Author Topic: selling my second house  (Read 795 times)

frugalnacho

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selling my second house
« on: July 13, 2017, 09:09:36 AM »
Back story: I purchased a house in 2009 for $67k.  Lived in it for 3 years, then moved into my wife's house.  My family (mother, father, sister, sister+daughter) was getting their home foreclosed on so I let them move into my house.  Rent was far below market value, they just had to reimburse me for the mortgage.  They lived there for the last 5 years.  They haven't destroyed the house, but they didn't maintain it nearly as well as I would have liked.   I'm glad I was in a position to help my family, but I greatly regret ever letting them move in.  Long story short, I've asked them to leave, they have a new place and will probably be leaving within the next month.

Zillow zestimate for the house is $150k.  From other comps in the area this seems a little high for the condition it's in, but accurate if it was all fixed up and move in ready.  I don't like the stress of renting the place out, though I would be much happier if I was getting fair market value (probably $400-500 more than I'm currently getting).  I still think I'd rather just sell it and be done with it since I have so much equity in it (I owe $35k on it). I think I probably need to fix it up (though if the market is hot enough than I can just reduce the price by an equal amount and just let the buyer deal with it I will do that).  I  haven't spoken to a realtor yet, but I have some idea of some things needing to be fixed:

Replace glass sliding door and address the leak at same location
Update kitchen (new counters, maybe new cupboards)
new flooring throughout house (currently carpeted)
replace bathroom vanity
lots of minor fixes to door handles, etc.
fresh paint throughout

I don't have the cash on hand to make these repairs, but I should have more than enough equity in the house. Will it be an issue for me to get financing from a bank or credit union seeing as how this is my second house and not my primary residence?  I have no intention of renting it out, I want to sell, but which answer is more likely to get the bank to lend me the money necessary to fix it up?  It seems like a no brainer for my credit union to lend me the money to fix it up since I have A++ credit score and can use the house as collateral, but sometimes mortgages and lenders don't make any sense so I wanted to seek advice here first.

I'm also a big proponent of DIY and sweat equity, but seeing as how I work a full time job, have a baby on the way in October, and will still be paying the mortgage for every month until it's sold, I think I should probably hire out all the repairs to get it done and on the market ASAP.  Saving $500 by DIY but paying $700 for mortgage doesn't make much sense to me, especially since I have to put in all the effort.

I'm thinking I might need to dump $20-30k into the house, but then should be able to sell it for $150k.

$150k - 6% realtors fees - $30k loan - $35k mortgage = $76k

The mortgage on my main residence is $46k @ 5.5%, so my plan is to use the proceeds from the sale to eliminate my main mortgage.  That leaves me mortgage free with about $30k in taxable investments.

Any thoughts or advice on this? 

frugaliknowit

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Re: selling my second house
« Reply #1 on: July 13, 2017, 09:43:53 AM »
I like your plan.  Depending on the market the home is in, I'd be careful about putting too much money into updating the kitchen.  I've heard there are new processes for having cabinets painted that make them look great.  Unless the counters a pretty "chewed up", maybe not replace them.  Maybe carpet replacement would be cheaper than new hardwood in at least some of the rooms (not sure what you had in mind for flooring...) and again depends on the market.

Certainly, you've got tons of equity for a Heloc.  Good luck:)

frugalnacho

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Re: selling my second house
« Reply #2 on: July 13, 2017, 10:04:53 AM »
I like your plan.  Depending on the market the home is in, I'd be careful about putting too much money into updating the kitchen.  I've heard there are new processes for having cabinets painted that make them look great.  Unless the counters a pretty "chewed up", maybe not replace them.  Maybe carpet replacement would be cheaper than new hardwood in at least some of the rooms (not sure what you had in mind for flooring...) and again depends on the market.

Certainly, you've got tons of equity for a Heloc.  Good luck:)

Yea I'm not gonna rush in and dump a bunch of money in.  My whole thought process is that I will recoup close to 100% of what I put in, and be able to sell it that much faster.  If that's not true, then I won't bother putting the money in for a particular repair/upgrade.  I will be discussing it with a real estate agent.  I will do whatever makes the most financial sense.  I just don't know exactly what that is yet.

It has carpet right now. Even in the kitchen/dining room.  When I bought it I thought that was strange/gross, but thought fuck it I can live with it it's not that big of a deal.  And now 8 years later is still has that thin gross berber in the kitchen.  I did replace the carpet everywhere in the house expect the kitchen when I moved in.  But that was 8 years ago, and my family is dirty and has multiple pets (2 dogs, 3 cats, multiple birds etc, plus I consider my actual family animals too).  I'm fairly certain it will be worth it to just recarpet the entire house.

frugalnacho

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Re: selling my second house
« Reply #3 on: July 15, 2017, 01:19:46 PM »
I spoke to my credit union.  They will do home equity loans and mortgage refi on primary residences only, which we can't do.  My wife bought the house (our primary house, not the 2nd one up for sale) before we were married and was incentivized by the county reducing the price of the house.  In reality the county gave her a mortgage for half the purchase price of the house ($94k purchase, so $47k mortgage from county) that is interest free and only needs to be repaid back if 1) sell house, 2) rent out house, or 3) take out home equity loan.  So if we take out an equity loan we owe $47k back immediately, so not really an option.  They approved me for a $25k unsecured loan nearly immediately, but won't let me use the house with $100k+ equity as collateral on a loan, which seems totally backwards and crazy to me.  They claim it's the law (that they can't do a loan on a house that isn't a primary residence), but I don't know exactly what law they are talking about and I know financing rental properties is a thing.

It seems like my only real option from my credit union is taking a personal loan at 6.75%.  It would be roughly $1,340/mo for a 24 month $30k.  The mortgage is $705 right now, taking it to $2045/mo I'd be responsible for paying back.  $30k is likely an over estimate of what I'll need, so I can reduce that accordingly, but that doesn't seem like a great rate and I don't know that I'm comfortable with an unsustainable $2k/mo bill hanging over my head in the event the house takes much longer to sell than anticipated.

I also have a 401k that I could borrow from.

Any other options I should be getting into? Or any general advice?


dilinger

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Re: selling my second house
« Reply #4 on: July 16, 2017, 04:22:11 AM »
I'd start by talking to a (trusted) realtor.  They might be able to give you a good idea of the value of fixing up the place.  Maybe it'll turn out to not be worth it, in the realtor's opinion?

Dicey

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Re: selling my second house
« Reply #5 on: July 16, 2017, 05:01:08 AM »
Off the top of my head, I'd say you're underestimating the cost and time it's going to take to fix the place up.Skimping on materials might not give you the best returns for your efforts,

Have you looked into a cash-out refinancing of the mortgage on the rental? The longer time line will make the payments much lower until you sell. Typically, lenders charge about 1/2 point more for non-owner occupied property, which is way better than what your CU is offering. You could also classify it as a second home and save a bit of interest that way. Your plans to sell at some point do not need to be discussed with the lender. Just be sure the new loan has no pre-payment penalty. We bought a property we explicitly intended to use as a rental. We went through Chase Bank and the Loan  Officer insisted we characterize it as a second home to get a lower interest rate.

I agree with dillinger. Speak to a realtor or three. They often have trusted contractors they can recommend, and can help you determine the optimal scope of work. Also, consult a tax professional. You need to consider the tax implications of both selling the house, and any IRS backwash you could get from renting the property to family for below market value. They do not like that.

Finally, I can understand your disillusionment with landlording, but understand that your most mustachian option might well be to fix it up and rent it for market value. Saying "I don't wanna be a landlord any more" could be the most expensive option in the long run. I'm not saying you must keep this property, but make sure you consider all parts of this equation before making an expensive decision.

ETA: I suggest you move your question to the Real Estate and Landlording thread for more advice.
« Last Edit: July 16, 2017, 05:04:25 AM by Dicey »
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swaayze

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Re: selling my second house
« Reply #6 on: July 16, 2017, 09:13:41 AM »
With that kind of equity you could try to stick it on the market quickly and offer a cash allowance at closing out of your proceeds. That allows buyers to get into the place with less cash and/or choose their own counters/flooring etc. However I suspect most folks will want move-in ready, but maybe that's offset by the lure of cash and ability to get into the place prior to summer's end (a big deal if your place is family friendly).

If it doesn't sell quickly then you could pull it off market, pay someone to freshen it in a timely manner, and re-list at the higher price.

I'm no real estate pro though....just a thought to run by your realtor.

frugalnacho

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Re: selling my second house
« Reply #7 on: July 17, 2017, 09:22:39 AM »
Off the top of my head, I'd say you're underestimating the cost and time it's going to take to fix the place up.Skimping on materials might not give you the best returns for your efforts,

Have you looked into a cash-out refinancing of the mortgage on the rental? The longer time line will make the payments much lower until you sell. Typically, lenders charge about 1/2 point more for non-owner occupied property, which is way better than what your CU is offering. You could also classify it as a second home and save a bit of interest that way. Your plans to sell at some point do not need to be discussed with the lender. Just be sure the new loan has no pre-payment penalty. We bought a property we explicitly intended to use as a rental. We went through Chase Bank and the Loan  Officer insisted we characterize it as a second home to get a lower interest rate.

I agree with dillinger. Speak to a realtor or three. They often have trusted contractors they can recommend, and can help you determine the optimal scope of work. Also, consult a tax professional. You need to consider the tax implications of both selling the house, and any IRS backwash you could get from renting the property to family for below market value. They do not like that.

Finally, I can understand your disillusionment with landlording, but understand that your most mustachian option might well be to fix it up and rent it for market value. Saying "I don't wanna be a landlord any more" could be the most expensive option in the long run. I'm not saying you must keep this property, but make sure you consider all parts of this equation before making an expensive decision.

ETA: I suggest you move your question to the Real Estate and Landlording thread for more advice.

I might be under estimating it.  I know it's going to be a bitch to fix up everything in such a short time frame, but nothing really seems like that major of a job.  I think a kitchen reno will be the most costly and time consuming, and it will depend on exactly what we end up doing to it.  I'll have to get advice from realtors/contractors I know once they check it out.

I have looked at all kinds of mortgage/financing options for the second house with no luck.  Many companies flat out refuse to do anything other than your primary residence, and the ones that will deal with non-primary houses won't touch such a small mortgage.  I haven't approached them about a cash out refi, but I approached tons of them in the past 7 years trying to get the rate down (it's around 6%) and I can't because the balance is so low.  They all tell me they won't even bother refinancing a mortgage with less than $100k on it, let alone my piddly $35k mortgage. 

It is currently classified as a second home (It seems many lenders, like my CU, classify every house that is not your primary residence as a rental regardless of how it's actually used - vacation homes are classified as rentals to them).  I moved out, and my immediately family moved in.  They reimburse me (approximately) for the mortgage and water bill.  So it's not a rental and I don't report rental income, nor take deductions or depreciation, it's just a second home.  I've made numerous threads on here and bogleheads about the situation and talked to a lot of people.  I've been filing taxes for 5 years this way and the IRS hasn't said anything.  I can't see why they would care since I'm not making any money, and any capital gains from the sale they are going to tax anyway.

I haven't technically lived there in 5 years (which should be verifiable based on my voter registration and drivers license address), so I think I am going to get stuck paying capital gains.  Our income is pretty low though, so I don't actually think we are going to owe that much.  I'll be making another thread in the real estate (or maybe that should be in taxes?) section to clarify that and make sure I have a good understanding of it.

I'm open to running the numbers on a rental/sell, but it seems like with so much equity in that I might be better off just cashing out?  If anything it seems like selling this house, and buying a new house where I am much more leveraged and have a lower interest rate, or possibly using the payout to put a down payment on two houses, or maybe a duplex or a multiplex would be a better option.  Even if it works out that it cost me a little money in the long run to not have to be a landlord, I think I would be fine with that.  I realize it may not be the most optimal choice mathematically, but I'm not a good people person and I hate dealing with people.  I am much happier owing passive investments.  I understand it's an emotional thing and my personality, but I would prefer not to be a landlord.  Obviously I could be swayed by math if it's overwhelmingly in my favor, but if it's anywhere close to a toss up I would opt to sell.

dilinger

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Re: selling my second house
« Reply #8 on: July 20, 2017, 01:42:31 AM »
It is currently classified as a second home (It seems many lenders, like my CU, classify every house that is not your primary residence as a rental regardless of how it's actually used - vacation homes are classified as rentals to them).  I moved out, and my immediately family moved in.  They reimburse me (approximately) for the mortgage and water bill.  So it's not a rental and I don't report rental income, nor take deductions or depreciation, it's just a second home.  I've made numerous threads on here and bogleheads about the situation and talked to a lot of people.  I've been filing taxes for 5 years this way and the IRS hasn't said anything.  I can't see why they would care since I'm not making any money, and any capital gains from the sale they are going to tax anyway.

Technically, you ARE making money. Not on the mortgage interest, obviously, but they are paying off the principal for you. The IRS will tax your capital gains on the house sale, but they're not taxing the initial cost of the house.  From my reading of IRS documents (and note that I am not an accountant - I've just considered complicated rental options), even just someone paying off a mortgage should be reported as income.

That said, it's probably not worth the IRS's time to come after you for such a small amount of money, and I'd probably do the same as you in this situation.

slappy

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Re: selling my second house
« Reply #9 on: July 20, 2017, 07:11:43 AM »
How much would it sell for if you didn't do the updates? If you dump $30k into it, is the selling price going to be $30k higher than if you didn't? 

frugalnacho

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Re: selling my second house
« Reply #10 on: July 20, 2017, 08:16:12 AM »
It is currently classified as a second home (It seems many lenders, like my CU, classify every house that is not your primary residence as a rental regardless of how it's actually used - vacation homes are classified as rentals to them).  I moved out, and my immediately family moved in.  They reimburse me (approximately) for the mortgage and water bill.  So it's not a rental and I don't report rental income, nor take deductions or depreciation, it's just a second home.  I've made numerous threads on here and bogleheads about the situation and talked to a lot of people.  I've been filing taxes for 5 years this way and the IRS hasn't said anything.  I can't see why they would care since I'm not making any money, and any capital gains from the sale they are going to tax anyway.

Technically, you ARE making money. Not on the mortgage interest, obviously, but they are paying off the principal for you. The IRS will tax your capital gains on the house sale, but they're not taxing the initial cost of the house.  From my reading of IRS documents (and note that I am not an accountant - I've just considered complicated rental options), even just someone paying off a mortgage should be reported as income.

That said, it's probably not worth the IRS's time to come after you for such a small amount of money, and I'd probably do the same as you in this situation.

But my parents are paying tax on that money.  I don't see why it makes a difference if the principal portion of the payment originates from my checking account or my dad's.   I know you can't run a business by saying you gifted $X worth of service, and they (completely separately and coincidentally) gifted you $X [and neither of you claim the value of $X on taxes], but I thought there were exceptions made for immediate family members.  It's a very low amount anyway.  Only $31-32k of principal has been paid off, and it's been mostly by me (living there for 3 years, and making extra payments towards principal for the first 5 years).  A larger portion of the mortgage payment now goes towards principal, but that's because I've aggressively paid it off from the start.  I don't think anyone is going to look at the situation and think "this guy was renting to his immediate family, for far below market value for 5 years and at a net loss, all in an attempt to commit tiny tax fraud.  His brilliant scheme has finally come to fruition and he intends to not claim upwards of $5k in income (in the form of his dad reimbursing his mortgage payment)."

Now that I'm thinking about it, I don't think I've paid [much] federal taxes since I discovered MMM.  If you spread out the amount of principal they have paid down and added it to my taxes in the appropriate years I don't think I would have paid much, if anything, on that extra income.

dilinger

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Re: selling my second house
« Reply #11 on: July 21, 2017, 01:54:47 AM »
That said, it's probably not worth the IRS's time to come after you for such a small amount of money, and I'd probably do the same as you in this situation.

But my parents are paying tax on that money.  I don't see why it makes a difference if the principal portion of the payment originates from my checking account or my dad's.   I know you can't run a business by saying you gifted $X worth of service, and they (completely separately and coincidentally) gifted you $X [and neither of you claim the value of $X on taxes], but I thought there were exceptions made for immediate family members.  It's a very low amount anyway.  Only $31-32k of principal has been paid off, and it's been mostly by me (living there for 3 years, and making extra payments towards principal for the first 5 years).  A larger portion of the mortgage payment now goes towards principal, but that's because I've aggressively paid it off from the start. 

I paid tax on my income; when I pay for a contractor, that contractor still has to pay tax on that same money, since it's his income.  I'm unaware of any exceptions for family members for any kind of earned or rental income.  But like I said, I doubt the IRS would even bother coming after you, especially since there are all kinds of loopholes that you could potentially use (ie, https://ttlc.intuit.com/questions/2952950-if-my-parents-pay-rent-for-a-room-in-my-house-13k-year-do-i-need-to-claim-income).  If it were me, I'd probably just ask my parents to give me a "gift" each year of some amount of money (that covers the mortgage + property taxes), and then let them stay "for free" (while having them still pay utilities).

frugalnacho

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Re: selling my second house
« Reply #12 on: July 21, 2017, 07:59:10 AM »
That said, it's probably not worth the IRS's time to come after you for such a small amount of money, and I'd probably do the same as you in this situation.

But my parents are paying tax on that money.  I don't see why it makes a difference if the principal portion of the payment originates from my checking account or my dad's.   I know you can't run a business by saying you gifted $X worth of service, and they (completely separately and coincidentally) gifted you $X [and neither of you claim the value of $X on taxes], but I thought there were exceptions made for immediate family members.  It's a very low amount anyway.  Only $31-32k of principal has been paid off, and it's been mostly by me (living there for 3 years, and making extra payments towards principal for the first 5 years).  A larger portion of the mortgage payment now goes towards principal, but that's because I've aggressively paid it off from the start. 

I paid tax on my income; when I pay for a contractor, that contractor still has to pay tax on that same money, since it's his income.  I'm unaware of any exceptions for family members for any kind of earned or rental income.  But like I said, I doubt the IRS would even bother coming after you, especially since there are all kinds of loopholes that you could potentially use (ie, https://ttlc.intuit.com/questions/2952950-if-my-parents-pay-rent-for-a-room-in-my-house-13k-year-do-i-need-to-claim-income).  If it were me, I'd probably just ask my parents to give me a "gift" each year of some amount of money (that covers the mortgage + property taxes), and then let them stay "for free" (while having them still pay utilities).

That is what I mean.  I can "gift" them the opportunity of staying in the house, and they can "gift" me enough cash to cover the mortgage, and it's all kosher because we are immediate family members helping each other out and they are effectively paying my mortgage (alternatively I could have them pay the mortgage directly from their account).  If I did this arrangement with you however, the IRS would be all over me to claim that as "income". 

However if the IRS wanted me to claim it as income I also would expect them to let me deduct expenses, and since it was operating at the loss (the cost of maintaining a home for 5 years is higher than just the mortgage payment) I wouldn't have reported anything anyway and would have actually taken a loss.  It wouldn't have benefited me the last 5 years though, because my AGI is usually low enough to pay little to no taxes anyway.