How to decide when to cut your losses?

Question

Hey y'all

I bought a house in August, renovated it and... The market kinda froze on me.

When I bought it I calculated an ARV of 300K, and got an appraisal for 275K (for the condition it was in, pre the 80K rehab).

Looking at comps now, I'd be lucky to get 220K for it.

I'm trying to decide if I should wait, or get out and cut my losses. Maybe if I sell now I lose 10K and in a year I lose 100K? Or maybe the market will bounce back and if I wait six months I can make 60K.

I do have a hard money loan on this. Rent and refi won't really work, rents are kind of low in that neighborhood.

Best would be if I had a crystal ball to make decisions, but as mine isn't working, I'll take your advise on how to decide these things.

TIA!

Obed Calixte · Answer

I can imagine this is a challenging decision to make.

My thoughts:

When hope is a key component of the plan of action, it is time to cut losses. We are entering the prime buying season - find other local investors and get their interest.

With that said, there are a couple things that are unclear from your post.

- The as is appraisal was for 275K,yet you are now expecting that it would be a reach to sell for 220K. That is a steep decline in value. When was the appraisal done? and are you certain that the appraisal is based on AS IS value and not subject to value (ie value after repairs)?

Akin Okegbile · Answer

Post the listing, Any local investor would be  able to tell you if you were fleeced in the acquisition, Birmingham is notorious for being different street to street. 500k houses one street over from 100k houses.

Bill B. · Answer

The Birmingham market is down 25-30% in the last 6 months? Ouch. It has to be the worst market in the country.

That being said…

Can you sell your current primary for a decent price and move in to this property? (Get an owner occupant loan.)

Can you seller finance it for more?

Could you rent it by the room?

Except for the mental pain losing $10k isn’t THAT much worse than breaking even. I find it hard to believe such a bad market could get worse, but only if you know why it’s doing so poorly compared to the rest of the country. Is it something that will pass? Is it a market like much of the country where prices might be 5-10% higher in April? (Fix it up, take beautiful pictures and be first to hit the spring market?)

Peter Mckernan · Answer

I would really get with someone in that market that can dig in see what is going on with the market (comps), and also maybe the rehab was not as good of a job of what the market is yielding at 300K property. Did you put in a kit shower and the market is better with tile shower walls.. Did you put in the carpet when all the properties in the comps you pulled are selling with luxury vinyl.. These are things I would go over with the agents, and get the in there to see what is going on.

Then if you still 100K off, I would start dropping the price in a big way to get to an even playing field.

The last tip, I would also see about the first option above I mentioned and add in staging if you do not have it.

Couple listing options: range pricing, new photos, cancel and re-list, and stage the property.

Jay Hinrichs · Answer

well you dont say how much you have in it..

but if you can sell now and lose 10k and get out of a HML that would be my suggestion.

HML  if they go into default interest and you could look at losing quite a bit especially if your HML is one of those that are not forgiving and wont give an inch on what they are owed.

Evan Polaski · Answer

@Hemed Tov, like most posters here, I am not a Birmingham expert.  Things that would be helpful to know: how much are your holding costs?  Do you have capital to float that if you did decide to hold?

At the end of the day, losing $10k is really not a lot in the grand scheme of real estate investing, and given the seeming high volatility of this market ($275k to $220k, presumably in a matter of months), and the generally high monthly cost of HML, I would get out quickly and think of the loss as the cost of education.

At least in my area (Cincinnati, OH) I don't see the market dramatically improving even as we get into the spring buying season, and, honestly, I only see mortgage rates continuing to climb for the foreseeable future, taking more and more buyers out of the market.

Ty Coutts · Answer

Given the market conditions and your hard money loan, it might be wise to first calculate your monthly holding costs, including loan payments, taxes, and maintenance. If you're losing money each month, selling now to minimize further losses could be the best option. However, if you believe the market could recover within six months and you're willing to take on that risk, waiting might yield a better return. Since renting or refinancing won’t work, your decision comes down to how much you’re willing to lose in the meantime versus the potential for a market rebound. Consider consulting a financial advisor for a more tailored plan. Though you have received a bit of advice already I hope this adds more insight. If ever in the future you're in need of help deciding between finance options, feel free to DM me.

Ko Kashiwagi · Answer

Hi Hemed,

Did your realtor and investors agree with your comp analysis (both on the initial and current)? I know a good amount of Birmingham investors and I know market is slow right now but I haven't heard that much of a decline in the market. It might be worth rechecking numbers and even seeing if the property sells closer to what you need.

1. Refi into another bridge - if it's fully renovated it shouldn't be able to get 75% LTV and even cash out if you want, or you can do rate and term. You could even rent it out to make sure you're not losing while you wait for it to sell

2. Is it really not possible to get DSCR refi? Generally houses worth 200-300k rent in my experience close to 1750-2250 in AL if you can get section 8 assuming you have 3-5 bedrooms

3. Sell subject-to - let someone else take over the hard money loan

4. Sell and cut the loss

Hemed Tov · Answer

Thanks, I don't think the rehab is the problem - I only had one showing and it ended with an offer (the problem with that one was financing).

Hemed Tov · Answer

Thanks everyone, I appreciate the time you took for this!

The section 8 might be a good way to go, I'll see what the rents for that are like. I'll look at seller finance as well. Always good to get new ideas!

I don't think the whole Birmingham area is down, I think it's really by neighborhood/suburb, but certainly anywhere I have property is down. I'm told the above 400K market is blooming and so is the under 100K. Buy yeah, prices might be coming back in April, who knows...

How to decide when to cut your losses?

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