Hello BP!! I overpaid for a property. There I said it.
My quick back story. I was living in Las Vegas, NV and had a short time period to find a home to purchase in our new location of Eau Claire, WI. I went through a spreadsheet of homes in our (wife and I) price range and she pulled the trigger on a house we figured would be about a 13% ROI if we stuck to our original rehab plans of kicking in about $30k. Since we couldn't get eyes on the property ourselves we had 3 parties (2 family, 1 hired inspector) to look at the property. All said it was a solid house with usual old house issues. House asking was $90k, wife pitched $88k without me as she was getting antsy with other houses she wanted sold (I wanted to start at $70k). Needless to say they jumped on the offer, we were able to knock off an extra $500 bringing it to $87.5k.
Now jumping to current. I got to the house and realized that all the feed back we had gotten was way off. A little upset with all parties including myself as I guess I did not relay my intentions specific enough for what we needed in a house. The one thing I didn't want to do was to worry about foundation and electrical. Huh. Now I'm looking at rewiring the entire house. Good part is the house is laid out to make wiring to all floors through a central column were the chimney will soon be removed.
So what's my problem? The way the house stands I figure the house is actually worth $65k. City assessment put it at $75k. So I figure I'm starting out $20k in the hole with my original intentions to turn it into a rental property. Average home rental in the area is about $750. Our current mandatory mortgage (wife's dad fronted the purchase with his great credit) $350 but figure tossing in an extra $100 giving him a nice profit. We are paying the actual mortgage of $65k and paying back a no interest personal loan to him for the rest.
So what's my question? What would you do? How would you try to keep the property as an asset/insvestment?
Overpaying for a property is not the worst thing that can happen to you. When I began building my rental inventory I overpaid for every house I bought. The market was competitive and I wanted to buy houses (not just make offers on them.) Everyone of them was cash flow positive and if i had waited 6 months or so I might have had to pay the price I bought at anyway. Unfortunately, this was a few years before the big crash. I still hold some of those properties and even though they are definitely not worth what I paid before the crash they are still cash flow neutral to slightly positive. It isn't that hard to hold them.
This is a long way around to telling you that time can heal a lot of mistakes in real estate. If your house is cash flow neutral to positive when it is rented it should not be too difficult to hold. If the market is appreciating even a little it may not be long before you can afford to sell your mistake. Then again, if rents rise along with prices you may not wish to.
If you already purchased the house you don't really have many options. You are upside down on a deal, it happens. Rent it out, pay down the mortgages, let it cashflow and appreciate. Time heals most wounds in real estate, just give it time and it will sort itself out.
Did you said that you hired and inspector for estimating the property's value? You can hold him responsible for not disclosing the problems you're having with foundation repairs/electrical wrings. The seller is also responsible for disclosing information regarding the state of his house to you through a seller's disclosure form, were the damages noted? If not you can also go after the seller for withholding information about the home and be paid for damages. Best of luck and despite it all, congrats on purchasing your first property! 1st step is always the hardest!
A couple things to think about:
1. Could you attempt to resell for a slight loss right now if you found the right buyer? Maybe fix only a few items to make it more marketable.
2. I would evaluate my rental budget and try to tie cost to how much it will raise the rent. Do you have to remove the chimney? Do you have to re-wire? Can you leave some or all of the old wiring and ground each outlet at the outlet itself?
@Non Phan The inspector was a home inspector not an assessor. We have given our negative feedback and will not be working with this inspector in the future. As for the seller, I'm sure there are things we could go after them for. However, as we have learned during our time in the house the family had very little with a large family, all the work done was done by a do-it-yourselfer who obviously did not have the funds to do the simplest repairs with any amount of quality. So if we did end up having a case and awarded anything, I do not believe we would get anything back or if we did the time spent would not be worth it.
@Sawyer Lubke Selling the property is not on the table, I wouldn't say it isn't an option, but surely not on the table at the moment. We would be atleast $20k if not more under with no place to go to and another debt payment.
Thank you everybody for your input it has given me a lot of things to consider. My wife and I are looking toward the future and I think we are simply going to consider the money lost as the price for education. We might have the opportunity/ability to rent out the basement as an efficiency apartment and that could bring in about $300 extra. So if all went well we could end up having cash flow of about $1,000 a month. We will simply have to be extra lean on budgeting and smart in our strategy. Again thank you, I have a renewed confidence in making this work.
It's not the best place to be, but not the worst by any means. And, I would guess, not an unusual mistake to make going into a new market. If you had intended it as flip then yes, you'd definitely be losing money. But for a rental the price the building would sell for at the current time is somewhat irrelevant (unless you need to sell at the current time! ) Would you be getting more cash flow if you'd bought cheaper? Sure, but that's water under the bridge now. Don't waste time kicking yourself- onward, upward
In the state that the house is in I would not get anything in positive cash flow. I would be lucky to break even. On top of that I would not be able to get quality renters into the property in the state that it is in.
I kinda side with @Nicholas Kral
Options are to sell it now and lose money up front and lose you said 20k or so.
The next option is to commit to hold on to the property. To do that, you'll need concrete numbers.
How did you figure $65k for what the house is "worth"? You figure 30k in rehab cost so. You might wanna get a CMA done so you can get a more solid ARV. ARV - Rehab cost - cost you paid = profit? If profit is positive, great. If negative, you either sell or hold. Selling is immediate. Holding the property takes up your time. I don't see rent is not guaranteed to come in due to vacancy and other factors. The property will take money and time. This is when you ask, how long will you be upside down? 5?7?10 years? Get the numbers you need to figure out how long. Once you know how long, you should have enough factors to make your decision.
I overpaid for a property too. First time buying. I'm not too upside down on it, and I've calculated that the property will have good cashflow after 2 years. ROI will be very tight until then so I minimize the cost to keep it and vacancies.
Unfortunately, one of the worst things you can do is overpay for a property, but it is much much worse to overpay for a flip than for a rental.
You said you bought the property with your father in law's credit, so didn't the lender ask for an appraisal? Was there any real estate agent involved in the deal? If yes, didn't the agent provide you his/her opinion about the value?
If I were in your shoes, I would keep the property and chalk up the negative equity to real estate education and move on. Everyone makes mistakes whether they are newbie or experienced investor. The important thing is to learn from your mistakes and not repeat them.
@Russ Copeland Just forget things and move on, thinking too much of it makes it worse.
Keep it as a rental until it makes sense to sell it. Learn from your mistakes and don't repeat them. Don't be too hard on yourself. We all make mistakes and we make the best decisions we can at the time. Successful investors make LOTS of mistakes but they don't let those stop them from being successful.
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