What should I do with this house?

[VMAX]

A property I bought in cash was rehabbed to be turned for a profit. House came out nice and was over budget but not too bad..... It appraised and was listed for $125 and I have had 2 contracts on it that fell through around this price. I have now dropped it to $119 to get more buyers interested. I will have about $106k in the property including closing costs upon sale. That will leave about $13k in profits at $119.

 I am having a hard time selling it in this economy and am considering owner financing or leasing it. One problem is my realtor who has been great for many years, made a mistake and did not catch that this property is in a flood zone and requires flood insurance. This has killed a few deals with buyers also. So at this point I am on the fence on what to do with it....

Lease it and I run the risk of flooding and loosing good tenants. All though besides this factor it would be a good rental.

Lease to purchase maybe??????

Seller finance it and not get my cash back for a while but make more on the interest in the long run?

Wait until I get a buyer?...... So far it has been 6 months on the market.

Any advice would be appreciated on what you might do in my shoes. I have 13 rentals and am not against leasing it. I just put in more than I normally would for a rental in this house and the flood issue bothers me some.

Here is link to the house.

http://search.har.com/engine/10939-Gulfdale-Houston-TX-77075_HAR98391682.htm

[jmd_forest]

Depending on the cost of the insurance, keep the $125K price and offer to pay flood insurance for 10 years.

[motivatedceo]

Now is definitely not the best time to flip. It can be done, especially if you get a house cheap enough, but it's still a "buyers market" and not a "sellers market" ... for probably a few years to come.

I would definitely consider owner financing it.  I recently met some guys who are currently owner financing ... like 300 houses! That blows my mind. They buy houses for cash AND also with existing mortgages in place (a sub2 purchase I guess, using a wraparound mortgage?), sell them above market, close at a title company with about 10% cash down, and carry a mortgage for 3-5 years on a balloon note amortized over 30 years. If the person defaults because they can't pay the balloon, or if they refi, they make out like bandits considering you're paying almost nothing but interest for the first few years of a mortgage.

But, you can also rent it out and just wait for the market to improve...then sell it. I am doing that actually with one of my "nicer" rental properties. Once the market picks back up in a few years, I am going to unload it as it's not near as profitable as my other rentals.

PS - thats a good looking house!

Good luck!
 

[javipa]

Sell the house for what you can get.  Forget chasing unicorns trying to salvage this bad deal. 

If you read my posts, you know I advocate seller financing, and I'm a grizzled veteran on this issue.  However I've got systems developed to handle both marginal rentals and marginal seller financing candidates.  This house has been transformed into a bad rental candidate (or never was), and according to your numbers, was never a good flip candidate either. 

Relying on seller financing to somehow overcome a bad investing decision, is just adding gas to this fire, and a last resort. 

Again, you're much better off getting out of this property asap, and learn that agents are not there to keep you out of trouble, but their primary focus is to generate commissions. 

I could say a ton more, but the bottom line is that this lemon isn't in either the demographic or niche you should be attempting to make lemonade.

If this were a newer home with LOTS of extras I would say, "Go for it."  There would be a ton of demand in that situation, but this is not that situation.

Okay, that's all I've got.  Good luck and I'm pulling for you regardless of what you do.

 

[davewindsor]

Lease it and I run the risk of flooding and loosing good tenants. All though besides this factor it would be a good rental.

Why would you risk loosing good tenants if you lease it?  As long as you have flood insurance, what difference does it make if there's a risk?  That's the purpose of insurance.  To deal with risk.  What kind of people normally live in this area?  If it's a good area, it doesn't mean good tenants won't live there or choose to remain.  There's obviously a demand for this kind of housing; otherwise, you wouldn't have a neighbourhood here.  What kind of flooding happened in the past and how long ago was it?  Is this property overlooking a really beautiful brook or river?  If other people in the neighbourhood are finding good tenants and keeping them, why can't you?  What drew you to this property?  Was it just the price or was it something else?  Stay positive.  It may not be as bad as you think to lease it.  Maybe a consultation with a good real estate lawyer can put your mind at ease.

[VMAX]

Thanks for the replies....

Javapa, We had two contracts/appraisal at around $125k that put me at $19K profit cleared after dust settles. To me that is good return on your investment. But since then no more contracts at that price.

Davewindsor, From past experience on my other properties I did have one that flooded and it was a disaster to deal with and loss of rents for almost 6 months. Plus I loss some good tenants. This property has flooded twice according to one neighbor that has lived across the street for 25 years. It is a mixed ethnic neighborhood and your average 3/2/2 setting. Has HOA ect.

I knew going into this it would be risky during this economy but I remodel homes and would love to be able to flip houses back to back and keep the crew count up. So I tried it........ Still enjoyed it and wish I could do more but probably wont. Buy and keep it is for a while.

Still dont know what to do........ But I do have a problem losing money on a deal if it came to that I would lease or owner finance.

One couple wants to buy it now with 10% down, 3 year ballon and asking price at $119. So that would put me at $12k down payment but unfortunately I would then have to pay $5700 in commissions.

[javipa]

We had two contracts/appraisal at around $125k that put me at $19K profit cleared after dust settles. To me that is good return on your investment. But since then no more contracts at that price.

Appraisals don't mean squat without a sale.  I've lost count of the number of sellers waving appraisals under my nose to justify me over-paying for their hell holes.

I understand your position, but if the market is/was failing this fast, you, as a professional should have been working this into your analysis (along with the extra insurance requirements).  Meantime, to put your credit and cash at risk just to keep people employed means you've stopped investing and turned to gambling.  Hey, gambling keeps things interesting; win or lose.

[davewindsor]

This property has flooded twice according to one neighbor that has lived across the street for 25 years.

What kind of floodings are you taking about?  Basement floodings or floodings that go several feet above the main floor?

[VMAX]

We had two contracts/appraisal at around $125k that put me at $19K profit cleared after dust settles. To me that is good return on your investment. But since then no more contracts at that price.

Appraisals don't mean squat without a sale.  I've lost count of the number of sellers waving appraisals under my nose to justify me over-paying for their hell holes.

I understand your position, but if the market is/was failing this fast, you, as a professional should have been working this into your analysis (along with the extra insurance requirements).  Meantime, to put your credit and cash at risk just to keep people employed means you've stopped investing and turned to gambling.  Hey, gambling keeps things interesting; win or lose.

Javipa, I thought I covered costs with sales comps prior to purchase. I gave a serious fudge factor per sq foot even then we fell a good amount below sales comps 6 months back in the neighborhood. I am not a professional flipper being my 1st one but am an experienced contractor.
Javipa, I am not even as negative towards this deal as you. Anything positive prospective of the situation?

Dave it had about 1-2 ft of water in it during two major storms. This is all I know of. I did see evidence of this behind an access door for one of the tubs?

[davewindsor]

Dave it had about 1-2 ft of water in it during two major storms. This is all I know of. I did see evidence of this behind an access door for one of the tubs?


[/quote]

1-2ft of water in the basement or 1-2ft of water on the main floor?

[javipa]

Hey VMAX,

I'm not really meaning to break your chops, but after re-reading my posts, that's exactly how it sounds.  My apologies.

In any case, coming out 'even' is always better than coming away with a loss.

That said, I really don't like your real estate agent.  Knowing about special assessments, tax rates, flood insurance requirements, and a myriad of other things, should be basic real estate 101 due diligence.

In the meantime, you're evidently working with a residential real estate agent that does not have enough, or any, experience with flipping.  That person must go.  You can't offer on-the-job training with this kind of risk. 

Go find an agent that has actually done what you are wanting to do, and network with other rehabbers.  Otherwise, you're gonna have more costly surprises.

Thankfully, according to what you said, you've built in a margin for error.  However, if you're gonna have errors like this, I can think of surer, easier and faster ways of making 19k, such as sub2 deals without rehabs, loans, or carrying costs.  Just saying.

Sell that property and insist on bigger discounts ...and dump the agent.  Please don't tell me this current agent is double-ending this thing, or I'll spit.   

Frankly, not that I haven't been, in the end, you've got to be your own market expert, appraiser, estimator, and deal analyst, because nobody else will care like you do.  Until you 'get there' you need better help than you're getting.

  

[VMAX]

Sorry Dave this house has no basements. All floor level. One of these storms (Allison) Half the city flooded so I really dont count that one. Hell one house I have from 1930 flooded for its 1st time during that storm.

This agent has worked his ass off for me on say 15 deals. But they were all purchase deals..... On the selling side of the table (just this deal) I am not too happy with him. Amazing what you can learn with the tables turned. But we are under contract or I might have allready fired him. But after this deal he is gone......

After all the time and effort I just cant swallow taking a loss. I would rather lease it and take my chances. Or at least get 15k in rental income than sell. I know it is stubborn mentality but failure is just not an option with me.

Truthfully I enjoyed the rehab and would like to do more. It beats the hell out of having a client to deal with. I like the freedom and being able to use my creative side without a client never ending opinions.

[davewindsor]

Dave it had about 1-2 ft of water in it during two major storms. This is all I know of. I did see evidence of this behind an access door for one of the tubs?

If it has one-two feet of at grade flooding, have you looked into what it would cost to raise the house two feet?  What would it cost to jack it up and add two feet of cement block on top of the original crawl space foundation wall and add a staircase to the front and back?  I knew a guy who had a two and a half storey century home moved in downtown four blocks from where it originally was onto a new foundation so he could build a plaza on the original parcel because the heritage committee wouldn't give him a demo permit.  If they could move an old house, I don't see why you couldn't raise yours.

[VMAX]

thanks Dave but it is a slab foundation house. If it was a pier and beam house I could see it. Just got another guy wanting to buy it today with owner financing, but for the long haul. I nromally can make decisions fairly fast but this one is a tough case.

[javipa]

VMAX,

Check out this deal summary offered at flippingjunkie.com

http://www.flippingjunkie.com/2011/def-leppard-final-house-flip-numbers

He bought this nice, newer home, that didn't need a lot of repairs for 65% of the effective ARV (of the final sale price) less repairs of $6,500.

His gross profit was about $31k and his gross overhead was about $31k including everything.  That's a monthly net income, before taxes, of $7,750.00. 

This is what everyone's deals should ideally look like.  Just saying.