I have SIX options on this house and I don't love any of them
The appraisal came back at $538,000.
We were planning to list it for $495,000.
You would think that's good news. It kind of is. It's also the reason I'm stuck.
We bought this house in Austin in April for $285,000. The plan was always to keep it as a rental. On paper it was going to break even at best, maybe run a little negative, and I was fine with that. Austin rentals are saturated right now, that gets absorbed eventually, and when I bought it rates were in the low 6s.
The rehab is done. And this is where the math stopped cooperating.
It was a good deal. Then things happened.
Full disclosure, some of this is on me.
The rehab budget was $85,000. It ended up at $100,000. Part of that was our call: the driveway was cracked and messed up, we were starting to think about listing it, so we ripped it out and replaced it. The other part was a contractor we had to let go and new crews we had to bring in. (Some of you read about that one. It's the house with the lien and the kitchen uppers: read it here.)
That contractor situation cost us 90+ days. This house was 95% done months ago.
If it had finished on time and refinanced in the low 6s, it would have run maybe $150 to $200 a month negative. Today my refi quote is 7.625%, and with taxes and insurance the payment is about $3,630 a month against $2,950 in rent.
About $680 a month negative.
Good times.
So a good deal turned into...a deal.
Here's the thing. I bought it. I own it. I own every issue it has. I can't give it back, unless I want to hand my problem to the private lenders who trusted me and blow up my reputation in the process. Why would I ever do that?
I've always been a fan of the saying, you can't jump back in the airplane once you've jumped out. The decisions I made when I bought this house aren't the decisions I have to make today, because the math changed. No amount of wishing or getting frustrated with myself changes that.
Why I got the appraisal first
I've said this before and I still believe it: get the appraisal before you list, and definitely before you drop the price. Most lenders won't refinance off a number higher than your recent list price. If I had listed at $495,000 first, that $538,000 appraisal would have been worth $495,000 to any lender looking at a refi.
"But Tarl, if it appraised at $538,000, why not just list it there..."
Because I don't think it sells there. Not in this market, not with rates where they are, not going into the holidays. Just because a house appraises for a number doesn't mean anyone will pay it, at least not in any hurry. My realtor and I agree sub-$500K is the right price if we want a real shot at selling it.
Am I waiting for rates to come down?
No.
The Fed held rates last week. My personal guess is the next move is up, not down. I could be wrong.
And even if they cut, the Fed doesn't set our mortgage rates. Mortgage rates follow the 10-year Treasury, and the market sets that. Chairman Warsh put it this way last week: "Not the interest rates that we control, but interest rates set in the market."
Translation: the Fed is not here to protect the price of your house. When he was asked in September about people getting pinched by higher mortgage rates, he said the people he's focused on are "people that don't own financial assets... They don't have equity in their home. They don't have equity in a 401k plan."
That's not us. So I'm not betting on rates bailing me out.
My SIX options
Here's the actual math, rounded. (Refi at 7.625% on a 30-year fixed, taxes $500 a month, insurance $125 a month, rent $2,950, about 6% to sell.)
A. List it at $495,000 and sell. If it closes in about 60 days, I make roughly $35,000 and move on with my life. If it sits 120 days, closer to $27,000. If I have to drop to $475,000, about $8,000. And if it still hasn't sold by spring, when my private loans come due, I'm refinancing off the lower list price and bringing roughly $47,000 to the table.
B. Refinance at the $538,000 appraisal and keep it. Pay off my private lenders, nothing more out of pocket, and the roughly $13,000 I already have in it stays in. About $680 a month negative, around $8,000 a year. I get the depreciation, and maybe one day Austin rents come back...maybe not.
C. Refinance and turn it into co-living. Convert the garage, six bedrooms, about $20,000 more in. At roughly 80% occupancy it goes from break-even to maybe +$200 a month. Also a lot more management than I want.
D. Refinance but leave enough cash in to break even. That's about $96,000 more of my money sitting in the house, earning 0%. It doesn't make me $8,000 a year. It just stops me from losing $8,000 a year. That's all it does.
E. Refinance, hold it at least a year, then sell or 1031 it. I've done this before and it works when you believe in the area (talk to your CPA, not me). But this refi has a 3-2-1 prepayment penalty: 3% of the loan if I pay it off in year one, 2% in year two, 1% in year three. If the price is the same a year from now, I walk away with about $11,000 instead of $35,000 today.
F. List just above appraisal at $539,500 for 30 days. I said I donā€™t think it sells there. I still donā€™t. But finding out costs me about $3,400, mostly one more month of interest. If it sells, I make roughly $77,000 and move on. If someoneā€™s interested but wants a better deal, we negotiate it in the contract, a lower price or concessions, without ever lowering the price on the MLS. If nobody bites in 30 days, I pull it and refinance, and because I never dropped the price, the lender still uses the $538,000 appraisal (confirm with your lender first before doing this).
Risk first, profit last
The real question isn't which option makes the most money. It's which one protects my downside and keeps the most options open.
(A) has real upside and the scariest downside. (B) has a known cost, about $8,000 a year. (C) and (D) buy away the negative, one with work, one with cash. (E) only wins if Austin goes up or the taxes I defer are worth it. (F) risks about $3,400 and a month to find out if Iā€™m wrong about the price.
Savvy investors look at risk first and profit second...if not fifth.
Which one is the least risky? Which one gives me the most room to keep protecting the downside? That's the question I'm asking myself. It's the one you should be asking on your own deals right now.
Then the math has to meet real life. Stopping the bleeding with $96,000 sounds responsible...until you remember that money is earning nothing, could be doing something else, and you might need it somewhere else more. Or you just don't have it.
Where I'm at
My gut says my future self might not like it if I sell this right now.
I haven't decided. I'm going to decide soon, then run the after-action review on my end, own what I messed up, and hopefully not repeat it.
If you're sitting on something like this right now, a refi that doesn't work the way it did on paper, negative cash flow you didn't plan for, you're not alone. A lot of people are in the same spot. It doesn't get better by waiting. It's better to know where things actually are and face it head-on, with every option on the table, than to run on wishful thinking.
So what would you do? A, B, C, D, E or F? Email me your pick and why. I'll read every one. Yes, me.
The next Deal Teardown is mid-November
This is exactly the kind of deal we work through live on the Deal Teardown. On our first-ever Deal Teardown two weeks ago, we went through three real investor deals live, and two of them had contractor problems...sound familiar?
If you have a deal you're struggling with right now and you're trying to figure out your options, I'd like to review it live on the next one. Submit your deal here. Exact date coming soon.
Good luck, it's that sort of market right now.
Tarl Yarber
(Once again, I personally write these...)
PS: Need funding? If you're staring at your own refi math right now, we are actively lending on single family deals, hard money, DSCR loans, plus small multifamily, in 40 plus states. Go to www.fixatedfunding.com, or just email me and it comes straight to me.
