Sunday, July 29, 2007

Real Estate Dilemma

Our real estate purchases have been stagnant since February when we purchased 2 houses on the same day. We spent the better part of 3 months rehabbing one of the houses while trying to flip the other wholesale. Neither house has sold and the nicer home is draining about $2000 a month cash from us.

So we have not been too aggressive in trying to buy more houses. We have had a couple of opportunities but just missed making an agreement with the banks. One was in Amherst which is a pretty nice area, so I had some regret that we did not get a better appraisal.

Now it looks like we have an opportunity to get a really nice house in the town that I live in. I know the values very well here and it is a high demand area, unlike the area where we own the other 2 houses. There are a couple of challenges to buying this house. Our financing does not allow us to buy properties over $150k and this house is going to go for about $220k (We have had it appraised at $268k, so that is not a problem). The rehab money we have doesn't allow us to live in the house either. So I will need to get conventional financing. My plan would be to rent out our current house and move into the other house.

The dilemma is that the down payment will use up all of our cash and there will not give us any cushion to pay the mortgages on the houses we are trying to sell. So we will have to exist purely on lines of credit until one of the 3 houses we have for sale is closed. This is a risky strategy but this new opportunity is the best house I have had the chance to buy. So what do I do? Live on faith that one of the houses will sell or pass up an excellent opportunity?

Update question: Why is this different from people that purchase a new home before they sell their old home? (I actually am against this practice, but....)


LuckyLily said...

Paul, just my opinion, but I think you're pushing your limits.

No cash and $20k in LOC, and you're bleeding out each month with *just* the properties you have. You know this won't last very long, not to mention that it's a LOC at a high interest rate. And you want to add another liability?

The new house... $268k ARV or "as is?" Does it need repairs? Buying at 82% of purchase price is good for the general public, but not really a smoking deal for an investor. If it *were* a smoking deal (in my book... purchase price minus repairs equals less than 70% ARV), I'd consider using alternative financing that requires less or no down... Can you find a conventional program? A different hard or private money lender? A partner?

Turning your house into a rental... will it cash flow? And not just taking in the mortgage payment, but vacancy, make-readies, repairs, maintenance.

I would sell your two other deals first. How long have they been on the market? Why haven't they sold as quickly as you anticipated? Are you ready to just break even or perhaps take a loss on these learning experiences? No shame in that; we took a loss on a rehab recently.

I wouldn't do this new deal, but of course, it's up to you. Are you letting your emotions get the best of you? Crunch the numbers, look at the facts and make your decision.

Paul said...

No, the new house does not need repairs - it is a really good buy in a great area. For an investor I like to be at 70% but as an owner can live with 80%.

My existing house is in the same town and demand for SFR's is high and supply non-existant, so it will generate $200 a month in profit.

One house that need repairs has been on the market for 5 months - average time on market in the city of Buffalo is 7 months so I am not surprised. The rehab has been on the market 2 months. I've been trying to sell the houses using flat fee listing services and that may be part of the problem.

Is this emotional decision? Absolutely. My wife has been unhappy for the 2 years with the house we live in (I bought it before marraige).

ab said...

Hi Paul, I actually have a friend who has attempted exactly the sort of thing you are considering, except in the philly market. I'm also a financial advisor, so wearing those two hats, my advice would be not to proceed at this point. It seems like you are staring at this new house with dollar signs in your eyes, rather than from a pragmatic standpoint. My friend's lesson was to ALWAYS have a reserve fund. No matter what comes along, no matter how sure it is you'll make money. Follow luckylily's advice and take one thing at a time, get rid of the other two houses first. Another one will come along when the timing is better, and when it will be much less risk to yourself and your family.

Paul said...

Thanks for your advice. Yes, I see $$ signs. In my career of investing I've rarely been able to buy in growing areas (lived in WV 20 years and the Buffalo area is losing population as well), so the chance to buy a property in an area with growth is overwhelming my pragmatic side at the moment.