Hi BP community,
I'm hoping I might be able to get some feedback and clarity on a situation I'm providing help and moral support on. During the last cycle, circa 2004, a close and dear family member purchased a single family home in Sacramento, CA. As we all know, that market got hammered during the crash, but they were able to hang on to the property, even in a negative cash flow state for many years. Here we are in 2018, approaching or at the top of another cycle, and they still own the house and would now like to sell in hopes of finally making a small return. The home values in that area, though, have not really surpassed their previous highs. Here's a summary of the economics.
They purchased the property for $280,000 in 2004.
The loan balance is about $178k.
Monthly principal and interest payment is about $1,265 with $709 currently going to interest
Property taxes are $4,116 annually and insurance is $1,000.
Currently the house is vacant for the sale so there's no rental income.
Therefore, the monthly burn is -$1,135 (ouch).
For the sale:
Property was originally listed at $335k and they received 0 offers at that price. They've dropped the price twice since then and it's currently at $318k. It's been on the market for 66 days as of the date of this post. They've received one offer from what I deduced to be from a wholesaler for $275k. My advice to them at the time was that they should counter slightly higher and sell it for what they could and just get out. They passed.
Here's the thing. Just like many others, they're fixated on getting a price that to them makes sense based on what they paid for it. They say that once they pay commissions and closing costs, they don't want to accept a price in which they'll "lose" (chuckles slightly). I've explained to them that it doesn't matter what they think it's worth or what Zillow says it's worth. The market will tell you what it's worth. I took a look at the inventory in the area, and there are a lot of other homes for sale in the same area around the same price or lower. Many are more updated, and those seem to be the ones that move. There are many stale listings in the area, also, many of which have been on the market for over a month. It's just not a "hot" submarket in Sacramento.
My advice to them has wholeheartedly been to take whatever price you can get and get the heck out while they can. The opportunity of renovating the home just wouldn't pencil. It would take probably $50k-80k to get the home to a condition that it may sell in the high $300's - maybe - not at all worth that high of risk in my opinion. The market rent for this 3 bd 2 ba house with the level of finishes in this area is ~$1,500 if they were to keep the house and rent it. This would leave them in a break even at best once you factor in other operating expenses.
What do you think? Do you agree with me that they should sell at essentially any "reasonable" price? If so, what information would you give them to make them see things for the business reality of the situation, which is that they're realizing an economic loss every month they continue owning the house? Or, is there some other exit or possibility that I'm not thinking of, like maybe a lease option? Truthfully, I'd just hate to see them in which market conditions change, which they may in the near future, and they're stuck with this bad investment losing money that they then couldn't exit all over again. I look forward to hearing your thoughts and feedback!
@Eduardo Zepeda you are doing the right thing by advising them to exit the home. The home was a bad investment, and the sooner they can recoup part of their capital the sooner they can re-deploy the capital in a way that is profitable. If you show them how much their "burn" is every month and explain how much better they could do investing the proceeds it may help.
I have been running into the same types of issues on listing appointments in my local market. People in Chicagoland have been desperately holding onto some of their properties they over paid for, and now that the market is higher they are trying to get out. They still don't understand why their house isn't worth what they paid for it, while we as investors think the market is over heated!
You've fulfilled your moral obligation to share knowledge that can help them, but ultimately they need to decide what's best for themselves. They'll figure it out eventually, or they'll just keep burning money on the mortgage. I wouldn't nag them about it.
There are a few ways this can go bad for your relationship with them if you keep pushing. What if they accept a low offer then get a higher offer before closing when it's too late to accept? And what happens when somebody flips it and they think they could have gotten coser to the post flip price? They may believe you pushed them into accepting too low of an offer.
Very well said @John LaBanca .
Eduardo if you have laid out your perspective as clearly to your friend as you did in your post then you have done what you can and should do. You will have a hard time rationalizing someone into taking the emotion out of their decision making process. People usually have to come to that on their own. Now if you are representing them in the sale, and you have a fiduciary responsibility, then that will complicate the matter. But if you are just offering advice (and from what you laid out, very sound advice), then the most prudent thing would likely be to step back and let them come to the realization that you are correct on their own terms. Hopefully losing $1.5k a month won't put them in desperate financial straits. And you never know, if they hang in there long enough maybe they will snagging the buyer they are after.
I hope everything turns out well.
It sounds like you're doing the right thing, and advising them to lower the price and cut their losses, but some people are stubborn. Two years ago we offered $310K for a home, they countered back at $330K, angry that they had already lowered the price from $359K.... we rejected it... 6 months later, not sure if it went to foreclosure or private deal, but it was sold for $275K. Arrogance and pride are very costly traits! True story!
A lot of people have too much pride to accept what the market is telling them... my advice is to be supportive, and answer their questions when asked, but don't get yourself involved or push them to do anything. Their money, their choice!
I would love to know how much money they lost over the past 18 years. If it were just $750 a month, that would be a total loss of $162,000!
They will have to sell for $340,000 just to break even. I think they do whatever they can to sell and cut their losses.
Your advice is spot on. Now step away before you get sucked in any farther. They are not thinking rationally and you are not going to change that. Their greed is going to be very costly for them.
The best you can do is maybe some day say "I told you so".
@Eduardo Zepeda I would not take an offer at $275 from a wholesaler when it is listed for $318K. They would be better off dropping the price to $299 which would put the property in an MLS "up to $300K" search window for buyers. That is likely to invite better offers. The wholesaler believes it is worth more than $275K, so the question is why can't the listing agent get a better offer?
The listing agent should be calling the buyers agents who have dropped cards at the property after looking at it. They need to ask them for feedback. Is it just price or are there cosmetic things or other issues. If nobody is even viewing the property, then price is the issue.
Thanks, everyone, for the suggestions! It's very helpful to hear your perspectives on this. I agree that I shouldn't nag them or press them too hard, which I haven't been doing. My subject line was misleading since it was accidentally cut off before I posted and then I couldn't edit it after. It was supposed to read "How much should I tell them they should lower the price and accept for their house?" I've politely given them my thoughts when they've asked me for my opinion :)