Author Topic: Case Study: what should I do with my parent's house?  (Read 1735 times)

sehr

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Case Study: what should I do with my parent's house?
« on: June 15, 2019, 03:45:26 PM »
My parents have both died and I have inheritied their townhome in a HCOL area. While I think it financially would be best to sell, I don't think I can bring myself to do it in the next year despite the hot market in the DC area. So I'm trying to figure out if I should refinance or not. Also, I'm trying to figure out if I should possibly rent it out to a pastor at my church for a reduced price of 1600 or try to find a renter at full price, which I estimate at $1950.


Market Value: $350,000
Original Purchase price: not sure, according to the deed it was purchased in 1974
Original Mortgage Amount: $125,000
Interest Rate: 4.75
Mortgage Term: 30 year
Term remaining: matures 01-2040
Amount remaining on mortgage:  102,478
Gross Rents: $1950 ($1600 if rent to pastor)
Principal and Interest (the P&I of your PITI - should match with the above info): $646
Taxes and Insurance (the T&I of your PITI): $322
HOA costs:$240/quarter (community has a pool)
Deferred maintenance notes: needs new dishwasher, plumbing in bathroom seems clogged, some ceiling tiles need replacing in basement. Need to landscape the tiny front yard. Otherwise in good shape.
Anything else special or unique in regards to the numbers of the property (not the property itself; things such as city assessments, back taxes, special costs due to unique features of the property, etc. etc.):

The interest rate of 4.25 is really high given current rates, but I'm not sure if I should refi, and if I do, if I should refi into a 10, 15, 20 or 30? Numbers aren't my strong suit so I'm not sure how to figure it out. Also, given my situation would this be a second home or an investment? I imagine it's going to sit empty until fall because I can't go though everything in it with summer coming and the kids out of school, but it will eventually be a rental. Our credit is excellent and I'll probably get a closing cost discount if I go with our current mortage company. I could also just pay off the mortgage.

Finally, should I rent to someone I think is good for less money or try my luck with a renter at full price? From watching another rental in the county, I know that laws are really tilted in the favor of renters. And I've been left enough cash that I don't need to worry about maximizing return, although I would of course like to do so.

waltworks

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Re: Case Study: what should I do with my parent's house?
« Reply #1 on: June 15, 2019, 03:56:20 PM »
Maximizing return here means selling the condo. You should be able to do that for zero capital gains/zero depreciation recapture if you do it now thanks to the stepped up basis from when you inherited it.

If you can't bring yourself to sell it, rent at market rent to someone until you can, then sell.

You are not going to beat 4.25% for non-owner occupied right now, so don't worry about refinancing. Rates would have to drop a LOT for that to be worthwhile.

-W

srad

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Re: Case Study: what should I do with my parent's house?
« Reply #2 on: June 17, 2019, 12:02:32 PM »
Going through this exact thing now.  Wife's parents have passed and her and her sister have decided to sell it.   We initially though one of them would live there, then we thought lets rent it (home is paid for and i already have rentals in this town) but in the end, after a few months of grieving and processing the loss (dad went about a year ago, mom in March), they decided its best financially for our families to sell the property.   I'm not sure how long you've had to grieve and then think about what next.  Since you said the house is still full sounds like its been recent.  Give it some time and your ideas on what to do may change.  If you sell, that is tax free money that can be used to benefit your family.

If you are going the rent option, rent it at market.  To many unknowns in the rental game where leaving a significant amount of money on the table is just a bad idea.   If you want to help the pastor out, donate a few hundred a month to the church out of your rent fund.   

Refi, if you aren't going to be living there, 4.25 is as good as it will get for you. You haven't mentioned if you'd want to live there, a 1k mortgage in a hicol is pretty good....  I think rates have dipped below 4 now for Owner Occupied, but that's still not low enough to justify the refi costs.

sehr

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Re: Case Study: what should I do with my parent's house?
« Reply #3 on: June 17, 2019, 12:56:00 PM »
Thank you both for replying and I'm sorry you are going though the same thing, srad. I made an error in typing. The mortage rate is 4.75 not 4.25% . You're right, 4.25 would be fine considering closing costs.

 I would be willing to live there but my husband would not. Based on your advice, I will try to find a market price renter.

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Re: Case Study: what should I do with my parent's house?
« Reply #4 on: June 17, 2019, 01:49:55 PM »
$1.950 is not a good rent on a $350,000 townhouse.  4.75 percent mortgage cannot be improved on as a rental.  I would sell the property if I were in your shoes.

The economy is slowing and real estate is also slowing in many areas.  In your shoes, I would power through the cleaning out of the house, make any needed repairs, and get it on the market ASAP.  Take advantage of the stepped up basis and you won't have to recapture the depreciation if you don't rent before you sell.

kenmoremmm

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Re: Case Study: what should I do with my parent's house?
« Reply #5 on: June 17, 2019, 04:00:29 PM »
sell ASAP

Papa bear

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Re: Case Study: what should I do with my parent's house?
« Reply #6 on: June 17, 2019, 11:09:35 PM »
Market rent of 1950 would make for a terrible rental on a 350k property. 

Is the house in top condition?  I don’t know the market, but 350k doesn’t sound like much in DC.  Can you update and sell for 450+? 

I would either sell now, or see if you can “flip” it.  All depends on how much work you want to do. 


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Dicey

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Re: Case Study: what should I do with my parent's house?
« Reply #7 on: June 18, 2019, 01:12:32 AM »
Sell, sell, sell.

sehr

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Re: Case Study: what should I do with my parent's house?
« Reply #8 on: June 18, 2019, 07:10:31 AM »
$1.950 is not a good rent on a $350,000 townhouse.  4.75 percent mortgage cannot be improved on as a rental.  I would sell the property if I were in your shoes.

The economy is slowing and real estate is also slowing in many areas.  In your shoes, I would power through the cleaning out of the house, make any needed repairs, and get it on the market ASAP.  Take advantage of the stepped up basis and you won't have to recapture the depreciation if you don't rent before you sell.

Hi thanks for replying. I'm not great with the terminology. Would this mean that because the market is likely to go down in the next couple of years, it is likely I'll have to pay taxes on part of the 350k if I hold the property and wait for that price to come around again vs. selling it at that price right now since the stepped up basis should currently be 350?

sehr

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Re: Case Study: what should I do with my parent's house?
« Reply #9 on: June 18, 2019, 07:14:23 AM »
Market rent of 1950 would make for a terrible rental on a 350k property. 

Is the house in top condition?  I don’t know the market, but 350k doesn’t sound like much in DC.  Can you update and sell for 450+? 

I would either sell now, or see if you can “flip” it.  All depends on how much work you want to do. 


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It is in good condition with higher end finishes, but it is a small, mid-row 70s townhouse in the MD 'burbs with a very utilitarian design. Even if I opened up the floorplan it probably wouldn't go for more than $375.

nereo

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Re: Case Study: what should I do with my parent's house?
« Reply #10 on: June 18, 2019, 07:18:22 AM »
Sorry about your parents.  To echo others, the best financial decision would be to sell it ASAP.  The amount that you could rent it for ($1,950) is woefully insufficient for the price you could sell it for ($375k).

I understand that there's an emotional attachment at play and you may not feel prepared to sell it to complete strangers.  But having been a landlord on properties I formerly lived in it's also stressful to watch others slowly change, modify and 'depreciate' what used to be your home. IMO it's best to make a clean break rather than watch the new renters scuff your parents hardwood floors or allow their prized azaleas wither.  Once you rent it out you legally lose the ability to stop in whenever you want, or make drastic changes or major renovations while you have tenants.

Villanelle

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Re: Case Study: what should I do with my parent's house?
« Reply #11 on: June 18, 2019, 07:51:18 AM »
I'm sorry for your loss.

Renting to the pastor for a very significant discount seems like a terrible idea, given that renting it at full price is still not a good financial move.

Also, since it isn't owner occupied, refinancing is going to be more difficult.  Well, not more difficult, but likely more expensive.  We looked to refi on what was originally our home, and then became a rental.  We only called a few places before we worked something else out, but all of them only offered higher rates on a refi for a rental vs owner-occupied.

I definitely understand that selling this house is a difficult emotional thing.  But make sure that if you are set on doing that despite the finances clearly suggesting you should do otherwise, you are prepared for the emotional toll of seeing someone else live in (and make changes to) the property.  I think that emotionally, you might be better off tearing off the bandaid, even though that feels like a huge step now.  And certainly financially you would be.  At a minimum, make sure that you really consider the emotional aspects of having other people live in this house and what that is going to feel like for you, since the decision not to sell is also an emotional one.  You don't want to end up making the decision that both costs you money and ends up being harder emotionally.

Also make sure you are prepared to be a landlord.  If you live out of the area, it can be tough (and sometimes time consuming) to do so without a manager.  But having a manager means paying fees, making renting an even worse financial proposition.

Also, have you talked to a realtor about the value?  And stalked Hotpads or a similar site for comparable rents?  You say "the DC area", but unless the place is WAY far out in MD (so not really the DC area), that price seems incredibly low, as does the rent.

sehr

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Re: Case Study: what should I do with my parent's house?
« Reply #12 on: June 18, 2019, 09:23:13 AM »
I'm sorry for your loss.

Renting to the pastor for a very significant discount seems like a terrible idea, given that renting it at full price is still not a good financial move.

Also, since it isn't owner occupied, refinancing is going to be more difficult.  Well, not more difficult, but likely more expensive.  We looked to refi on what was originally our home, and then became a rental.  We only called a few places before we worked something else out, but all of them only offered higher rates on a refi for a rental vs owner-occupied.

I definitely understand that selling this house is a difficult emotional thing.  But make sure that if you are set on doing that despite the finances clearly suggesting you should do otherwise, you are prepared for the emotional toll of seeing someone else live in (and make changes to) the property.  I think that emotionally, you might be better off tearing off the bandaid, even though that feels like a huge step now.  And certainly financially you would be.  At a minimum, make sure that you really consider the emotional aspects of having other people live in this house and what that is going to feel like for you, since the decision not to sell is also an emotional one.  You don't want to end up making the decision that both costs you money and ends up being harder emotionally.

Also make sure you are prepared to be a landlord.  If you live out of the area, it can be tough (and sometimes time consuming) to do so without a manager.  But having a manager means paying fees, making renting an even worse financial proposition.

Also, have you talked to a realtor about the value?  And stalked Hotpads or a similar site for comparable rents?  You say "the DC area", but unless the place is WAY far out in MD (so not really the DC area), that price seems incredibly low, as does the rent.

We're in a county that borders DC and about 15 minutes away from the metro. I got the price from a realtor who valued the home around 340-365k. We might get up to 2100 for rent, but a similar model across the street just rented for $1950. It's built in the early 70s and is less than 1400 square feet, so it's the lower end of the market here.

I talked to my husband and we might be able to sell in the spring. Right now, though, my inlaws are living with us since they are in the process of selling their home and looking for a house where we and my SIL live, so I can't move my dad's stuff I want to keep into our house because we have all their possessions taking up the basement and garage. Everything is happening at once in our family.

FINate

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Re: Case Study: what should I do with my parent's house?
« Reply #13 on: June 18, 2019, 09:33:41 AM »
I talked to my husband and we might be able to sell in the spring. Right now, though, my inlaws are living with us since they are in the process of selling their home and looking for a house where we and my SIL live, so I can't move my dad's stuff I want to keep into our house because we have all their possessions taking up the basement and garage. Everything is happening at once in our family.

I'm sorry for your loss.

I don't understand how the bolded above relates to the timing of either renting or selling the place. You'd have to clean out your dad's stuff to rent it out, yes? IMO it's worth paying $100/month for a storage unit for a year, cleaning out your dads stuff and putting it on the market ASAP.

BNgarden

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Re: Case Study: what should I do with my parent's house?
« Reply #14 on: June 18, 2019, 09:36:13 AM »

I'm sorry for your loss.

I don't understand how the bolded above relates to the timing of either renting or selling the place. You'd have to clean out your dad's stuff to rent it out, yes? IMO it's worth Edit   paying $XX/month for a storage unit for a year, ...putting it on the market ASAP.

^^ This ^^
« Last Edit: June 18, 2019, 09:38:14 AM by BNgarden »

sehr

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Re: Case Study: what should I do with my parent's house?
« Reply #15 on: June 18, 2019, 10:15:54 AM »
I talked to my husband and we might be able to sell in the spring. Right now, though, my inlaws are living with us since they are in the process of selling their home and looking for a house where we and my SIL live, so I can't move my dad's stuff I want to keep into our house because we have all their possessions taking up the basement and garage. Everything is happening at once in our family.

I'm sorry for your loss.

I don't understand how the bolded above relates to the timing of either renting or selling the place. You'd have to clean out your dad's stuff to rent it out, yes? IMO it's worth paying $100/month for a storage unit for a year, cleaning out your dads stuff and putting it on the market ASAP.

Yes, that makes sense. We won't be doing anything until fall (rent or sell) when the kids are back in school and the market to sell is better in spring.

Villanelle

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Re: Case Study: what should I do with my parent's house?
« Reply #16 on: June 18, 2019, 11:35:49 AM »
I talked to my husband and we might be able to sell in the spring. Right now, though, my inlaws are living with us since they are in the process of selling their home and looking for a house where we and my SIL live, so I can't move my dad's stuff I want to keep into our house because we have all their possessions taking up the basement and garage. Everything is happening at once in our family.

I'm sorry for your loss.

I don't understand how the bolded above relates to the timing of either renting or selling the place. You'd have to clean out your dad's stuff to rent it out, yes? IMO it's worth paying $100/month for a storage unit for a year, cleaning out your dads stuff and putting it on the market ASAP.

Yes, that makes sense. We won't be doing anything until fall (rent or sell) when the kids are back in school and the market to sell is better in spring.

Spring might be a better sales market, but letting it sit empty and not listed gains you nothing.  If it's listed, it *might* sell, even in the off-season.  If it isn't listed, it definitely won't sell, so if you are selling anyway, there's little point in not listing it. (Yes, I know stale listings are a thing, but at a minimum, as an agent.  You also have carrying costs for that time, so you can probably afford to sell for less now (or in the fall) than more in the spring, and come out ahead.  Also, having at least some of your parents' stuff in it may actually be good for selling, so consult a realtor before emptying the place.

And if you rent it in the fall, you may lock yourself into a fall/winter sale (once you decide to do that) anyway.  Most people want to sign a 12 month least.  You might find someone willing to do 18 months, but that may signal to some renters that you intend to sell so if they want the possibility of living there longer, they may not be interested. 

Also, the market to RENT is also seasonal and better in summer, especially in the DC areas where you have a lot of people whose employment cycles in the summer.  We noticed a significant difference from April (when we started looking) to late June even.  Places lingered for weeks and then suddenly things were gone in days (or hours).  (We are a lot further in that you must be.) But again, one season may be better, but you are still better off renting for $50 less than getting a bit more money 3 or 6 months later.  Or selling for $5k less but not paying property taxes and losing the opportunity costs for that time. 

I feel like I sound super harsh.  I definitely understand an emotional attachment to a house, and I don't think that making a decision based on that is wrong, especially since you can comfortably afford to do so.  But I do think that before you do that, you need to make sure you fully understand and accept all the implications of that.  Good luck with your decision, and with wading through the legal and emotional complications of the estate, whatever you decide!


sehr

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Re: Case Study: what should I do with my parent's house?
« Reply #17 on: June 18, 2019, 12:27:10 PM »
I talked to my husband and we might be able to sell in the spring. Right now, though, my inlaws are living with us since they are in the process of selling their home and looking for a house where we and my SIL live, so I can't move my dad's stuff I want to keep into our house because we have all their possessions taking up the basement and garage. Everything is happening at once in our family.

I'm sorry for your loss.

I don't understand how the bolded above relates to the timing of either renting or selling the place. You'd have to clean out your dad's stuff to rent it out, yes? IMO it's worth paying $100/month for a storage unit for a year, cleaning out your dads stuff and putting it on the market ASAP.

Yes, that makes sense. We won't be doing anything until fall (rent or sell) when the kids are back in school and the market to sell is better in spring.

Spring might be a better sales market, but letting it sit empty and not listed gains you nothing.  If it's listed, it *might* sell, even in the off-season.  If it isn't listed, it definitely won't sell, so if you are selling anyway, there's little point in not listing it. (Yes, I know stale listings are a thing, but at a minimum, as an agent.  You also have carrying costs for that time, so you can probably afford to sell for less now (or in the fall) than more in the spring, and come out ahead.  Also, having at least some of your parents' stuff in it may actually be good for selling, so consult a realtor before emptying the place.

And if you rent it in the fall, you may lock yourself into a fall/winter sale (once you decide to do that) anyway.  Most people want to sign a 12 month least.  You might find someone willing to do 18 months, but that may signal to some renters that you intend to sell so if they want the possibility of living there longer, they may not be interested. 

Also, the market to RENT is also seasonal and better in summer, especially in the DC areas where you have a lot of people whose employment cycles in the summer.  We noticed a significant difference from April (when we started looking) to late June even.  Places lingered for weeks and then suddenly things were gone in days (or hours).  (We are a lot further in that you must be.) But again, one season may be better, but you are still better off renting for $50 less than getting a bit more money 3 or 6 months later.  Or selling for $5k less but not paying property taxes and losing the opportunity costs for that time. 

I feel like I sound super harsh.  I definitely understand an emotional attachment to a house, and I don't think that making a decision based on that is wrong, especially since you can comfortably afford to do so.  But I do think that before you do that, you need to make sure you fully understand and accept all the implications of that.  Good luck with your decision, and with wading through the legal and emotional complications of the estate, whatever you decide!

You no more sound harsh than I sound flaky. I appreciate you taking the time to voice your thoughts and I will certainly consider them. I think I am trying to find excuses to give myself more time when logic says it is best to move quickly to optimize this opportunity.

Enigma

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Re: Case Study: what should I do with my parent's house?
« Reply #18 on: June 18, 2019, 12:39:32 PM »
Sorry for your loss as well.

What were the wishes of your parents'?  My parents have already stated they want my brother and I to sell their property.  Your parent's condo sounded like a great retirement setup near HCOL area with a pool.

When the time comes, regardless of the market, we will sell our parent's property.

SwordGuy

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Re: Case Study: what should I do with my parent's house?
« Reply #19 on: June 18, 2019, 08:27:45 PM »
Take the kids with you.  Find what you (they) want to keep and get it moved out.  Hire an estate sale company to do the rest.  Sell the house.  The sooner the better.

$1900 / month on that property is not a good rental, especially since there is a fair bit of deferred maintenance.

The only business reason to keep it would be if you have a very reasonable expectation that it will go up significantly in value, like $500,000 in the next couple years.

sehr

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Re: Case Study: what should I do with my parent's house?
« Reply #20 on: September 18, 2019, 05:20:36 PM »
I did it, everyone! I cleaned out the house, put 15k into fixing it up plus a lot of elbow grease and help from friends and got it on the market last week for 350k. We got 7 offers in 6 days and chose one that is offering 365k with no closing help. The buyers are a DC science teacher and a pharmacy tech who have a conventional loan with 20% down and 100k in savings who are purchasing their first home. I feel pretty confident it will close. I think it will inspect well although we might need to do radon remediation depending on test results. An issue we might have is appraisal because 365k is higher than the comps around us, a good problem to have. I'm hoping if anything goes wrong in the inspection we can just offer to lower the sales price for them to fix it since we might not appraise that high anyway and they volunteered that they have the cash to handle it.

My family pretty much didn't have a summer this year but hopefully it was worth it.

Dicey

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Re: Case Study: what should I do with my parent's house?
« Reply #21 on: September 22, 2019, 07:03:44 AM »
I did it, everyone! I cleaned out the house, put 15k into fixing it up plus a lot of elbow grease and help from friends and got it on the market last week for 350k. We got 7 offers in 6 days and chose one that is offering 365k with no closing help. The buyers are a DC science teacher and a pharmacy tech who have a conventional loan with 20% down and 100k in savings who are purchasing their first home. I feel pretty confident it will close. I think it will inspect well although we might need to do radon remediation depending on test results. An issue we might have is appraisal because 365k is higher than the comps around us, a good problem to have. I'm hoping if anything goes wrong in the inspection we can just offer to lower the sales price for them to fix it since we might not appraise that high anyway and they volunteered that they have the cash to handle it.

My family pretty much didn't have a summer this year but hopefully it was worth it.
Excellent update!