Strategy on selling an upside down rental - what do you think?

4 Replies

The rental I bought while my son was attending college for $170K cash flowed while he was in school and managing the property. Now that he's long graduated and married we would like to sell it. However, it is only worth $124K. I refinanced it (for $124K) at a better rate to lower my monthly payment and paid off a second for $13K. To sell it on the retail market I would have to spend another $5K+ for paint, carpet and repairs. My total out of pocket expense would be $13K + $5K + $11K (settlement expenses) = $29K. The realtor told me that it might take up to 6 mos to sell, so add another $4,800 in mortgage payments. My thought is to spend the $5K, fix it up and offer it "Rent to Own" at $140K. Take 5% non-refundable down payment ($7K) and rent it at $1200/mo (current mortgage pmts are $825/mo) for 5 years (the option period). Once the house is occupied, assign the contract to a cash buyer for $135K. I would then recover my $18K ($13k+$5K), the buyer would collect $1200 mo x 60 = $72,000 in gross rent and sell it for $140K to the tenant at the end of the term. Plus he/she would take the full depreciation during the option period.

Is that a good enough deal for the cash buyer?

Of course I could keep the property myself for 5 years as well.

What would you do?

Thanks for helping out...

Right now it is empty, waiting for the rehab to start next week. So, no.

The first question I would have is: would someone accept a lease/option with the above terms and would a cash buyer accept the above offer.

The cost of the option is $7,000.  For that he gets to purchase the house any time in the next 5 years at a price of $140,000 which is $16,000 more than the current price.  If the house were to appreciate by 3% per year the price in 5 years should be $143,750.  The option is not worth $7,000 in my opinion.  I am assuming that $1,200 per month is market rent.

What about the cash buyer.  He is buying a house worth $124,000 for $135,000.  Using the 1% rule the house is worth $120,000.  Using the 50% rule the cap rate is 5.3%.  Plus he can only sell the house at $140,000 less the cost of the sale.

In my opinion, these numbers don't work.

Good Luck.

Bill

I would put someone in their and start generating some cash.  It seems like it is going to be a big money loser if you try to sell it right now.  More power to you if you can get someone to take it off your hands as a primary residence, but I doubt an investor is going to touch it.

Where did your $124,000 valuation come from?

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