October 5, 2007 at 7:07 PM #10511
I have kind of odd situation. I have lived in a rental house since late 1999, and have a nice low rent. The house is owned by an older lady, and I feared that she would die and her adult children would sell the property. So, to insure that myself and my dog would have a place to go, a friend and I bought a house in City Heights in July 01. We re-fi’ed in 03 (I think) and we and the rent is a couple hundred more than the mortgage payment. (Fixed loan at 5.35%)
Since then, the friend and I are no longer friends. She moved to the Bay area, and wanted a buy out in Jan 07. She got too greedy (especially for having done nothing in 6 years–I did all the work) and would not accept my buy out cost. She demanded that we sell it. I told her no way (the loan is in my name only…long story…got pushed around by a WAMU idiot mortgage broker for the re-fi) unless she wanted to re-fi the loan in her name and then she can do ALL the work to sell it. She left in a huff, and said we would discuss it at the end of the year.
I have had some minor contacts from her since January, and they have not been pleasant. The tenant is talking about getting married and moving in the next 8 months. I am still in the rental house but who knows when this gravy train will end. Though I bought the house so I could have a place to live, I really do not want to live there. It’s too chaotic.
The end of the year is near, and I suspect the former friend will call and want a buy out or to sell. Should I sell it? We have about $136K left on the loan, and it could probably sell for around $240K, but we do have a disclosure, because there is a water problem coming down from the condo conversion next door. Furthermore, I have done some un-permitted things to keep water away from the foundation. (That is another story from hell….Turko would never call back either)
SD Realtor, bsharma, SDR, anyone—I know you guys deal with the big boys and not small houses in the hood….but any advice would be appreciated.October 5, 2007 at 10:14 PM #87147
Ricechex it sounds like alot of disclosure work to do if you do sell…If you are gonna do it, cut the price to the bone… make sure you disclose EVERY single last thing that you have done to the home, permitted, unpermitted and otherwise. Make sure you tell any potential seller about the water issue next store…just be sure to disclose EVERY last thing. Talk to your cpa about the tax implications of the sale. Since this is/has been a rental then you will have to cope with all of the recaptured depreciation, which will change the cost basis which will end up with you paying a bigger tax based on the gain from the sale. Also when you sell there will be 3 1/3% of the sale witholding that is applied for state taxes.
If you could convince your friend to just sit tight for a good many years I would do that and just keep it as a rental. Otherwise if that is a nogo then dump it as soon as you can, the longer you wait, the less you will get unless you batten down the hatches to ride out the storm.
Also because the home is in your name you will suffer the tax burden of the sale so I advise you to make sure you talk to your cpa about it. After you show your friend how much (or how little) there will be after it is all said and done she may not be to happy…
SD RealtorOctober 5, 2007 at 10:43 PM #87153
SD Realtor….thankyou so much for that feedback.
The title remains in both names, so she would get taxed too. The loan is in my name alone. I really do want to get rid of her though, she is very troublesome and has little common sense when it comes to owning property, tenants, etc. There is some termite work that needs done, and based on past experience, I see continued headaches with her as the years go by.
On the other hand, if I get the boot from my present rental, it would be cheaper for me to live there than find another rental.
I am very ambivalent. If I sell now, I would have some minor profit, and put that in savings to buy another property in North Park where I want to live, but then the dollar is de-valued, so I don’t know how that is going to play out. If I buy her out, then I get the house, a payment I know I can afford, but the price could come down further, so my equity will be reduced.
Or should I buy her out (she might be more reasonable considering the current market), keep as a rental, and hope that prices continue to drop, and hopefully buy in North Park in a few years?October 5, 2007 at 11:12 PM #87159CoronitaParticipant
SDR, just curious…
If Ricechex went back and to live in one room of her home to claim it as a primary residence for 2 years, would she avoid the recaptured depreciation from a rental AND also be eligible for the primary residence cap gains exemption if she decides to sells it after living there for 2 years?
Also, if she subletted one room, and "lived" in the other, could she still claim it as a primary residence?
Just curious.October 5, 2007 at 11:15 PM #87160
Hmmmm what you need to do is keep the property and get rid of her…
Personally I do see the dollar getting devalued but it’s descent may not outpace real estate so you may be alright… it will be an interesting race.
Tough call about buying her out or not… only you can run the numbers to see if that is possible…personally I would do all I can to save money so I would say build up as much cash as you can to get a place where you want to live rather then scratch out life in a place that you called chaotic. Just make sure you can pay the rent wherever you live…
SD RealtorOctober 5, 2007 at 11:19 PM #87162
FLU, FSD is real good at these questions as is Surveyor but yes I believe if the owner did go back to live in the home she would be able to get the cap gains exemption. I “don’t think” she would be able to lose the recap on depreciation though I could be wrong…I don’t think it would be a major problem though. To me, depreciation is like a loan that uncle sam gives to you and comes to take back no matter what…
Even with the recap, she would still be below the 250k so she would be okay…Also I am not sure of the sublet question…
FSD your assistance please…
SD RealtorOctober 6, 2007 at 10:43 AM #87168
Yes I know besides a life I should get some sleep.
“Also, if she subletted one room, and “lived” in the other, could she still claim it as a primary residence?”
I think you are saying if she lives in the house she has title to and has a roommate can she fully call this a primary residence. Yes. I did this for years and my tax guy said the IRS didn’t want to hear about it because then I could start deducting all kinds of stuff and it would be a wash. The rules probably technically don’t read that way. At the level of economic impact we are talking about,my guess is that nobody cares.
Disclaimer, this is not tax advice this is shared experience only.
Most everything is covered by previous posters.Here are my opinions about the concerns on the condition of the house.
Most of these houses have issues. This is a very old neighborhood and forgive me for saying,also questionable housing stock. They sell all the time. You probably are not going to need to make any more disclosures than the next house and the next house “should be doing”. You are not likely to get in any trouble over unpermitted modifications and I doubt it would change the opinion of the person who would ultimately buy you house at all.If you sell your place definitely have a game plan for how you are going to negotiate around any repair concerns. You might want to put heavy emphasis on “as is” terms. A low LTV buyer might have some issues that have to be repaired due to lender program requirements, but those can usually be accommodated for by not being too flexible on price or alternately you might give a cash buyer a break.
Lots of these houses have water issues from surrounding apartment buildings.In city heights and surrounding areas clay exists right below the surface and the water floats right across the clay after it becomes saturated. Just disclose it.I would even say minimize the measures you have taken against it as much as you can without hiding it completely.This is not to say be dishonest . Just make sure you are not making a mountain out of a mole hill.October 6, 2007 at 8:09 PM #87209CoronitaParticipant
Thanks Rustico. For future reference, I need to consult a CPA.October 6, 2007 at 8:53 PM #87211
I am wondering if she could do a 1031,and if there would be any benefits in doing so, with her half of the proceeds. I think she would have to rent out the property she got in the exchange for a period of time, at least a year before she could take it owner occupied. I recall a guy doing this on the buyer’s side of a deal for which I had the listing
I am not sure how much he benefited.October 6, 2007 at 9:15 PM #87214
Rus I didn’t recommend a 1031 because of the parameters of the original post, that the girls friend or ex friend wanted her money back. As I understood it, the question was should I buy her out and keep it or sell.
SD RealtorOctober 7, 2007 at 9:11 AM #87230
I think you do a a great job with these spur of the moment suggestons. We don’t really have what we need to put all the pieces together and as you know, even in real life scenarios, it is a process.I just threw the 1031 idea out there because tax consequences came up in the hypothetical sell secenario.October 7, 2007 at 11:41 AM #87243
Thanks All. I really appreciate your feedback. Yes, it probably does not matter too much about the unpermitted fixes, as this is what goes on in City Heights. I will disclose it FOR SURE if I sell. I would have to buy her out before doing a 1031. As far as buy out is concerned, I thought it fair to get it appraised, then deduct realtor costs (as I would have to assume those at some time when I did sell), and make the offer based on that amount. Any comments on that idea?October 7, 2007 at 8:23 PM #87266
The buyout idea sounds fine it will be easy since she is not on the loan if you want to keep that loan. You will quitclaim her off of title.Just from reading your post one can discern that you are better parted on this issue. The buyout plan sounds reasonable and easy. It doesn’t seem fair to hold her up from selling in a depreciating market or not buy her out,unless you had agreed in writing to hold it until a certain milestone was met.Maybe it would be better for you to take the initiave that you have shown in asking for help here, further and get this over,for your sake as much as hers. If it takes a refinance to buy her out, and you don’t have to confirm or deny that, I suggest you get going after making sure you are comfortable with the higher debt load and if not it looks like you need to sell. Be careful about putting the house on the market and giving up and then trying to refi. Some lenders don’t like that.
That’s just my faceless, nameless, 2cents. Take it for what it is worth.October 7, 2007 at 10:34 PM #87272
Well said Rustico…
My advice would go as follows….If you are going to go for the buyout, try to get the best deal you can. She will most likely balk because she most likely does not know how bad the situation is down here. So if you cannot get a good deal, try to actually put it on the market and sell it at whatever you were going to buy her out for plus all of the closing costs/commissions. If the house sells then great…if the house does not sell, then buy her out for an even better price.
The reason I suggest this strategy is that the appraisal process for a home that is not in escrow may be a bit rosier then the reality of the market. This is no offense to Bugs or other appraisers at all. It is just that I think you can get a better deal if you take your time on it. The caviot would be that if you can just get a SMOKIN deal on the buyout without putting it on the market then maybe take the deal… just realize that even with the buyout, you are purchasing a depreciating asset. Maybe try to for sale by owner it?
SD RealtorOctober 7, 2007 at 10:50 PM #87281
Thanks SDR we are quite a team on this.
I wrote this in the above post….
“Be careful about putting the house on the market and giving up and then trying to refi. Some lenders don’t like that.”
Have you heard of this? Anybody who might be reading? I was told this by a mortgage broker who I came to mistrust. I had some misgivings after posting it for that reason.
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