Overpriced, first home bought in 2007 - what to do with it now?

32 Replies

{Numbers included}

You've heard it before: in 2007, my husband and I were young and naive, and desperately wanted to purchase our first home. Not only did we pick a neighborhood that we didn't know well (which turned out to be rough), we bought way too high right before the crash. This particular area was hit hard by foreclosures and we soon found ourselves owing more than the home was worth. So many lessons learned. 

Long story short, we kept this property as a rental. It does not cashflow; our tenants have paid down the mortgage over the past 11 years and even now, we would barely break even if we sold. It's still not worth what we paid for it. There's a lease in place with renewal in January.

Numbers

Purchase: $172,000
Downpayment: $17,200
Owe on (interest only) mortgage: $102,303.33
Monthly payment including $100 Principal, Interest, Taxes, Insurance: $1031.45
Rent: $1125.00
Average Monthly Expenses: $150
Cashflow: $-56.45
Comps selling ~: $140,000
Improvements needed to sell: Likely $10,000

THOUGHTS ON WHAT YOU WOULD DO?

  1. hold it and let it appreciate/pay down down the mortgage? If so, at what point would you sell?
  2. Sell it and just move on?
  3. Other ideas I'm not thinking of???
Thank you, in advance!! Sara

Sell and move on.  Based on your numbers, even with the equity buildup, you are still going to be negative in the end.  You are not going to improve this situation standing in it.  Sell and move on.  You can recover what you lost here, and make more, in your next series of deals.  The longer your stay here, the more you end up losing, and more important...you have lost time that you can't recover...like you can the lost cash you've accumulated thus far.  Sell and move forward.

REI is much like Poker, with the most important rule being "stay in the game". Every hand you lose, no matter how much you put into the pot, has not lost you any money...yet. The money you had in your control, is just in a different pile on the table, which can be recovered in future hands as long as you are "still in the game".

You haven't lost money here (yet) because you are still in the game.  If you stay in this "hand" (this property), you will be out of the game.  Then you will be counting your losses as losses.

Get out while you can, move into the next round of investing, recover your losses from this deal in future ones, and more profit beyond that.

...and please, don't rationalize this deal still can <fill in the blank here with all kinds of rationalizations>.  This deal is done.  Get out while you can.  Move forward, not backwards....there's profit ahead of you...and a cliff behind you.

Maybe you could sell it as a Rent to own to someone with poor credit.  This allows you to ask for more than market, PLUS you get a sizable down payment on it.  You can also ask for above market rents as well.  

I would likely sell and move on. Continuing to deal with negative cash flow and stuff like that would not be worth it for me personally. I’d rather lose a little money from selling than dealing with it more

I think you all are saying what I needed to hear! Sounds like the upside of hanging on to it is little to none. 

Can you use a modest amount of cash flow from a second rental to cover the spread, in the spirit of Rich Dad Poor Dad?

Can you plan a re-financing that would re-amortize your loan schedule to improve cash flow?

Can you generate unusual secondary rent from someone other than the existing tenant? Garage storage? Attic storage? Parking?

Can you contest your RE taxes?

Selling might be wise, but I don’t sell.

Why is it on an interest only loan?  What rate?  Can you refi to a lower rate for 30 years and make it cash flow?

Ask yourself this.  Would you let your daughter live there.   If no sell.  If yes -hold on.

Originally posted by @Linda Moore :

Ask yourself this.  Would you let your daughter live there.   If no sell.  If yes -hold on.

 What does this have to do with any of this?

Originally posted by @Jonathan Cope :

Can you use a modest amount of cash flow from a second rental to cover the spread, in the spirit of Rich Dad Poor Dad?

Can you plan a re-financing that would re-amortize your loan schedule to improve cash flow?

Can you generate unusual secondary rent from someone other than the existing tenant? Garage storage? Attic storage? Parking?

Can you contest your RE taxes?

Selling might be wise, but I don’t sell.

A - Paying good money after bad money is not in the spirit of RDPD...it is in fact the opposite. 

B - Why would you not sell a bad deal?  Captain my Captain...and down with the ship.

C - Want to play Poker some time?

Originally posted by @Joe Villeneuve :
Originally posted by @Linda Moore:

Ask yourself this.  Would you let your daughter live there.   If no sell.  If yes -hold on.

 What does this have to do with any of this?

 I doubt she wants her daughter living in the Hood. Zhood properties don't appreciate. 

If she OK with area getting better values will rise also. 

This post has been removed.

@Joe Villeneuve

A) Yep, it’s a bad deal. And the RDPD solution is unconventional. But I’d still find a way to keep it. Long term it’ll be nice to have.

B) Yep, that kind of Captain. Has worked for me - though I’ve avoided these shoals to date.

C) We can watch poker anytime while chatting about RE.

You should had short sold it.

You mentioned that your outstanding mortgage is around 102K. If you refinance with current rate of say 5% with 30 years, the Mortgage payment comes out to be around $550. Why not refinance and make this cash flow positive property.  Am I missing something here ? I am not really familiar with refinance process in USA.

@Sara C. In the last six months I've sold the 4 worst investments I'd ever made and my only regret is not doing it sooner. I'm positive you'll say the same after you sell this one.

Three of the four I purchased in 2006 and one in 2009. And they were all absolute dogs.  It was my experience that selling at a loss is a blow to the ego more than anything. I had to admit to myself that I made a very foolish decision.

Get rid of it and move on. You're a lot smarter now for it and will make money off the lesson learned.

I'm with Joe, but want to hear more about the mortgage situation. Several folks above had good points (re:refi). Has the area improved at all in those 11 years? When did the property start appreciating again and at what annual rates?

Can't thank you all enough for the thoughts and suggestions. 
I will likely run the re-fi numbers; I think that is a good place to start. 

About the loan, this was part of the "creative financing" of 2007, an interest only loan with 10% down. The rate has always been low and is currently at 4%, so we haven't refinanced. But of course that could change soon. 

This isn't the ghetto. I would say a mid Class C neighborhood. It started appreciating again in 2012 at about 3% per year. 

Sell and move on. You will feel 10' tall with the weight off of your shoulders.

Do you plan to purchase other investment property in the future? If so, unless you are willing to invest in a different area, you probably won't find a better opportunity than the one you have already paid down. You've already done all the heavy lifting over the last 11 years. If you were just making the interest only payment that would be a different story. But people underestimate principle pay down!

If you are thinking real estate investing might not be for you, or that you would consider investing in areas where the price/rent ratio is better, then that is a different story.

@Sara C. - sell and move on... It will allow you to focus your energy and money on more worthwhile things...

I bought into the peak in Phoenix in 2004, after seeing a 20% paper profit, it fell by like 60%... I sold and lost $100K, but it also allowed me to go back and re-focus on local markets....

One more point. There are many suggestions to sell and move on. I understand that selling at loss and moving on is one of the toughest things to do. It hits your ego and you have to admit that you took a wrong decision. Many of the comments address this particularly. 

However, I have slightly different take. Lets say you think current market price of this property is 140K. Would you have bought it today for this price and with the cashflow after refinance ? If the answer is firm No, then you should sell. 

Also, think about your best alternative. Lets say you sell. You have 38K equity now. Deduct 10K  for improvement to sell. That leaves you with 28K. Deduct agents commission and closing costs, if applicable. That leaves you with say 22-25K. Now what are you going to do with this money ? If you are planning to invest is another residential property, you need to factor for closing costs there too. Suddenly your 38K equity is less than 20K. Are you going to get better cashflow/appreciation than the one which you would get if you refinance this one ? 

In summary, this is what I would do.

1) Are you going to get refinance and make this property decent cashflow positive. If no, then sell

2) If you refinance, whatever cashflow you are going to get, are you going to get better cashflow/appreciation with 20K downpayment in similar properties. If yes, then sell

3) Otherwise, refinance and keep the property.

PS:- IMO, from the pure analytical standpoint, your purchase price is irrelevant. All that matters is current numbers and current alternative 

Selling just to repeat the same does not make as much sense as a refi to make it cash flow. Can you flip this into a duplex or more?. Can the existing residence be economically modified to accommodate 2 renters?

@Sara C. Perhaps you can lower the interest rate and refinance to make the numbers work better? Also, if you can lower the monthly expenses that may help as well. Just a thought. Good luck! 

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