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My husband had a house about 70 miles north of where we live and we rented it when we got married.
It is a 125 year old Victorian farmhouse on 4 acres and is really sweet. It is also a money pit. We just had the whole house painted (still has most of the original boards!), ductless hvac inside (12k), sewer pipes (5k) and the list goes on and on. We barely net positive NOT including repairs so this is not a good rental.We could not sell it during the recession as the area this house is in was one of the worst hit in the country during the recession (Dalton, Ga) and the price tanked. Things are looking up in the area and I’m tempted to get an appraisal to either refinance or sell. Currently the interest rate is 6% and we couldn’t refi without coming out of pocket these past years. We may be able to refi now depending on current value.
Here is the thing: the tenant is moving out at the end of this month and we are deciding what to do. There is some sentimental value to the property for my stepsons but that seems to bother me more than my husband. He would sell in a heart beat. I am inclined to do a lease option on the house but I wonder if there is something else I should look into. Thought about owner financing but I guess I would have to pay off the balance and I don’t want to use my cash for that. We owe $135k on Loan of $165k. Valuation is tricky because of the type of home and acreage.
Any ideas? Thanks!.
Kathleen, here are a few incomplete thoughts that still might prove useful for you.1. Re: the “sentimental value” to the stepsons, whether that implies deeding over the property, selling it to the stepsons, or waiting until they could inherit it some unknown decades away, let me discuss the downside of undivided (aka fractionalized) interests in a property. It’s the on-paper equivalent of handcuffing two previous independent and friendly people together so that if there’s ever a difference of opinion on whether to sell, rent out, bulldoze, or convert to “whatever” use, nothing can happen as long (and this can run for many decades) as there is that difference of goals. It is a not-so-subtle way of turning two people into mortal enemies, who at best speak to each other as little as possible. That’s not a good thing to do to two brothers who should be best friends for life.
It’s also why the real estate industry regards fractionalized interests in a property as a serious value detriment — perhaps in the 20% range.
Personally, I believe it’s much better to educate those boys on how best to protect what they might inherit (whether in cash or real estate or whatever), how to preserve it, and how to make it grow — despite the never-ending assaults on its value from governments at all levels. And they might arrive at different strategies, which the handcuffing from fractionalized interests would torpedo every time. (I am speaking from some bitter personal experience, but I will not mention the details.)
2. If you intend to give owner financing some serious thought, consider that the US government reports on inflation rates (largely from the BLS) have been lying in a major way for decades to minimize the various payouts from the government that are legally indexed to that reported inflation rate. Social Security payouts are one of the largest. The disparity between SS check increases every few years of less than 1% versus actual price increases as monitored by Chapwoodindex.com is monumental. If you look at some of their major city line items, you’ll see annual price increases in the actual 7-10% range, depending. You can easily look up the numbers in the relevant major city they report that’s closest to your property.
The implications of such actual inflation is very serious in preserving your purchasing power when you consider what rate to charge if you sell via seller financing. You would be at war with the relevant tax hit AND the actual loss of dollar purchasing power — not just the bogus BLS reported inflation rate. So as they used to say on a now long-gone TV cop show, “be careful out there.”
–Dee
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the sounds like the ideal property to do a Highest Bidder Sale for the Highest DOWN PAYMENT. You can wrap the underlying loan (you don’t have to pay it off)
Set a fixed sales price and a low down payment ( 3%) then have people fight over who will give you the most down. You should be able to get 20% down.
If you sell, you won’t be responsible for repair costs anymore.
If you insurance and taxes are currently escrowed in your mortgage payment, you can do the same with the buyer. The buyer pays you and you pay the underlying loan. hopefully, with no repair costs, you’ll even cash flow.
This would qualify for an installment sale too!
Did you or hubby live in this house for 2 of the last 5 years? if so, it will qualify for IRC 121 – which means no capital gains taxes o the first $500,000 in taxes for a married couple or $250,000 in profit for a single person.
You could also just sell to the HIghest bidder, pay off the underlying loan, then take the money and run. Get this money pit out of your life forever.
This is absolutely the top of the market. Prices will not go up much more and could start going down this summer. SELL SELL SELL
So glad to hear from both of you. Dee- I hear you on the siblings. My inlaws inherited a retail store with their four siblings and only two still speak. So true about real inflation. They were telling us there was no inflation when milk cost almost $4 a gallon and gas $3…
Jackie- thank you for the advise! I was thinking of doing this before I asked the question, but I really don’t know the mechanics.
Let me run through a scenario. Let’s say I sell the house for $165K through a HBS and end up getting $20K down.
We owe about $135K, so we would wrap the first mortgage and add $10K for a total owner financing of $145K.
Our rate with the mortgage we have currently is 6%. What rate and terms would you suggest? 20 years, 8%? Would you do a 5 year note and a balloon to get them to refinance?Would our wrap trigger the due on sale clause (as in a subject-to?) I’m not too worried about that- but curious. I read your great post about NOT doing subject-to’s but to have the seller wrap the underlying mortgage and you mentioned that the due on sale clause could still be triggered. I assume this is the same situation- but with more money being financed by the seller (me.)
We have not lived there within the past 5 years- so don’t qualify for that tax benefit. Regarding an installment sale, I assume I should hire a good attorney or cpa to structure that? Should I start that process before the sale?
Thanks so much! This could really be turning lemons into lemonade.
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