Newbie...what to do with my old house?

Question

Hi, I am new at all this. After years of remodeling my husband's 100+ year old house by ourselves, we are finally starting to work on the house I have owned for 15+ years. Because of major foundation issues, I have not yet decided what I am going to do with it. My options that I know of are: #1: Repair the foundation, rehab the house, & sell it to a normal buyer for a good price, #2: Repair the foundation, rehab the house, and rent it out for a good price, and #3: Sell the house as is to an investor with alternate financing.

I am interested in becoming a real estate investor/ landlord, but I am terrified of losing time and money on this house. Then again, I have already lost time and money on this house, so why not make more mistakes on it? The house is in a great area and is a good house other than the foundation problems (which will probably cost $20K+ to repair).

I do like the idea of having multiple sources of income in retirement. I hope this wasn't too much info for an intro.

Susan Herschell · Answer

@April Friedl. Yes, our buyer was able to get a conventional loan from a bank.I like @Brian Adzadi’s idea of selling to a flipper or someone who looks at these imperfections as opportunities and is possibly coming to the table with a cash or private money offer. You might have to tweak your marketing strategy to attract an investment-minded person rather than the home-buying market. Good luck with whatever path you choose.

Brian Adzadi · Answer

@April FriedlSo why not avoid that route and sell the property straight to either a wholesaler or a flipper. Sell it at a price which covers the whole mortgage and gives you another 10-20K in profit. For example you sell the property for 130K cash to a flipper. The flipper stands to make a 20K to 30K profit after investing 40K into it. You walk away with 10-15K net profit to invest in better quality properties. If the market is as hot as you say it is, a foundation repair is but a bump in a road to a flipper.

April Friedl · Answer

Thanks for your insight Susan. Luckily my situation is not quite as bad as your situation was, but your story is very helpful. Do you know if the buyer of your property was able to obtain a federally-backed mortgage on the property? That is the problem I am going to run into with selling my house unless the foundation is repaired first. I would be doing so well on this house financially if the foundation walls had not moved on me. I should have known the risks, but I was so young and naive when I bought this house.

Susan Herschell · Answer

Hi April, Welcome to the world of real estate investing. It’s a crazy but very rewarding ride. Your post reminded me of a very similar situation my husband and I had with our first home we purchased together that I wanted to share in hopes to give you some perspective . We owned a 2 bed 1 bath that we purchased in 2006 and shortly after buying it we learned from the city records that the 200 SF bonus room was not a legal addition and the walls were basically poorly mortared cinder block on a concrete floor that was covered up with drywall to make it appear like a finished space. The foundation began to crack and we learned that if we wanted to do ANY remodeling to the house, which we were planning to add a bathroom to add value, we’d have to bring the entire room up to code which basically involved tearing it down and starting over. We lived with it for a while and kept it as storage/ laundry, but it was always the black-eye of the property. We eventually moved on to a larger house, but because we we were still in a down economy we kept the original house and rented it out for a few years hoping the walls didn’t come crashing down on our tenants! It was always a pain point, but it was a bad time to sell. We broke even for a few years, but then the market got really hot. I’m not sure what it’s like for you in your area of Texas, but Portland, OR is a boom town right now. We decided to capitalize on this and put the house up for sale. Our strategy was that buyers in this market are more willing to overlook imperfections like foundation issues so now is the time to sell. We were very careful to disclose EVERYTHING with the buyer so that they were going in eyes wide-opened. We got an offer on the house in the first week and was able to do a 1031 exchange and purchased a multi-unit apartment building that generates more cash flow than the original house ever did PLUS we can sleep at night knowing that the property is in good shape and not about to fall down on our tenants! Based on my experience , Id sell it now in this sellers market and buy up into something that will generate cash flow and not a liability. Hope this helps!

April Friedl · Answer

Thanks for you reply. I still owe $40,000 on the house @ 4.125% interest. I bought the house for $109,000 15 years ago. It might sell for between $190,000 & $200,000 with a full renovation in the current market frenzy, but may need another $20K of work beyond the foundation repairs. I can rent it for $1,300/month or slightly more. Current P&I+tax & ins =$800/month, so it will not cash flow for ~6 years when the main loan + rehab work is paid off. I am looking to retire in 4 to 6 years (with additional savings), so I don't need it to cash flow now as long as it cash flows well later.One thing I do worry about is the possible stigma associated with foundation repairs. Could a mortgage be denied even if a foundation has been repaired by a reputable company and the work comes with a warranty? Will it hurt the selling price? Many older houses in my area do have foundation issues due to heavy clay soil, water, and the freeze and thaw cycle.

Michael Lee · Answer

Hello April! That is a tough one to answer, especially not knowing your age but I will assume you are in your mid-twentys. One way to go is a home equity loan and use those funds to repair you house and, hopefully, the rent you could pay that debt with rent money. Assuming you are young and are a long time investor borrowing from that house and renting it out. Right now loan rates are pretty low a"nd it might be a good time to take out a loan.I think an investor will probably "low ball" offer on your house that would make you lose most or all of your equity. Hopefully, the home debt will be covered by your rent collected and you will not have to pay any of that out of your pocket. Even though you might take a home equity loan it will be forgotten and your first deal might be profitable. Make sure that your subject house is in a good rental area that there is good demand for your house.If you qualify for a "house hacking" loan on your first investment. You also did not say what your type selection is, makes it kind of difficult to answer what you should do and if you have saved any money for a down payment. If you are thinking about a "house hacking" loan on a 1 to 4 unit place that only requires a 3.5% down payment but try to get on 3 or 4 unit place under the same roof, which is one of the parameters of the FHA loanIf you need any short term return, you might try a Fix and Flip type with wholesaling and /or a quick flip. All three work together well. You might see what kind of price you might on your current house or taker a small loss on it and just walk away. It depends on if you can just forget about it and move on. If its in a good neighborhood it might increase its value on a long term basis. Good luck to you!

Brian Adzadi · Answer

@April FriedlKey question here would be, do you own this free and clear? Meaning no mortgage or tax liens, etc. If that is the case then I would personally go with option 2. Minus the day to day expenses, majority of the cash flow will be going into your pocket instead of a lender, within 1-2 years you would have recouped costs for the foundation repair and rehab. If the house is still mortgaged, I would only go with option 1 if the market is hot and I know it will sell so well that not only do I recoup the repair and rehab cost but make another 10K or more upon sale of the house. However, if that is not the case, where upon sale of the property I may just be breaking even after repair and rehab then its not worth it and I will go with option 3. Hopefully other members may have a better suggestion for you. So far, that is my take on your options.