Money Where Mouth Is - Listed Our House For Sale - Already Frustrated

You'll remember a few weeks back the contentious debate about what to do about neighbors who can't keep their property clean and their dogs quiet. I have long suspected these neighbors would impact the sale of my house, and its now coming to fruition. 

We listed our house on Friday and had three showings over the weekend. All said the same thing: "good price, great house, didn't like the area of the neighborhood."

This has me freaking out that we're going to be stuck with this house. We have an offer accepted on a house we really like, but we're not sure if we're going be able to make two mortgage work, especially with the little things the new house will need. 

Our mortgage rate is pretty high, making renting look profitless. AirBNB wouldn't likely cover mortgage either. Selling at loss would suck, effectively making new house more expensive. 

Are there "Refinance calculators" that can tell me if refinancing would be worth it? What's the percentages over mortgage that's ideal to cover all the costs of renting? Our current mortgage + tax + ins is $1475, we could probably rent our place for between $1600-$1800 depending on if we allow students and pets. 

What's the APR on your current loan? 

It's early.  Give it time.  Stay positive.

Current rate is 4.825%. We're getting quotes for 3.75% for our new mortgage, so obviously there could be an improvement in that regard. 

Just keep in mind that when you're refi'ing it as a rental, the APRs tend to be higher and you'll have have to have 20%+ equity in the house.

Also not sure how kindly lenders look upon you buying a house and refiing one at the same time.

We would only refinance if we cancelled the deal on the new place and stayed at our current home. 

Was buying the new house contingent w/ the selling of the old?

If not, just wait it out and/or start pestering the city to do something about the neighbors.

Renting is a feasible option, but you might run in to the same issues.

We're giving our current home two weeks on the market (also the length of our inspection period) to see what happens. 

If we get no offers in two weeks, then we're staying. If we get offers but they aren't high enough or whatever, we'll have to debate whether we want to take the risks involved with carrying two mortgages. 

I think the question is if you're able to carry to mortgages for the idle periods of a rental. From the numbers you throw out up there, it looks like you would already have positive cashflow from day 1 on your rental. That's a pretty good starting point.

If I'm reading right, your house has been listed for one weekend.  Stay positive, give things a little time. 

Every market is different but my condo took 2 years (2009-2011) to sell and the house I bought had been on the market for 3 years. 

You = 3 days so far 

Now that you're going to leave go full regulatory on him.  Who cares at this point?  Would a Section 8 rental be an option?  Payback?  

In reply to John Welsh :

Agreed. Also, from what I'm reading the market is slowing down a bit, so two weeks until offer might be a bit tight. I'd probably give it about a month before deciding to pull the listing or not.

Two weeks isn’t much time unless you’re in a really hot market.  I would make sure your realtor is spreading the word that you’re motivated and looking for offers.

Usually the people you get through that early in the campaign are "dream home" hunters, they're the ones that spend every waking minute hitting refresh on their home searches waiting for "the one" to pop up. They can be great, because they can be desperate to get hold of the right house, but they're often the most critical of things too. 

Personally, I think 2 weeks isn't allowing yourself enough time, 4 would be better. You're not selling a typical suburban home in a highly sought after neighborhood so your buyer pool is a little smaller and a bit more niche. This is also where your agent needs to be earning their keep, they should be selling the idea of a lifestyle and buying into a potentially up and coming neighborhood at the right time.

I sold a house last year in a very hot housing market, and it took over a month to sell. Just bad timing, a lot of houses hit the market at the time. A bit nerve racking, but it sold. My brother sold a similar house close by 6 months prior, in 5 days for well over the listed price. Timing is important. 

There are two major "back of the napkin" rules when it comes to rental properties.

1) "The 1% rule" states that in order to perform well relative to other investment possibilities, a property probably needs to rent for at least 1% of the home's value each month. So $1800/month is only "good" if the house is worth 180k or less. Now, you may not exactly be approaching this as an investment, but more of a way to not lose tons of money if you're stuck with the property. But, it may still be better to sell (even at a small loss) and be done with it than keep it and slowly lose money over a few years all while dealing with the hassles of land-lording. Paying two mortgages+ utilities/insurance/taxes in times of vacancy, and paying for maintenance/repairs over time will eat tons of your money outside of the rental money if the rent just barely covers your mortgage.

2) "The 50% rule" states that half of rent each month should be set aside for non-mortgage costs related to owning/maintaining the property. This includes insurance, property taxes, both short and long term maintenance/repair costs, and coverage for times when the property is vacant. It does not include any accounting for time if you'd be handling things at the property, screening tenants, or driving to/from the property, hardware store, etc.

** The asterisk with the 50% rule, is that it assumes the property meets the 1% rule as well. If your property is renting for a value below 1%, you will need to save more than the 50% for Cap Ex. For example, if you're getting 1800/month in rent for a 180k property the 50% rule would cover the taxes/insurance/maintenance of a 180k property. If the place is worth 300k, it's going to have higher taxes, more expensive insurance, and potentially more expensive maintenance, so 50% of $1800/month would be inadequate.

 How certain are you that when the prospective buyers said neighborhood, that they actually meant your physical neighbors? Some people are snooty and maybe consider your neighborhood ghetto in general. These are the types of people that wouldn’t be happy in that neighborhood anyway. If you can somehow find out if they specifically mean your actual neighbor, then you could actually go to that neighbor and tell him that because of the way things are going you were unable to sell. And if he could do something about his situation when they are  Showing the house, that would help him and you. Maybe, maybe, that will work.

3 days isn't much time, definitely don't freak out for 2 weeks.

We got very lucky on our house, it was on the market for 3 hours and we got an offer over asking price but the market we sold in was insane, can't expect that always

1) "The 1% rule" states that in order to perform well relative to other investment possibilities, a property probably needs to rent for at least 1% of the home's value each month. So $1800/month is only "good" if the house is worth 180k or less. Now, you may not exactly be approaching this as an investment, but more of a way to not lose tons of money if you're stuck with the property. But, it may still be better to sell (even at a small loss) and be done with it than keep it and slowly lose money over a few years all while dealing with the hassles of land-lording. Paying two mortgages+ utilities/insurance/taxes in times of vacancy, and paying for maintenance/repairs over time will eat tons of your money outside of the rental money if the rent just barely covers your mortgage.

That 1% rule sounds WAY off. At 1% per month, rent would be 30% higher than what the mortgage on the house would be, buying it with no money down. I don’t think there are many places in the country where you could charge 1% of the value of a home in monthly rent. Maybe it’s a .5% rule? That works out much more realistically at today’s interest rates. 

Boost_Crazy said:

1) "The 1% rule" states that in order to perform well relative to other investment possibilities, a property probably needs to rent for at least 1% of the home's value each month. So $1800/month is only "good" if the house is worth 180k or less. Now, you may not exactly be approaching this as an investment, but more of a way to not lose tons of money if you're stuck with the property. But, it may still be better to sell (even at a small loss) and be done with it than keep it and slowly lose money over a few years all while dealing with the hassles of land-lording. Paying two mortgages+ utilities/insurance/taxes in times of vacancy, and paying for maintenance/repairs over time will eat tons of your money outside of the rental money if the rent just barely covers your mortgage.

That 1% rule sounds WAY off. At 1% per month, rent would be 30% higher than what the mortgage on the house would be, buying it with no money down. I don’t think there are many places in the country where you could charge 1% of the value of a home in monthly rent. Maybe it’s a .5% rule? That works out much more realistically at today’s interest rates. 

 

Don't take my word for it, do some reading about rental math and making the numbers work. The only way owning a rental at .5% makes financial sense (relative to other investment vehicles) is if the property appreciates a fair bit faster than inflation and that's a total crapshoot. If I'm investing 6 figures into a property, and I'm going to have to deal with all of the added risk/hassle of a rental, I want to make sure that it's going to outperform a simple index fund or it really doesn't make sense to me to waste my time/money. Why have that much of my net worth invested in an inefficient way that also complicates my life more than the alternative? A building breaks down over time and besides needing frequent small repairs (paint, flooring, plumbing, appliances), it will eventually need expensive ones (new roof, HVAC, etc). It's very possible that the rental ends up costing the owner money long term (rather than making the owner money) when the property needs a $20k roof or HVAC system or something and the owner hasn't been charging enough above the mortgage or setting enough of the rent aside over the years to cover those kinds of expenses.

You've hit on a key point though. It's really difficult to find properties right now that meet the 1% rule, especially in the hottest markets, because home prices have risen so high that rents aren't keeping up. Just like any other investment, it doesn't make great financial sense to buy in when prices are at or near their highest. That's a seller's market. To that end, in my location, I've been watching as land lords with several properties sell off their places because they can harvest the gains while the market is high rather than continuing with the slow, long term gain of a rental. It's way better for them to take the 50-100k or more in profit now by selling, than it is to hold on and try to make that same amount over the next 10 years in rents. Buy low, sell high, just like anything else that you intend to make money on.

Keeping a property that you already own as an underperforming rental is a potentially expensive gamble where you're just hoping that one day in the future it will appreciate high enough to make the numbers work, or that rents will rise enough to make it work. That's sunk cost fallacy. You're probably better off selling it (even at a slight loss) and moving on than keeping it as a stressor in your life and financial anchor around your neck. It's a "death by a thousand paper cuts" kind of thing.

It is area dependent, but the market is pretty hot right now.  With the right realtor and pricing homes in my neighborhood are getting sold in a week.  But don't worry yet and drop the hammer on these neighbors about their mess.  You know it is the right thing to do.

Good luck, man. We’re looking to list our house asap. The houses around us have sold quickly for prices I’d be more than happy with, In spite of the “Bumpusses” across the street. But knowing my luck, it’ll be a huge berkeleying nightmare.

In reply to pheller :

Stay the course sir - anything with a roof is selling quick these days.  You have made your decision amd it will work out.  

pheller said:

It should be mentioned that while junky neighbor guys piss me off, I don't think they are badly impacting my home value. My realtor estimates my house has gained 10% in value in just two years

You posted that last month, why the change now? 3 days on the market and a few showings is early. Someone will buy it, just as you did. 

pheller said:

We're giving our current home two weeks on the market (also the length of our inspection period) to see what happens. 

If we get no offers in two weeks, then we're staying. If we get offers but they aren't high enough or whatever, we'll have to debate whether we want to take the risks involved with carrying two mortgages. 

As others have said, 2 weeks is not enough time. 

Additionally, if you are concerned about the sale ability of your house, I would suggest that your above plan is not great. 

The better plan would be if you don’t get the offer you need in 30 days, then kill your offer to purchase the new house, but KEEP your property on the market. Don’t resign to staying put. Give it the time to sell. 

If your neighborhood really is questionable, it could take time. So keep it on the market, and keep working on selling it. When it sells, THEN buy another house. 

Steve_Jones said:

pheller said:

It should be mentioned that while junky neighbor guys piss me off, I don't think they are badly impacting my home value. My realtor estimates my house has gained 10% in value in just two years

You posted that last month, why the change now? 3 days on the market and a few showings is early. Someone will buy it, just as you did. 

Your realtor’s job is not to give you legitimate assessments on the value of your property. Your realtor’s job is to get you to sign listing agreements, then negotiate you down to meet the real market value as buyers make offers. 

They routinely upsell the “value” to sellers to get them to sign listing agreements. How much do they bump the price?  About 10%. 

In other words, the psychology of marketing real estate is to tell the sellers their property is worth about 10% more than it is. That’s a number that will usually get them to sign, and also a number a realtor can usually get a seller to give up when they are actually sitting at the negotiating table with an offer in hand. 

I would not say your property has increased in value.