We finished a house in the Des Moines market built in 1894. It was a real challenge - and took a year to turn around. It's beautiful but is an interesting one. We have a signed lease and deposit with a couple that love the house - they have expressed interest in executing a purchase option and we have put some preliminary terms in front of them on that subject.
Anyways, one of the challenges with the house is that it's so unique. Here is a link to the zillow listing and you'll see what we mean!:
Here's some info on possible relevant items related to the market:
- At least here in Des Moines, it's indicitive of what I'm reading nationally, that there is suppressed inventory which is driving higher than usual prices. Not sure when that'll change but on a $/SQ FT basis, the house compares well to surrounding comparables - however the possible lever/challenge is that most of the surrounding area are houses built out in the middle of the 20th century - whereas ours was originally a farm house in Des Moines that was added on to and annexed as the city of Des Moines grew. It's got a cool history and story to it which appeals to some, however the HIGHEST comps in the surrounding area are going to be around $170,000 -180,000 at the top end. Most of the 1940-1960 houses are closer to
- All that said, the intangibles are quite striking on this one and we are getting consistent feedback to that effect. However, it seems my initial read is that there's no doubt that we're selling/appealing to a smaller 'subset' of the market that places value on the charm and history of the house. The average upwardly mobile family that buys what home they can afford would probably choose to move to a suburb.
- Two recent comparables on the same street are houses that sold for $157,500 and $162,000 - with about 1150 sq ft and 1200 sq ft, respectively. The $162,000 transaction was the next door house which was also rehabbed during the time we were working on ours. This house in question is 1800-1900 sq ft (not sure exactly as the assessor page is not accurate) and 'feels' different, in a good way.
- Our numbers on this house: so first relevant info here is that it was purchased under a Self Directed IRA. So, there comes with that certain rules/limitations for us. One of those is that we need a 3rd party property management company to manage it under a lease scenario. The house was purchased for $52,000. We have in the tens of thousands into the house in terms of repairs, and we have about $6,000 left in the IRA for rainy day, etc.
- On the current situation, we have interested tenants (already paid the deposit and signed a lease starting on Jan 1) that are looking to grow a family (first baby on the way) and we really like them. They have an interesting background (both college educated entrepreneurial musicians) and actually went to a college where I grew up that I'm familiar with and know some graduates from (and think good things about etc) - We have agreed to a lease of $1550, and in good faith/principle, we have agreed to them having a purchase option kick in under a separate agreement after 6 months of a traditional lease. That will allow us some time to manage whatever things come up from a maintenance perspective, and allow them to save up for the down-payment. They have not outright agreed to a purchase price of $215,000 but the terms that we offered them for a private debt/owner financing are based on that sale amount. We feel overall like we are offering some pretty competitive rates and the sale price is really where the possible question is - again, the comps per above and max sales data points might struggle to support this - but there's not a lot of beautifully done, restored 1894 original farm houses out there. I tried to make it clear when the tenants asked if they could do an appraisal. I guess worst case scenario, if these tenants want to push back on the sales price then we may have some room to push back on the financing terms. My expectation is that if they hire an appraiser on this transaction, the appraisal will come in well below 215,000 and we would have to challenge that to 'claim value'. But on the upside, they love the house and just an outright lease may not be the worst thing in the world under current terms if it works for both parties. Here are the financing terms that we offered to them:
We caveated that we would track an increase in rates that track increases in the prime rate (anticipated over next year or so)
We did not mention any PMI but I am now kicking myself for not doing this given that we don't know what their ability to come up with down-payment is.
- I'd be happy to share any other details about our balance sheet or 'big picture' if you think it's relevant in terms of evaluating our options with this property. Just let me know what if anything you want to know there.
Basically what we are looking for is advice- Anything and everything :)
Things that would be really helpful are understanding what we should be thinking about in terms of a private debt instrument - things like - if we sell the house and have a private debt note - how do we go about selling that?
Also, does anyone have any experience doing something like this under a Self Directed IRA?
Thanks very much :)
Jim and Rachel
Hello Jim and Rachel,
While an IRA holder is not allowed to be the formal property manager of record, they are certainly able to handle the decision making, and, depending upon the IRA provider's services, the paying of bills and the receipt of rent or loan payments can be online and for free.
Thanks for that. Our custodian is down in Austin TX and we feel has been doing a pretty good job overall.
That's good to know though and I can explore that with them.
Do you have any other thoughts on best route to go? We are interested in hearing some thoughts on the possibility of offering financing as this is the first time we've done that.
While I don't offer investment advice, I will say that an IRA can offer financing in much the same way as a non-IRA entity. It may be a logical sequence to decide the type of deal that makes you comfortable and then run that scenario past an IRA expert to see if it violates any IRS rules for the account.
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