What are the options with this property?

Question

I have a home in a new Ocoee, Florida subdivision that I purchased for $275K in June when the builder's list price for the home was $298K.  The builder has about 9 units left and the price for my model dropped to $280K.  However, I have one of units with a lot premium because of the view.  The model I have is the largest, lots of upgrades, and a similar one is listed on the MLS for $360K and my neighbor next door is asking $380K for his.  A smaller model in the subdivision is also on the MLS listed at $340K.

My mortgage on the house is $1900 PITI; and will go up to at least $2300 when taxes are reassessed in the next few months.  Mortgage is 100% financed at 6.875%, 5-year interest only.  Rents in the area are $1000 - $1300.  I've had about four months of vacancy, as the tenants who left only paid for 1/2 a month and the deposit $500 (August) and never paid for September.  My payments are current.

I'm aware of how bad a situation I'm in, I'm looking for some ideas on how to get out of this situation with my credit intact.

Focus:
What are some lease option structures that I can consider?
Should I list for $295K on the MLS?
Any other options available to me?

Thanks,

Michael Rossi · Answer

RE-Driven,

In a declining market, the smart money is out in front of the crowd.  I wholeheartedly agree with Wheatie  -  sell this thing NOW before the price drops farther.  If you think it will sell at $275K, lower the price to that number tomorrow and see if you get any bites.  If you don't get any bites in 2 or 3 weeks, then lower the price and bite the bullet.  It's a lot less painful to lose $15,000 today with a price decrease to $260K than to lose $15,000 to$25,000 in mortgage payments and operating expenses over the next year and then be upside down by $30K or $40K as the market continues to decline.

We've had a historic runup in real estate prices and now we're headed down.  Do you really think this is going to be a mild recovery?

Mike

Jon Holdman · Answer

OK, so it sounds like you can rent it for $1300, but your note will soon go to $2300.  You don't say if that includes HOA, so I'll assume it does.  You can manage the property yourself, earning the property manager's cut, and maintenance is covered.  So, we'll assume there are no other expenses than the $2300 payment.  You're $1000 in the hole each month.  You'll need money to cover that deficit, whether it's monthly with a renter or all at once with a fire sale priced sale.  Certainly, you know the area better from me, and if you confident you can sell it in the desired time frame without taking the loss, and you can afford the monthly nut, that's the better alternative.

Lease option might be feasible, but won't be much different on a monthy basis that a pure rental.  But, might generate some up-front cash.  Could talk to Edward or another lender about your re-fi alternatives.

You do have other expenses in addition to the monthly payment.  You have the vacancies, as you've already experienced.  You'll have some make ready expense before the next tenant. Hopefully minimal, but could be significant if you get a bad tenant.  You'll also have the fixup before the eventual sale, since the tenants are very likely to cause wear and tear a owner occupant will want fixed.

Jon

N/A N/A · Answer

Wheatie,

Let's say I sold it for $260K; where do I find the $15K to pay off the balance of the mortgage?

Generally speaking, the home prices in the area are declining while the "better" homes are flat.  However, there is no real comp for this subdivision given the builder has not closed out yet, and the other homes in the area are older and a much different product.

I live ~30 miles from the house so I can stop by every now and then to see it.  As far as costs go, the home is under a two-year warranty so one number fixes everything that would go wrong.  The HOA takes care of the lawn.  I won't have to repair or replace anything for the next two years in this home.

With 9 homes left, maybe two or three of my model, I'm not too concerned with the tactics the builder may entail to get rid of those homes.  Most of them face the back of a strip mall or have rearview neighbors, basically the least appealing lots.  Four of them are the furnished model homes.  And once the builder sells out, there's is only way to buy into the community...there is some opportunity for me to sell at $295K.

Jon Holdman · Answer

I really don't see renting as a very good alternative for this situation.  If the best rent that can be had is $1300/month, and using the expenses = 50% of rent rule, the NOI would be only $650.  Even at 6% IO, the loan balance would have to be about $110,000 to be at break even.  Which would mean the original poster would have to come up with $165,000.  If he or she has that kind of cash, I'd certainly be dumping this one.

The poster mentions four month vacancies and tax increases. And, it sounds like a long-distance situation.  So I think the 50% rule definitely applies.

Just because the market is bad now doesn't mean it won't be worse later.  I think these hyper inflated areas like Florida may well see some big declines.  Remember the NASDAQ in April and May of 2000.  Lots of folks thought it would come back any time.  Instead, we were just at the start of a long, long slide.

I am interested, Edward, in hearing about your loan programs.  I'll send you a mail.

Jon

N/A N/A · Answer

What's your cash situation?

Short of dumping the property at a loss in a severly depressed market, your best bet is to refi now and rent the property.  I have a loan program that can practically assure you of good positive cash flow on a rental.  However, given the 100% purchase, you'll have a tough time finding a lender to refi the deal without a serious cash injection to lower the LTV.

But this may be worthwhile.  If you have the cash or access to the cash, call or email me to discuss how this can work in your favor.

Edward Rodriguez

Jon Holdman · Answer

What's the market like in your area?  I assume its not rising, so is it flat, declining, or dropping like a rock?  How long have the $360K and $360K houses been on the market?  Is there builder offering incentives on the houses they have at $280K?

Knowing nothing more about the local market and your personal situation, I'd say you should price it at $260K and get rid of this loser.  In this weekends paper I saw builders offering $40K in incentives on similarly priced houses.  If your builder has similar incentives, those $280K houses he still has may be closer to yours than you think in terms of upgrades, or may actually be priced at $240K.  When the get to the tail end of a project, builders take heroic measures to dump the remaining inventory.  If you want out you should get out before they start doing that to you.  The ones listed at $360K and $380K sound like they're listed by people living in a different world.  The one that has lots of appreciation.

Jon