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Rehab & flip, Sell to Tenant, Hold as Rental... What would you do???
I'm really in an investing conundrum here...
About 2 months ago I bought a house, well, manufactured home. Please read the details of that deal here. (It's the second deal.) This isn't a shameless plug for my site, I just don't want to attempt to explain the deal as some of the finer points are sure to have slipped from my mental grasp by now. I'd rather focus on the dilemma at hand.
So, the tenant has been there 34 years. I served him a 60 day that expires the end of October. He has been quite adamant, albeit nicely, that it is his home and he isn't going anywhere. I did my best to explain that this chapter of his life has already been written, he just refuses to read it (one of my favorite "time to move on" sayings).
About two weeks ago he called me and offered me $100K. He said he called the previous owner and she informed him I paid $90K for the house. He thought it fair that I get a 10% profit on the deal and brilliantly came up with the $100K offer. Hopefully, you in fact did go to my site and read about the deal so you won't be lost at this point. The problem with accepting $100K is twofold; first, I will have to give back $25K of borrowed money and if you know me, you'll know my philosophy on money is "When someone puts money in your hand, close it" as I pointed out in a previous landlording post here. Second, I don't like anyone telling me how much I should make on a deal.
A little more background info: This manufactured home sits on a lot at the top of a hill, at the end of a street and across the street and on the far side of the house is a city park. It is the only manufactured home for many miles. Similar sized houses are easily in the $250K+ range. The location is excellent. It is also within bicycling distance from UCR (University of California, Riverside). As a student rental, it will bring in around $1,700/month. As a full on frat house, the remote location being so perfect, it would certainly bring in much more. On the retail side, it should sell for $225-$250K in this market. To get it to that price, I expect it would cost around $35-$40K.
When the tenant offered me $100K, I told him we (the property is owned by a trust) would consider letting it go for $150K. He was appalled to say the least and claimed he would never be able to raise that kind of money. He went on and on. I told him it's not personal, it's just business, and then begged him to let me off the phone because hanging up on people is rude.
Tonight I received an email and he upped his offer to $130K and added "I may be able to squeeze out $135,000, but I'm kind of maxing out here." He told me the same thing when he offered me $100K. This is where, as a negotiator, I know he screwed up. If he came back and said he could do $110K, I'd be under the impression that he was about ready to tap out and I might see $115-$120K out of him. BUT, he raised his offer 35%!! I'm thinking I can get him to come up with $145K. It is only $10K more than his offer. (FYI, when someone tells me two numbers in a negotiation, I only hear the number that is most beneficial to me (higher number when selling, lower number when buying) and the other number no longer exists.)
So...
1. Keep the property, evict this guy whose been living here since he was a student attending the university down the street, use the money I already have from the over funding by my private lender to do the rehab and rent the house. I'll be sitting on $100K in equity that I can tap at some point in the future when its more tax advantageous to do so.
2. Same as #1, but flip the house and make $70K-ish profit on this deal by next spring.
3. Get him to up his offer and sell it to him for minimum $145K if he can get there, which I think he can.
What would you do? I'm looking for suggestions from experienced investors. If you're broke and you comment based on the fact you just want money as quickly as possible, please refrain from commenting, but instead read the comments and try to learn something. This isn't about the money. (It never is.) It's about what it takes to get to that money and sometimes, being like water and following the path of least resistance is the better choice. But, sometimes its not.
Sell it to him for 180k and hold a private mortgage for 30-50k in whatever position you have to for the balance. Take the cash profit, and the note and move on to put someone else's life into a tailspin.
I would sell it to the tenant. Make a quick profit, the tenant gets the house he loves, and the world is right again!
So if I understand correctly, you stand to make $70k after investing a lot of time and money into the deal. On the other hand you can make $45k with little to no time/money into the deal. IF that is the case, I think it comes down to deal flow. Can you find another deal quickly? If so, I would sell him the house and move on. If deals are very hard to come by, I guess I would maybe squeeze every penny out of this one and do the flip.
From the outside looking in, it seems like the best route would be to sell the guy the house. He wants it badly and you stand to make a very nice profit risk free. I would absolutely explain to him that whatever price you settle on is firm and regardless on any inspection or other findings you are not coming down another penny.
As a lawyer, my first question is always how difficult it will be to get the tenant out. CA and Riverside law very favorable to landlords, but the fact that he has been in house for so long will mean he will have sympathy of any fact finder. Eg, has he suggested in your conversation that suggest he had an agreement with former owner of some sort? Chances of him hiring lawyer? Even if he only sues prior owner and records lis pendens on property, he could tie the property up for 1-3 years. Or he could maliciously trash it on way out and your rehab number could go way up.
If that is medium to high risk, I would do as @Leigh C suggests and show him how you could flip for $225k but willing to deal with him at $180k with seller take back. Maybe even just take $145k if I were convinced he could not support more and the tenant risk is very high.
But assuming you think this is all low risk and that he will go quietly into the night, then let's move on to other considerations.
I would almost always choose the renting angle when I get a great price because I get cash flow and appreciation. But whether I would suggest this route you depends on your interest rate and your view of the future of the Riverside market.
First, interest rate. At a hard money 10%, you are paying $12.5k in interest and even if $1700 is right rent (seems high for a mobile but I trust you know this market better than I), doesn't seem like you are clearing much free cash after taxes, insurance, repairs, vacancy, etc. With sweeter financing of 5%, this generates good cash flow.
Then, your view of the future of this market. John Burns among others think the Riverside market has gotten ahead of itself and may be due for either a correction or at least very flat appreciation until incomes in this area increase. That would suggest flip rather than hold. But I assume you have your own opinions on this important issue, but where you stand on this would very much drive what I would do.
On the income side, I would be even more tempted to hold if I could maximize the income with some sort of fraternity or group house play. I would definitely explore this. But frats tend to like stick build and code issues could make group concept impossible, especially since this is already on code enforcement radar.
UC Riverside reputation is ascending, there are several large new development projects in planning stage nearby (including huge master planned community immediate to south of university along I-215), UC Riverside has a dearth of student housing and thus ample demand, and I personally see continued appreciation in this market over the next 3-5 years. So if this were my deal, would evict, rehab and rent.
Originally posted by @Account Closed:
"This isn't about the money. (It never is.)"
So what's it about? Power?
It's about making the best decision to get to the end result. Sometimes, the road less traveled is the better option, sometimes it's not.
Yes, at the end will be a check, but my corporate motto is Real Estate Problems Solved, not Make The Most Amount Of Money On Every Deal.
Originally posted by @Leonard L.:
As a lawyer, my first question is always how difficult it will be to get the tenant out. CA and Riverside law very favorable to landlords, but the fact that he has been in house for so long will mean he will have sympathy of any fact finder. Eg, has he suggested in your conversation that suggest he had an agreement with former owner of some sort? Chances of him hiring lawyer? Even if he only sues prior owner and records lis pendens on property, he could tie the property up for 1-3 years. Or he could maliciously trash it on way out and your rehab number could go way up.
This is one of my concerns. He is not a dumb person. He's just lazy. I don't think he works, but he has a masters degree. The scene plays out in my head that he is a great candidate for a bankruptcy filing and I don't want to be reeling in this fish for the next 12 months.
Originally posted by @Account Closed:
So if I understand correctly, you stand to make $70k after investing a lot of time and money into the deal. On the other hand you can make $45k with little to no time/money into the deal. IF that is the case, I think it comes down to deal flow. Can you find another deal quickly? If so, I would sell him the house and move on. If deals are very hard to come by, I guess I would maybe squeeze every penny out of this one and do the flip.
From the outside looking in, it seems like the best route would be to sell the guy the house. He wants it badly and you stand to make a very nice profit risk free. I would absolutely explain to him that whatever price you settle on is firm and regardless on any inspection or other findings you are not coming down another penny.
Selling to the tenant seems to be my first choice. However, I just ran comps and there is only 1 house active in the neighborhood at $399K. If I put this house on the market at the very affordable price of $250K, I believe it would sell in a weekend and I would stand to make about $100K after expenses. The main hindrance are the great unknowns; how long will it take to get him out and what is the real condition of the property.
I also think about this guy and how selling to him is probably the right thing to do if he can pay me a fair price. As much as I'd like to rip $100K on this deal, do I need $100K and all the hassle or is $50K and be done now good enough? Sometimes, good enough is good enough.
My vote is #3: get him to up his offer to $145K and make the quick cash without the headaches and with minimal risk. Personally, it's not about the money also. The way I look at the situation is:
A. I kick the guy out and make a LOT more but I go through stress, and he loses his home; OR
B. I make quick cash with NO stress and this guy keeps his home.
With B, you're able to do good, still make good money and you move on to the next deal or solve that next real estate problem.
Regardless of your decision, it's an awesome deal!
Hello @Aaron Mazzrillo, I'm Sandy, a LIC. RE professional in Brooklyn. Not an "experienced investor" here, however I have been through many negotiations with an array of people with different personalities, etc.
I understand you want to be cordial and respectful with this tenant, however, he is taking too much time with you on the phone and via email. It is rude of HIM to be taking time from you as a business owner. If he is indeed serious, ask him for proof of funds, and then reconsider. He is arguing and negotiating on AIR without actually proving that he has the money.
Each time that he tries negotiating with you, tell him the same exact thing, "Please show me your proof of funds and then I will consider. As a reminder, it is X days until October 31, 2014. Thank you for your time, I have a meeting to attend. (CLICK!)" Break him down instead of having him break you down. Best, Sandy.
here's how I would make my decision.
If you find deals frequently and with relative ease (I sure as hell don't) then take the easy cash at 145-150 k rather that's selling to him or anyone else willing to pay 150 in its "as is" state.
If its a lot of work / stress for you to find deals then maximize your profits and fix and flip it with a PROVEN General Contractor to minimize the headaches. At that point you can offer to sell him the property 5% below market value if you feel you need the feeling of being a good guy. If he doesn't want the discount ; can't afford the discount ; or thinks your being unfair than thats on him and the guilt has shifted away from you clearing your conscience.
He sent me the following email at 6PM today:
After further (much) deliberation, we accept your offer of $150K for sale of the property. Please contact us to expedite & finalize this sale @ your aforestated price of $150,000.
Unfortunately, I spoke to an investor friend who buys a lot of properties off me and he said he was very interested in the house. I had not checked my email when I told my friend if he still wanted it, to let me know what he is willing to pay. He said he would let me know tomorrow.
