Do i hold it or sell for a loss and move on?

Question

Hello BP community,

I wanted to share a "not so great" experience with you and see how you would handle it. I am a newer investor and purchased my second unit at foreclosure over 18 months ago. Without going into great detail, I will summarize some of the challenges this property has presented.

- Bought it on line at auction

- used hard money to satisfy the mortgage.

- Took months to pay off because i had to track down the relatives of the deceased to get their consent.

- Had the unit under contract for sale

- pre-sale inspection found moisture in the wall.

- needed to get out of the hard money and refinance with a bank.

- couldn't refinance because there was an issue with the documents the daughters of the deceased signed

- had to reach back out to them again.

- refinanced the property with a bank. (unit appraised for $217,000. Took a loan for $156,000)

- had a mold remediation company come in, half of the 1200 sq ft unit had to be demo'd

- General contractors are currently installing a new kitchen, new bathroom and half of the living space.

Question is, what do i do with the unit now that it is almost complete. At this point i will need to sell the unit for $245,000 just to break even. The realtor feels that the market has slowed in the area and i will only get about $220,00 which would net me about $205,000 after closing costs (a $40,000 loss). I could rent the unit but between HOA, Property Manager and mortgage, the unit would lose about $150/$200 a month.

If you found yourself in this situation would you sell now and take any cash from the deal ($45,000-$50,000) to purchase something else and write this off? Would you Rent it for a year or so and list it n a year or two in hopes to secure a better sale price, OR have you been in a similar situation and found a creative solution to minimize losses?

Thanks in advance,

-

Tyler Gibson · Answer

@Len Miller everyone has a different opinion but I would keep and rent but I would manage myself. That should make it closer to breaking even. Ride for a few years and then you should be above water again unless you just want to move on. I personally would not be ok with the loss.

Alan Grobmeier · Answer

@Len Miller I live in Phx & have managed a property in San Diego for over 10 years.  I use a home warranty as my first line of defense.  If it’s all rehabbed, all you gotta do is spend a weekend (or maybe 2) to find your tenant.  I realize that phl-Tpa is further than Phx-San, but I think you can save money overall & a lot less headache.

Best of luck!

Bill B. · Answer

if you don’t have another deal lined up for the money hold it. It may be cashflowing negative $150-$200/mo but that doesn’t mean it’s losing money. It probably paying that much towards the mortgage so you’re breaking even while piling up tax losses from depreciation and moving towards long term capital gains. This is especially true if you have little to no money tied up in the deal.

Alan Grobmeier · Answer

@Len Miller, is there a reason you can't manage it yourself?  It sounds like a nice place.  That should make it easy to rent, get paid, find the right type of renters, etc.

Alan

Dan H. · Answer

I am the contrarian to the other posts.  1 year hold is unlikely to result in significant appreciation (rent or market) and little equity pay down.

What is a virtual certainty it the tenant will cause wear n tear against the just rehabbed unit.   The quickest loss from wear n tear occurs immediately after the rehab.  The likely result is negative cash flow each month of the holding, a re that has depreciated due to wear and tear, and the RE has experience little market appreciation or equity pay down. the only way I would consider renting it is if your time span was significantly longer.  At least 3 years, but 5 years would be better.

Sell if your time span is truly a year or so.  No brainer!

Good luck

Len Miller · Answer

Thank you again to everyone who replied, I greatly appreciate your taking the time to share your opinion. I will start teh process of getting it rented. Thanks again!

Jason Graves · Answer

@Len Miller

I agree self manage.   With depreciation and a little appreciation you will break even.

I would not sell at that loss

Brent Paul · Answer

I don't see any reason you can't be your own PM and at least break even each month on the property.  Rent the property out and ride it out.  The renter will be paying down the loan while you wait for the value to rebound.  Plus you have tax deductions as well.  It's not a total loss.  I know of many people who have turned similar situations around by just renting the property out until the value gets closer to what they want.  The only uncertainty is when.  I would hope that in 10 years time between the principal being paid down by the tenant, appreciation and cash flow you would be fairly close to breaking even.  It's not ideal but it's better than losing your house like I did.  It takes a long time to rebuild your credit once it gets tanked.

Lynnette E. · Answer

I would keep it and manage it myself, and assume that maintenance and capex would not be much as everything is pretty much rehabbed, so it may not actually be a monthly loss.  Then with depreciation, after taxes, it likely would be fine.

Reassess yearly.

Len Miller · Answer

@Bill Brandt @Tyler Gibson Thank you both for your input, i value the opinion of people who are more experienced than myself. You both make great points, I thought for sure that i would need to cut my loses but there are benefits to renting that i wasn't considering.  Thank you again.

Do i hold it or sell for a loss and move on?

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