I have a townhouse property. Should I dump it?

Question

I have a townhouse property that is both a gift and a curse. Bought as a primary residence in 2018, moved out in 2019 due to mental health issues, refinanced at 2020, and now renting it out. Mortgage + escrow included, the property is generating $800 a month in profit with GOOD tenants. Very clean, very communicative, and they haven't told me but our solid relationship makes me feel like they think I'm a good landlord.

What's the problem? The property was at a LOSS last year. The townhouse is in a small community. Our community is currently involved in a lawsuit with everyone who was involved in building it. The townhomes were constructed with poor quality on the outer side of the buildings. This leads to a lot of issues that we are hoping to be resolved. I will not reveal more details of this case as it is ongoing. I heard people on this forum are willing to give private advice, so if any of you are interested in giving me advice, I can reveal more privately. I would really appreciate it.

Honestly, the only reason the property was at a loss last year was due to repairs to replace the water heater and air conditioning unit. Without those expenses, even with the litigation fees, the property would be at a positive. This also includes a pretty good payment to a property management company to find tenants for me. But I'm worried about the future of this property as mediation continues and then we don't know what fees will come after that so I would like to ask for advice. Should I keep it, or should I sell it to all these people calling us and wanting to buy our property "as-is"? Those are my two choices right now.

I'd offer more information, but due to the litigation I am not comfortable just posting everything online. But I hope to hear from you guys soon! Would going to see some sort of financial advisor help? Is this the type of question you can go to them with? Maybe advice for me would need to know my location, since laws are involved. I can provide that privately as well, for the same reason as above.

Thank you all for reading!

Jason S. · Answer

Hey! 1. So, there are units that have sold in the past year while this litigation was going on. They were going for roughly 25% above what I paid for. My parents are aware and updated on the constant issues with the litigation and my mother recommends I sell while we can still grab a decent-sized profit. My dad and I believe after litigation and repairs are over, it will be worth substantially more. Yes, the positive cash flow is what is mainly keeping me hooked in the game. But the reason I decided to make this post is because we are hit with a pretty big special assessment, which causes me to worry how much more of these we will have. The HOA promises this last special assessment will carry us all the way through mediation, but when I pose questions about after that, they are suspiciously quiet. We are having a local get-together tomorrow where I believe they will be more comfortable presenting more information (aka verbally and not in writing).3. As for the money, we are looking at a second property, this one where I will live in again. However, I already have secured more than a 20% deposit for the budget range of houses I am looking for, so the extra money would just go towards more superfluous things? Like furniture, etc. before the rest being just put into a bank account as savings. My parents are sitting on a very comfortable nest egg and don't invest too much, while I am trying to change that habit for us.4. I only lived there for a year, yes. It was not planned that I would move out, it was rather sudden. Yes, this year while paying taxes I was hit with losing homestead on my townhouse. Unfortunate but it's still very cash flow positive so I was not too upset.5. The area is skyrocketing. We have a lot of money flowing into the city. In 2021, our home values have gone up 30%+. And that's not even accounting forthe crazy rush that happened this year. And my unit is in a very good area, almost in the middle of all the places being build up right now. Every local that has been to my place has loved the location and the very spacious floor plan.6. I do have money set aside for special assessments. In fact, we are being hit with one this month, but we are told it is the last one as far as mediation/litigation is concerned. (More details tomorrow). I am able to handle the assessments, what I worry about is after mediation if we need to take exorbitant measures to raise funds how that would affect the cash flow of the property or its ability to sell.7. I did not know this was an option. I can definitely call my insurance agent for details.Yes it seems there is no right answer here. I am going to see a financial advisor about this this week, maybe they can take a personal look at my finances and tell me if the risk is manageable for me.Thank you all!

Jeff S. · Answer

@Jason S. I would consider how much grief you are experiencing with this property. I was involved in an association similar problems with siding and roofing and as a board member and treasurer twice I sold just to remove myself from the aggravation of it all. If you aren't involved in a major way you are trusting your property to amateur board members and contractors, lawyers and managers that will run up expenses in the worst ways possible.

Jason S. · Answer

Hello Theresa,My current tenants are not interested in buying it, I do know that for sure. They are transient. But I do get calls from local realtors who offer as-is purchases for 25-30% profit, which does seem really appealing.This is why I am considering not selling it.The litigation is heavily in our favor. I expect us to win, with confidence. Right now we are dealing with special assessments. However I have been able to handle them so far. Yes, my savings go down a bit when it's an unexpected hit, but I've been budgeting for them so if I had to be honest it hasn't had much of an impact on my monthly budget beyond that. Therefore, I'm sort of assuming I have the ability to absorb all of the expenses involved in this issue so far, so why panic sell if I expect to see greater returns in the future?That's sort of what I was looking for advice on. But I think at this point, I know everything I can and must make a choice.

Theresa Harris · Answer

Why not sell it? check the tax implications as you did live in it until 2019. See if the current tenants are interested in buying it.

Jason S. · Answer

I don't want to get into it too much, and yes, the future can always surprise you, but we as a community are pretty confident we will win litigation. In fact, as we headed into mediation, the question is how much can we get, and will it be enough, not "Will we win?" So yes, I am still worried about additional capital expenditures, but not for the whole estimated amount. Still, a lot of variables as to how much and how we will handle it.

Rick Albert · Answer

There are a couple of things to point out (considering I'm in a similar position to you with my condo rental):1. What are the units in the complex selling for and are they getting traditional financing? Litigation can be tough to sell and may want a discount. Keep in mind Buyers don't typically pay a premium for a new AC or water heater. It has marketing value. Don't look at comps outside of the complex unless they also have litigation, as it is a non-starter for some buyers.2. You are cash flowing well and there are repairs that are going to happen. Consider doing a reserves study for your own unit where you track the lifespan of everything. Now that you have replaced certain items, you should be good for 10+ years depending on wear and tear, maintenance, etc. It's the law of averages.3. What would you do with the money?4. You only lived there for a year, so there are tax implications unless you reinvest the money through a 1031 Exchange. Just something to think about.5. What does the appreciation for both rents and value look like for the area and for this unit? 6. Although no one can truly predict the outcome of the litigation, could you start putting money aside from the rents if there is a special assessment?7. Have you spoken to your insurance agent about ways to protect yourself. I've been told (and I'm digging into it), there are insurance policies for special assessments. I don't think there is a right or wrong answer, just a personal choice with consequences in either direction. You are getting good cash flow by condo standards and my guess is a great interest rate on the loan. Alternatively selling means you avoid potential fall outs for the litigation that could go either way.

Drew Sygit · Answer

@Jason S.You're assuming the mediation will be favorable to the owners?What happens if it is not and additional capital expenditures are needed?

Jason S. · Answer

Hey Nathan, so you believe even after mediation is over, there will still be headaches involved with the litigation?

Nathan Gesner · Answer

If you are able, I would consider selling it before things take a turn for the worse. The market is at a peak so you can get a good price and escape the stress of this legal fiasco.