Wwsad?

[riverwed070707]

Feeling a bit of deja vu here because I posted a very similar thread 4.5 years ago (holy cow, have I really been here that long??) but now I'm asking with a different set of circumstances so here goes.

We want to move. Desperately. We're starting to explore selling options and while we finally have enough equity in our home to cover selling expenses, the more I think about how a realtor is essentially going to walk away with more from this house we've owned for 6 years and poured thousands of dollars of renovations into kind of enrages me.

Last time we sold was out of necessity rather than need. We were new parents both working 50+ hours a week, had bought too much house and had too much debt and we had no family support. We quite literally couldn't afford to sell our house so we decided to sell on contract despite the risks. We took a $5,000 deposit and contracted the sale to have a balloon payment in 3 years. We weren't making anything month to month after income taxes on the payments but we broke even. At the end of the 3 years the buyers backed out and we ended up moving back into the house, albeit in a much better financial situation - no debt, a SAH husband, paid off cars and a higher income despite moving to one income. We got to keep the $5k deposit and obviously had a lower mortgage balance. It was a risky move but in the end we actually ended up with a pretty good deal.

So this time, I've run the numbers and spoken with a realtor and concluded if we were to list with a realtor charging 7% brokerage and listing at what we paid for the home (despite the extensive renovations) we're going to get out of this house with $7,700.

We also received a referral from a friend who just sold her home with a realtor who only charges 4% (3% for the buyers agent and 1% for himself) and if we listed with him we think we would walk away with $12,650.

Third option would be to sell on contract again. Making a few assumptions here so this definitely isn't 100% but in short, I think we could sell for $5k more, I also assumed an 8% interest rate, 2 year (rather than 3 year term) and that closing costs will be the same 2 years from now. I did account for income taxes on the cash flow from the buyers. All that said, we would walk with $31,150 just for holding the mortgage another 2 years. NOW I know there are risks, they could trash the house, default, etc. but they could do $18,500 worth of damage before we'd actually be in the red here and we stand to earn a whole lot more from the deal. I also realize that there will be a number of people who say we can earn a better ROI on the money but that assumes we have the proceeds to invest but we don't so I find that argument a bit illogical.

This is getting long so I won't go into detail about our next steps but a few more details: buyers will be responsible for maintenance and repairs, we will definitely not be buying a new place for AT LEAST two years, we have ample savings and e-fund to deal with missed payments, etc.

So... WWSAD? Would you take this kind of risk for the higher return or would you play it safe, sell it free and clear and accept that selling a house is costly and just sucks?

[snafu]

Selling a house and moving elsewhere is one of life's Big decisions. I'm not a real estate agent but personally, I think realtors earn their commission and take all the risk since they do all the research, make all the arrangements for listings, write-up on-line ads, arrangement photographers, write ads and pay advertising, call all their contacts, haul prospective clients around and if there is an offer, they negotiate the deal. The seller keeps the house looking as tidy as possible and accepts or rejects offers. I know the seller can negotiate the fee and ask whatever they want on the contract. We moved a lot over the years and I'd prefer an experienced agent who know the community very well. It helps if they are well thought of by other realtors who will show your home and talk up it's best features.

Have you considered FSBO's program? They sell you signs and guide you through the listing requirements, on-line system, hand-outs, what to say to a potential buyer and such. It might work for you since DH is home and available.

Selling on contract wouldn't be such a risk if you were staying in the same community. If you are moving more than a couple of hours away you increase the risk factor. Al the responsibility falls on your shoulders ouch!

[feh]

Just a couple immediate thoughts:

• You can sell your home yourself, which means you'd only have to pay one agent. This is how we sold our last home.
• I understand it's difficult, but try not to think about how much you paid for the house and how much you've spent updating it. It's not relevant - the only thing that matters is the current market price.

[riverwed070707]

Selling a house and moving elsewhere is one of life's Big decisions. I'm not a real estate agent but personally, I think realtors earn their commission and take all the risk since they do all the research, make all the arrangements for listings, write-up on-line ads, arrangement photographers, write ads and pay advertising, call all their contacts, haul prospective clients around and if there is an offer, they negotiate the deal. The seller keeps the house looking as tidy as possible and accepts or rejects offers. I know the seller can negotiate the fee and ask whatever they want on the contract. We moved a lot over the years and I'd prefer an experienced agent who know the community very well. It helps if they are well thought of by other realtors who will show your home and talk up it's best features.

Have you considered FSBO's program? They sell you signs and guide you through the listing requirements, on-line system, hand-outs, what to say to a potential buyer and such. It might work for you since DH is home and available.

Selling on contract wouldn't be such a risk if you were staying in the same community. If you are moving more than a couple of hours away you increase the risk factor. Al the responsibility falls on your shoulders ouch!

I know a lot of people are adverse to managing a property from afar, but with a contract sale there really isn't much to be managed... if they are responsible for maintenance, etc. it isn't as if I'm going to be hiring contractors to do work from a far or need a property management company. We still have family here so if they were to back out, it wouldn't be a problem to come back and get it ready to relist. My ranting about realtors aside, I was trying to look at it from an investment perspective -- we'd get about $600/mo cash flow for the two years, increase the selling price 3%, plus decrease our selling costs by $7,000... it feels hard to pass up. There's nothign I could do with the small amount we get from the sale that would give this kind of return in the same amount of time.

Just a couple immediate thoughts:

• You can sell your home yourself, which means you'd only have to pay one agent. This is how we sold our last home.
• I understand it's difficult, but try not to think about how much you paid for the house and house much you've spent updating it. It's not relevant - the only thing that matters is the current market price.

I'm not interested in selling FSBO - we're either going to list with a realtor or do a contract sale. I don't know if it varies from market to market, but here a buyers agent won't even show a house that is listed FSBO even if the seller is willing to pay the agents fees.

Totally agree that what we have spent isn't relevant but I also feel that a realtor who spends 2 months working to sell my home (at a max of 10 hrs per week at that!) deserves more from my home than I do. I'm not saying a realtor doesn't deserve to make a living but for starters, the selling price of my home should not be relevant to their pay since the amount of money i spent has nothing to do with how hard it is for them to sell it. I'd just really like to weigh all of our options before making the desision to hand over all the equity we've built.

[autoxer]

I'm not too familiar with a contract sale... Why would that increase the sale price by $5k? Is it primarily to help someone that doesn't have good enough credit for traditional financing?

Are you going to be renting a place to live for the next few years?

[riverwed070707]

I'm not too familiar with a contract sale... Why would that increase the sale price by $5k? Is it primarily to help someone that doesn't have good enough credit for traditional financing?

Are you going to be renting a place to live for the next few years?

Essentially, yes. You'll get applicants that have lower credit scores or don't have enough of a downpayment to qualify for traditional financning. We set a term with a balloon payment (typically after 1-3 years, although I wouldn't do 1 because it wouldn't be worth the effort) and at the end of that period they have to find a way to pay for or finance the balance. They give a deposit (we did $5k last time) which we hold for them until the sale but they forefiet if they break the terms of the agreement. We would use a real estate attorney to draw up a contract and file the sale with the county.

And yes, you're more likely to get your asking price in this kind of sale becuase the buyers have fewer options. We'd list the same in either scenario but in a contract sale, the buyers generally don't try to negotiate the bottom dollar like a traditional buyer.

We do plan to rent for a while. If all goes according to plan, we'd like to move to the USVI but we want to be there long enough to be sure we're committed to staying before we buy anything, which will be a min of 2 years -- property is expesive there!!

[autoxer]

If it only attracts people that the bank considers too risky, then I would run away from that deal. I would take the equity now, instead of gambling it on somebody that may not be able to make the balloon payment at the end of the contract.

[riverwed070707]

If it only attracts people that the bank considers too risky, then I would run away from that deal. I would take the equity now, instead of gambling it on somebody that may not be able to make the balloon payment at the end of the contract.

Well thats one way to look at it. OTOH, there is a lot more earning potential and if they can't make the payment, I get the house back and get to resell it with a lower mortgage balance and potentially increased value. Short of them trashing the house (which most people won't do - its not a rental and they have a stake in the house as well) its hard to lose money on the deal. Obviously not in all cases, but in many, if a buyer can come up with the downpayment they aren't just going to trash it away.

Example: Last time we sold on contract, we had a 3 year contract, they paid a $5k retainer, $48,600 in payments and our expenses were somewhere around $45k. When they walked away they forefieted the retainer making our total earnings in 3 years $8,600 and we had a mortgage balance $15k lower and we're still sitting on the $165k asset. This doesn't account for mortgage deductions, etc. Its kind of like letting someone else make the investment for you. The $5k retainer would cover 5 months of nonpayment and expenses and is a pretty great security net.

This time around we're looking at increasing the payments to align with market rental prices so we would bring in $41k over the 2 years (including the deposit) and our costs would be approx $24k (mortgage, taxes, insurance) leaving us with a $17k profit even if they bail at the end of the 2 years. If they don't bail and they do make their financing, we also get to cash out our equity.

Don't mean to disagree with everyone who isn't saying go for it, its just that I know people say this is risky and not worth it but I'm having a hard time grasping why its not worth it! Realy do appreciate hearing the different perspectives.

[riverwed070707]

Here's an article on this kind of sale written by a realtor... He explains it better than I do! http://www.biggerpockets.com/renewsb...and-contracts/

[autoxer]

Don't mean to disagree with everyone who isn't saying go for it, its just that I know people say this is risky and not worth it but I'm having a hard time grasping why its not worth it! Realy do appreciate hearing the different perspectives.

You make the math pretty compelling, but it isn't just free money. You are essentially playing the role of landlord and bank. You have to find someone willing to pay 8% interest. You have to pay a lawyer to set up the contract. You have to screen potential buyers. I also don't see much benefit for the buyers. I think they would be nuts to enter a land contract that was still under mortgage, because they could lose their investment if you let the house slip into foreclosure.

Will your current mortgage lender even allow you to do a land contract? They probably consider that a sale and will want the loan paid off before allowing you to enter a contract.

[riverwed070707]

You make the math pretty compelling, but it isn't just free money. You are essentially playing the role of landlord and bank. You have to find someone willing to pay 8% interest. You have to pay a lawyer to set up the contract. You have to screen potential buyers. I also don't see much benefit for the buyers. I think they would be nuts to enter a land contract that was still under mortgage, because they could lose their investment if you let the house slip into foreclosure.

Will your current mortgage lender even allow you to do a land contract? They probably consider that a sale and will want the loan paid off before allowing you to enter a contract.

well I'm not saying it's a good deal for the buyer or that I would do it but there are people who do and I guess I don't feel bad making the investment if they choose to do that. You are correct that some mortgages don't allow it but mine does so that's a nonissue. Lawyer fees are about $500 and he will run background checks for me at about $30 ea so yes, some additional cost but it's not substantial. There would also be about $2500 in paperwork when the sale finalized for abstracting, etc.

[ua_guy]

We were in a similar situation and went the route of a sale free/clear with an agent representing us. Similar to you, we wanted to be DONE with the house but were also on the edge of break-even and had sank thousands upon thousands of dollars into repairs and improvements into the home and wanted highest dollar for it. In our minds, and truly we had: We put our best feet forward, it was time to move on, and a traditional sale was the appropriate route to take advantage of a warm and engaging market and to advance us fully to our next set of plans and life adventures without the burden of that house.

[LivingAlmostLarge]

How is this different than being a landlord? I mean it sounds like rent to own?

[sandrark]

No way would I do it. Your greed is getting in the way of common sense. Every argument you have assumes that there is no damage, and no risk to you.

If they don't pay for 6 months, sure, you get the deposit - but you've lost the income. You claim that the "tenant/buyer" will pay for maintenance...but these are people who are BROKE, and even banks (which business model REQUIRES lending) won't lend to them. Broke people don't do maintenance on "other people's houses." Then, if they can't qualify for a loan, you've got a house with deferred maintenance and damage, plus now you're trying to repair it from afar.

If you evict them, or they can't finance the purchase when the balloon comes due - it is ridiculously easy to do $20K of damage if they're feeling angry and screwed over.

You are essentially stacking the deck in your questions, assuming that nothing expensive will happen, and assuming the profit is a slam dunk. It's not.

I encourage you to read the BiggerPockets website, and other landlord sites.

You ask what I would do? I would find a discount broker, like ReMax or your local 4% realtor, and hire them to sell the house and get out.

[riverwed070707]

How is this different than being a landlord? I mean it sounds like rent to own?

Its different than being a landlord becuase you actually initiate the sale process at the beginning when the contract is signed. Its more similar to being a lender than it is to being a landlord. When people search the assessors site for the owner of the home, it shows up as the buyer -- they are responsible for ensuring taxes are paid, etc. Very similar to rent to own but in rent to own the tenant usually has an option to buy at some point whereas in a contract sale they are committed to it and there is a date it must happen by or there are penalties and the contract seller does not have to continue to allow them to live there... of course the contract can be extended if both parties agree. We offered this options to our last buyers but they decided to move on anyway.