What to do with home tenant destroyed?

Question

We have a home in Mount Pocono, PA that is around 2400 sq ft, 3 bedroom, 2.5 baths. Tenants lived in there for about 14 years before moving out last month. The rent it was bringing in was $1450 per month.

Unfortunately this is a long distance rental so we broke rule #1 of being a landlord and depended on a 3rd party to provide us with updates on the property's condition. Well when we finally saw it first-hand it was far worse than what we had been told.

The tenant was allowed one cat and when we arrived there were at least 10 of them. We expected some carpet damage and that a repaint would be needed but in reality the wood floors are destroyed, windows need replacing, all carpets need to be replaced, cabinets require replacing or refinishing, and the grounds need landscaping.

Originally our plan was to fix this home and sell it. Realtor tells us comps go for around $160k but we still owe money on this home and we're probably looking at $20k-$30k in repairs. Since we can't oversee any renovations I'm wondering what our options might be here? Is lease/purchase still something that is done now? Are investors willing to take on a project like this when we still have a mortgage on the property? If so how do we find any interested parties?

Johann Jells · Answer

Buyers don't care about your debt, even if you're underwater. It's a "fixer upper", so price it as such and sell for what you can get if you're unwilling to repair it yourself. It's not that complicated!

I'm curious, did you own this place for all this time and not visit?

JD Martin · Answer

The Poconos has always been a tough market - I spent some years there as a kid. Did you own it for the past 14 years or was this tenant already in place? Not that it makes any difference either way but I am curious.

You might consider pursuing some of the egregious damages the tenant did if you can prove the condition of the house before they started renting. Otherwise, you probably are going to have to eat those costs.

Creatively, you might find someone to partner with to cover rehab costs, if the property rehabbed will bring in more than you owe, the difference becomes the partner's profit. So if you owe 150 and fixed up it can sell for 185 and it needs 20k, the 10-15k becomes your partner's profit and you get out from under the property without having to put anything in. A 30-50% cash return is pretty attractive to some people. But you'd have to find a partner that could be on the ground there; that's never going to work from Charlotte.

Tatyana M. · Answer

@Fernando Pena if you are thinking of selling, do it fast. Monroe county is doing a tax reassessment, starting 2019 school year, and by the looks of it, the tax bill might be significantly higher (some say ~40% more). it might lead to a higher number of houses on the market. PM me if you need an agent here.

Chris K. · Answer

@Fernando Pena

If the tenant intentionally or willfully damaged your place, your insurance might cover some of it. But nothing you described sounds like such a damage. It just sounds like it's gotten old over the past 14 years.

Just out of curiosity, how much upkeep and maintenance did you do during those 14 years? Have you been setting aside some of your rent for regular repairs and CapEx items? I would say over the past 14 years, you should've set aside around anywhere between $25k to $40k in CapEx reserves. And that figure doesn't include any repair & maintenance reserve. Let's say you should've set aside around $120 a month over the past 14 years --- you are looking at around $20k.

If so, one could reasonably expect to have spent anywhere from $45k to $60k in repair/maintenance/CapEx items in this investment. If you didn't spend that amount in the past 14 years, then the bill might be coming due.

If you sell it at a discount, do you have an underwater mortgage?

Disclaimer: While I’m an attorney licensed to practice in PA, I’m not your attorney. What I wrote above does not create an attorney/client relationship between us. I wrote the above for informational purposes. Do not rely on it for legal advice. Always consult with your attorney before you rely on the above information.

Peter M. · Answer

Another option is to find an investor who is willing to wrap it or take it subject to your loan. Just be careful because usually subject to deals don't obligate the buyer to keep paying the mortgage. If they default it will go on your credit. There are plenty of "we buy houses" websites. Just start calling ones in the area and get their best offers.

Fernando Pena · Answer

@Randy E. - That is correct although we have had to finance a driveway being paved, a new roof, and new siding because of a wind storm. So there's a smaller 2nd mortgage on the property. The challenge is that once we sell it as a fixer-upper the sale price, as you mentioned, goes WAY down because of other properties in the area with the same issue. So just trying to figure out next best steps here.

@Dick Stevens - Gross profit is about $110/monthly after all expenses. The reason for this is because the home was not originally intended to be a rental. We purchased it for our use but ended up relocating south. Instead of selling for what would have been a modest profit several years ago we kept it as a rental. Rent started at around $1200 but has crept up over the years.

@Dennis M. - Guilty as charged. Yes I realize this is completely on us for not managing our property properly. Not an excuse at all but we did have a baby 5 years ago and he was a difficult one so heading on a 600 mile road trip to see the house was never prioritized. Looking back I know we could have made time but it all flew by so quickly so here we are on the verge of losing any profit or value because of our inaction. And yes, we know much better now and make sure to keep anything we own much closer to us and under more supervision.

Unfortunately the market there isn't so great. Or at least compared to Charlotte where we live. It seems that there are a number of fixer-uppers and foreclosures out there that tend to suppress values. We'll figure it out but I wish we would have done things differently at this point (of course!) because the situation has no easy solutions except to sell for a loss.

Dick Stevens · Answer

Curious to know your monthly net profit on the $1450 in gross monthly rent?  Was it rented at $1450/month for all 14 years of occupancy?

Randy E. · Answer

You've owned it for at least 14 years, maybe more, right?  That mortgage has to be pretty low right now.  Forget $160K for a comparable house in good condition.  If you're estimating $30K in repairs, don't quickly assume you can price it as-is for $160K minus $30K, because to an investor it will have to sell for much less, and to someone who plans to live there it will also have to sell for much less.  Your house is not in good condition.  Price it to sell as-is, meaning a LOT LESS than $160K.  If you price it correctly, it should sell soon.  If it doesn't sell soon, it is priced too high.

Fernando Pena · Answer

I'm sorry I should have added that we're very likely to be upside down with what we owe and what someone will want to pay for this home. That's why I have a dilemma on my hands.

Unfortunately as for visiting the property - it has been about five years. During that time the tenant was hurt on the job and went on disability. Then he had his adult children and their families move in so things go ugly real quick.

Thanks for the heads up about the repairs. We were thinking it would probably be more but just based on initial assessment that's the figure I had in my head. We still don't know what's happening behind the walls.

I know we made all of the rookie mistakes on this one and now have to pay the ultimate price.

What to do with home tenant destroyed?

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