Selling my first property, what to do?

[Juan Catano]

Hi BP community, I’m somewhat new to real estate investing so I’m looking to get your expert opinion. I own a single family home in Livermore, CA that I have up for sale with the idea of doing a 1031 exchange into a 3 or 4 plex. It is listed for $595K, during the open house there was a good amount of traffic but we didn’t get any offers. A couple of issues are that it is a 2 BR/1 BATH but the 2nd bedroom doesn’t actually have a closet and there is a family room that was built without permits prior to me buying it. I owe $175K and I was renting it for $2,095mo.

I’m considering the following options:

Opt 1 – Wait for one more month to see if a buyer comes

Opt 2 – Drop price to $550K

Opt 3 – Refi then use the funds to convert to true 2/1, then re-list for $630-$650

Opt 4 - Keep original house layout, refi to add an ADU and rent both units ($3,200 mo)

Opt 5 – Hold as is, re-rent and refi to get fund for down payment

Opt 6 – Convert it into a nursing home (My wife doesn’t like this option)

What would you suggest?

Thanks for reading, looking forward to your input… Cheers

[Dan H.]

Even though a bedroom does not require a closet to be a bedroom, buyer expect a bedroom to have a closet.  This problem and the family room without permits is not going to go away by itself in a month.  So Option 1 is unlikely.

Option 2 is an expensive option.  $45K is a fair amount of money to reduce the cost for issues that I believe should be able to be addressed for far less than $45K.  See my option 7 below.

Option 3 depends on zoning but is probably not a real option unless you happen to be zoned in an area that allows true duplex to quad.

Option 4 is a protected option in CA and likely possible.  It still would not be a good return on the equity or value but much better than what you are getting today.

Option 5 you currently have a terrible rental in terms of cash flow in terms of value and equity. Even if I use $550K as the value, your rent to value ratio is 0.38%. You likely need near 0.7% ratio to be cash neutral if you held at 80 LTV. The rent may work for you because your current LTV (again using the $550K value) is 32% but your return on your equity is pathetic.

Option 6 your wife is against and happy wife, happy life.  It also seems like it requires expertise and may require a lot of work.

So that leaves option 4 of the options you proposed as the viable/best option but I will propose an option 7. 

Option 7: Address the permit issue and closet issues if you believe it can get you a sell at close to $495K.  I suspect you should be able to do this easily for less than $45K, probably less than half of $45K.

I believe option 7 is your best option. I believe the property is not a good rent and will not be a good rental due to value versus rent ratios being so poor. I say this but I keep one that is even worst (about the same rent but worth ~$620K and similarly the LTV is real low so it has positive cash flow at its pathetically low LTV). I also should sell mine but it used to be my home and I do not sell it. Do as I say and not as I do ...

Good luck