Case study: Out-of-state rental won't sell

[marblejane]

Market value: Currently listed at $169,000 ($10k in price cuts in the last month)
Original purchase price: $195,000
Current mortgage amount: $181,804 ($8,500 @ 0% interest, $173,304 @ 6.75% interest)
Mortgage term: 30 year fixed, 24 years, 4 months left
Gross rents: Most recently rented at $1,250/mo, currently vacant
P&I: Need to look this up, roughly $1,240/mo
T&I: Also need to look this up, taxes were $3,800 this year, insurance about $800/yr, so figure $385/mo
Total monthly mortgage payment: $1,626
No HOA fees or deferred maintenance.

I have held this property vacant since April and on the market since June. Interest in the property has been light (1-2 showings per week, no second showings yet), so I agreed to cut the price $5k on July 4th and cut the price again another $5k last week. Feedback is generally that the property is too small for their clients, and that the price is a little high but in the right ballpark. The property is about 700 sq ft, 2bd, 1 ba, fully renovated about 10 years ago.

Currently, I have $34k on hand to pay for the sale of the property, figuring I will pay ~8% of the sale price in transaction costs (realtor fees and state/local transfer fees & taxes). At a sale price of $163,000, I figure that I will pay roughly $32k out-of-pocket.

I am able to cash flow keeping the rental vacant for the time being, but doing so gives me little margin of error in my budget, and slows my progress on making extra payments towards my other debts ($160k of student loans, a $22k personal loan taken to facilitate the sale of the property, and $10.5k of credit card debt at 0% interest through Sep 2015).

My current plan is to keep the property listed through the end of September. I’m willing to cut the price as much as $10k more. I am not sure if I will be financially able to sell any lower than that.

If there are no offers on the property by the end of September, I plan to pull it off the market, rent it back out, and focus on paying down my mortgage enough to be able to refinance, and then reevaluate putting it back on the market in another 1.5-2 years when I am in a stronger financial position. For refinancing, however, I’m not sure what it would appraise for, or what kind of rate I could get as a landlord.

If you were in my shoes, what would you do? Keep it on the market through the winter? Try to rent it below market rates & keep it on the market? Pursue a short sale?

[Doomspark]

My gut feeling is to pull it off the market NOW and get a renter back in.   Try selling again when you're in a better financial position.

[Another Reader]

It's generally more difficult to get a renter in the late fall and winter.  The market is telling you your price is too high.  If you can't come up with more cash to unload this property, in your shoes, I would put it up for rent now to get someone in by September 1st.  I would also leave it listed for sale in case the second $5k price cut attracts an offer before the place is rented.  Do a 6 month lease or month to month if you rent, so you have the option in the spring to put it back on the resale market.

[usmarine1975]

I agree with the last post get a renter in there if you can.  Keep it on the market and re evaluate as the months go on.  Some money coming in is better than 0 coming in.  At least you would prolong how much you can put into the mortgage for the time being until you can sell the property.  I would look at what other properties are listed for sale in that area and what they are selling/renting for.  Try to price it right.  If you can get a renter and you decide not to sell, I would look at the mortgage you could cut your interest quite a bit with a refinance.  The only trouble you will have is it's not owner occ.  I refi'd one with the same bank.  Just called them up and asked what they had or could do.  I have 2 at 5.5% that it hasn't made sense yet to refi.

[marblejane]

Thanks all for the feedback.

I already have an agreement with my realtor that I would keep the property on the market until September 30. I don't think I'd be comfortable going back on that to get a tenant by Sept 1. But I am prepared to find a tenant for October 1, and I already have a lead on one prospective tenant.

The other thing complicating the matter is that my realtor has also been my property manager for the past 3 years. He's been fine as a property manager, but I'm not sure I'd want to relist with him next spring. So, I'd probably need to find another property manager now.

I called my bank today to inquire about a cash-in refi. Assuming that I could get it to appraise at $170k (generous...) I'd need to bring ~$50k to a refi closing. The good news is that in spite of my very high debt load, I could still qualify to refinance on my personal income alone (i.e., they wouldn't need my rental income to qualify me for the loan). They quoted 4.75% for a 30 yr fixed and 3.875% for a 15-yr fixed.

[usmarine1975]

Hence the reason you can't rent it before your sales agreement is up.  I tried a property manager for a time they just frustrated me.  Apparently I care more about my money then other people do.  Oh well.  I hope you get something to work out.  I was able to refi my properties without any out of pocket money.  Waived fee's as it was an internal transaction and of course rolled some into the new loan.  But it was worth it.  Went from a 30 year mortgage at above 6% to a 15 year around 3% on a rental.  Whew wife and I did the fist pump after that went through.  Took FOREVER.

[sammybiker]

I would have a hard look at selling the property as a lease option/seller financing. 

This will allow you to command top market dollar, perhaps even slightly above, while pushing maintenance/repairs back onto the tenant.  You may also be able to command a higher rent payment.

You're still stuck with the mortgage (and an awful rate), taxes & insurance...but if you can lock into a short term lease option (24-36mo), you may pull out at breakeven.  You'd also receive a size-able down payment (5-8k+) that is non-refundable. 

And, because it's just a lease option, if they fail to pay rent, you evict like any other lease.

Refi sounds interesting...nonetheless, this is an awful candidate for cash flow, especially one that you have to manage from out of state.  You have to sell, that's clear.

[JetBlast]

Out of curiosity, have you recently seen the condition of the property? 

I ask because of experiences my wife and I had while looking for a home a few months ago. We went to a property that seemed like a good fit for us for a few years before turning it into a rental. As it turned out, the current owner was out of state and had been renting it. The home was disgusting.

Carpet peeling up in bedrooms, damaged counter tops, retaining wall in back yard was falling down, peeling linoleum floors, pizza crust under the oven with bugs all over it, master bedroom smelled like urine, etc....

It was priced in line with much better maintained homes in the neighborhood. Needless to say, three months later and it's still on the market.

[marblejane]

Yes, I last saw it in person in January. I remotely supervised the interior/exterior painting, cleaning, and gardening before listing it. But my mother was onsite doing much of the work, and I got lots of pictures directly from her and another friend that I had help stage it for me. It's a good point, though.