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Aaron Mazzrillo
  • Investor
  • Riverside, CA
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Rehab & flip, Sell to Tenant, Hold as Rental... What would you do???

Aaron Mazzrillo
  • Investor
  • Riverside, CA
Posted Sep 30 2014, 02:57

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.

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