Author Topic: Made some dumb RE choices...  (Read 3415 times)

JM33

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Made some dumb RE choices...
« on: August 29, 2013, 10:00:50 PM »
Hello everyone, Iím in a bit of a bind and would like your thoughts on my financial situation.

I graduated college in 2007, lived reasonably below my means, packed away about $35,000, and purchased a 1 bed, 1 bath condo in a coastal city in Orange County in the winter of 2008. Purchased for nearly $250,000 with a 10% down payment and a 30 year fixed mortgage at 6.0%. 

Mortgage, PMI, HOA dues, and property taxes result in a monthly expense of $1,900. In retrospect, not the best decision as rent for apartments on the same street with similar (arguably better) amenities were going for $1,200 at the time. But I was foolishly emotionally wrapped up in the idea of becoming a home owner. 

It was a fixer and I spent $12,000 in savings from my job over the years, doing what work I could myself to save a bit.

Due to a job relocation, my commute increased substantially and after doing that for a while, reached a breaking point and rented out the condo, while renting a place closer to work. Condo is currently bringing in $1,300 a month. Rents for similar condos in the area going for ~$1,250 - $1,350. Iím currently paying $1,450 to live closer to work.

Iím obviously no personal finance whiz, but Iíve made it a priority to educate myself more over this last year. Got to admit, been kicking myself lately for that naÔve purchase in 2008 now that I know more. When all is said and done, the condo is costing me $600/month out of pocket, and I get about $300/month back via the refund from tax deductions each year. Total cash dumped into the condo, excluding mortgage payments, and included accumulated $300 monthly rental losses is about $48,000. I owe $206,000 on the mortgage.

At the height of the bubble, similar units were selling for $330,000. After the crash, several foreclosures/short sales were going for anywhere between $80,000 and $160,000. Prices seem to have recovered somewhat now, and a similar unit sold for ~$225,000 last month. 

I have no desire to keep this condo long term for a number of reasons. Primarily because it will take many many years to potentially become a profitable rental (not to mention make up for accrued losses thus farÖ), and Iíll likely have a growing family in a few years. Iíve been lucky with my tenants so far, but I know myself well enough now to say being a landlord long term is not for me.

What do you think are my options at this point? I could try and sell it in the near term, hopefully getting $225k, taking care of the mortgage debt and losing $35-40k overall. Or wait it out for a bit to see if the market keeps improving?
The idea of a second housing bubble in Southern California makes me really uneasy as thereís no way to predict what will happen with any certainty. Prices may collapse even lower in the future.

Perhaps the answer is obvious, and maybe Iím too wrapped up in this emotionally still. These last 5 years have been one hell of a time.   

Another Reader

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Re: Made some dumb RE choices...
« Reply #1 on: August 29, 2013, 10:21:34 PM »
My general reaction in this situation is to sell and move on.  If you can clear enough that you don't have to bring money to the table, so much the better. 

This property sounds like it's in a mixed condo and apartment area.  That's never a good market in which to invest.  Condos tend to be apartment conversions or built only a little better than the apartments in the area.  Parking is often a problem.  Renters always compare the condo rent to the apartment rents in the neighborhood.  Unless you have a garage, it's very difficult to distinguish your property and get a significantly higher rent.

With interest rates having increased, it makes less sense to try to reduce the bleeding with a refinance.  The rate increases may already have impacted the value of the condo, as a lot of first time buyers are being shut out now.  I don't think the property will appeal much to investors, but ask the agent what type of buyer bought the $225k unit.  It's difficult to market a leased unit if the market is comprised of owner-occupants.

In your shoes, I would be looking for a way to get rid of this alligator.  And sooner, rather than later.  The higher rates go, the fewer the buyers that will qualify to buy your condo.

MKinVA

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Re: Made some dumb RE choices...
« Reply #2 on: August 30, 2013, 05:36:51 PM »
I agree if you can get rid of it without bringing money to the table, do it and move on. But here's another thought, can you up the rent through a rent to own deal? Offer tenant the right to purchase at the end of a certain time frame (2or 3 years), and they pay an extra couple or three hundred dollars a month toward the future purchase. It's a good deal for people without the ability to qualify now, but may qualify for mortgage int he future.

Daleth

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Re: Made some dumb RE choices...
« Reply #3 on: August 30, 2013, 09:10:57 PM »
I agree if you can get rid of it without bringing money to the table, do it and move on. But here's another thought, can you up the rent through a rent to own deal? Offer tenant the right to purchase at the end of a certain time frame (2or 3 years), and they pay an extra couple or three hundred dollars a month toward the future purchase. It's a good deal for people without the ability to qualify now, but may qualify for mortgage int he future.

That is a completely FABULOUS idea. The OP will need to spend a few hundred on a real estate lawyer to get the rent-to-own contract ("land contract") in order, and he should price it a little high (pretty standard with rent-to-own deals), but it's a great idea. Especially because with sale prices at $225 and $206 owed on the mortgage, it's unlikely the OP will be able to sell without bringing a couple grand to the table, once you factor in the realtor's commission and closing costs. And if it's rented right now, that makes it slightly more complicated to sell anyway (unless the renter is a total neatnik with good taste, the place won't show as well as it could).

Blindsquirrel

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Re: Made some dumb RE choices...
« Reply #4 on: September 02, 2013, 08:47:50 PM »
OP, you have an alligator as a pet. Do not continue to feed it. At -$600 a mo cash flow, considering the tax loss value  and solid appreciation in OC, it is a best a  very marginal investment. If you can get 225K for it tomorrow, take it and run! Just my 2 cents worth

Hamster

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Re: Made some dumb RE choices...
« Reply #5 on: September 03, 2013, 02:01:42 AM »
I'm pretty much parroting what others have said, but I agree with sell it and be free. You will probably not walk away with anything after you pay transaction costs, but nothing is better than "minus $300" every month.

Prices could go up. The summer real estate market was hot in many places, but I think we're as likely, if not more, to see a cooling market with interest rates poised to increase. I could be totally wrong, and your local market may be completely different.

Selling it on contract (seller financing or rent-to-own), may allow you to command a higher rent, but if prices fall, the potential buyer can walk, and if prices rise, you would rather sell it to someone else, rather than be committed to sell it below fair market value to the contracted buyer. I would personally just make a clean break.

OzzieandHarriet

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Re: Made some dumb RE choices...
« Reply #6 on: September 05, 2013, 07:00:01 AM »
Another thing to consider: check tax laws because they may have changed since I looked into this, but if you have rented it out for more than 2 years, you will owe capital gains tax on the sale. If that is a possibility, and the amount is significant, you can avoid that by moving back into the condo for 2 years before you sell it. It may be a moot point, though, if you will have a loss and/or if your costs for living there would be higher than the tax, overall.