input THANKS!!!

Theresa Harris · Answer

The 2 bedroom is an 'easy' fix as there is presumably a window with egress, so adding a closest is simple. As for the unpermitted structure, that is harder and more costly. I'd get an estimate for the unpermitted family room and how much it would cost to get it permitted. Also how much for an accessory dwelling and ask your realtor how much value it would add to the house. New home owners may like the idea of having a separate place they can rent out to help with mortgage payments.

Sam Shueh · Answer

OPT 2. Anything that is not permitted is hard to sell or even rent to FHA buyers or section 8 tenants.

Juan Catano · Answer

Theresa, I found the average number of days on market on Redfin was 14 days and Zillow 44 days.The agent did agent tours and open house. The feedback he received was that it not being a true 2 bedroom and the unpermitted spaces were a turn off, this is why I'm looking into addressing these issues potentially.

Amit M. · Answer

1- Adding a closet should be a cinch, if the room has space for it. Same for legalizing family room, as there aren’t many code issues wrt egress and windows for a family room. So it should basically be getting a building permit with the city, and having it inspected. But don’t quote me on that- have a licensed contractor look at these two issues. I’d do those, as they will add value to the home. 2- adding the ADU will increase the property value, and give you a 50% rent increase. If you can do that, I think it’s a winner as far as keeping the property as a long term rental. You’ve got a low and protected property tax base. And Livermore is only getting more “prime” as a location...10-15 years ago it as the boonies. Now, not so much :) further out is now considered boonies. So this property will only go up in value, and especially with the ADU, should be a good long term rental. 3- then refi and pull cash out to buy the Oakland triplex. This is how people become rich in the Bay Area- by smartly leveraging real estate. It’s basically this, or winning the lottery with tech stock options. Simple as that.

Theresa Harris · Answer

Hi Juan. What is the average number of days on market for houses in your area and price point at this time of year? Three weeks doesn't see like that long to me. What has your realtor done-agents tour, open house?

Juan Catano · Answer

Hi Theresa, it has been on the market for almost 3 weeks.

Theresa Harris · Answer

How long has it been listed and has your realtor received feedback from the people who have viewed the property?

Juan Catano · Answer

Thank you for the thoughtful reply Dan, you made some good points!