I’m sort of in a tight spot.
Everyone knows how hot the market was last year. About febuary I decided it would be a really good idea to buy a lot (for 135k/9,500sq. ft.) and build a spec home. It is a craftsman style two story 2,500 ft. five bed two and a half bath, lots of nice trim, nice house. The problem is the market is crashing and burning. Out of seventy-one lots purchased all by other builders, about forty are built on and ten are sold. One other unfortunate peculiarity is that every one of the “SOLD” is a ranch. You may recall the number of levels in mine. The house will be completed in three weeks, I’m paying about 3,500/month in interest. So far NO interested potential buyers.
Here’s how I see it. I should fire my realtor and save 30k right off the bat. My hard cost for the land and construction is 410,000. The asking price is 550,000. It seems that it would make more sense to sell or rent my existing home (around 200k), convert to an interest only mortgage or something similar instead of paying all the interest for nothing, and enjoy the new home until I can sell it for what it’s worth next year.
I’m sure there are pros and cons, pitfalls etc., but I am uneducated in this area and would appreciate any advice.
By the way I am currently building a big presold custom home and have several large remodels going, so my finances look OK for the near future. On the other hand I am truly afraid that if I don’t handle this problem correctly it could seriously sink my business.
Thanks for any feedback
Josh
Replies
my neighbor has a average house, his wife wanted a big brand new house so he built one, but now a little downturn he cant sell the old one which would have paid for most of the new one, i told him put the new one up before you go broke but now the wife wants to live there but hes going bust paying 2 morgages. if he sold the new one he could make a few bucks go back to the old one and then build again, discrecion is the better part of valor. I own 3 houses 2 free and clear but will not get in over my head. im a wuss. put yours up for sale if that one sells the pressures off and you can live in the new one.
daiku... i don't see any dawn on the horizon until we go thru another cycle..
pick the one you like best and move in... rent the other one ..
do it now.....beat the crowd
the last time we went thru a work-around was here was '87 to '95 then everything took off
we built a spec house in '78 right into another down cycle... we owned it until '84... and sold it one year too soon
( buy high... sell low )... the point of my self-taught lesson..... i should never have sold ... or at least not then....the one we sold for $65K we could have sold for $565 later..
demographics are on the side of those who can wait it out... we are not going to go from 300 million people to 400 million people without having houses for them to buy
so the down-turn is real.. and lot's of distressed property will go on the auction block..
but if you can get rent to cover your cash-flow and hold until the market is hot again ( which it will be after a very painful correction ) you will be better off
the 2d alternative is to beat the rats off the ship.... sell you house for no profit or less NOW...
but it may be too late for that
I agree with you Mike.
If he's lucky, he might be able to move that 200k house if he's willing to disount and discount hard.
If I were him I'd be trying to break even right now. The new rules of credit and bankruptcy might begin to haunt all of us.
blueOur Skytrak is for sale. It has 500 hrs on it. We want 50k (you pay the freight) and we'll finance it. Drop me an email; it's a good buy.
ooh.. that's right jim.... i had forgotten about the new rules.... i know at least 4 guys... no.. 5 guys who went thru bankruptcy due to speculation.. they all got a clean start
today .. no clean start.. the game is really rigged against the debtor today
daiku.... sell or rent ... but do it nowMike Smith Rhode Island : Design / Build / Repair / Restore
Have ya read the Spec House from Hell thread?
Maybe that'll make ya feel better.
Hope things work out for ya.
If you want to sell it -- lease it with an option to purchase -- set the rent at a fair amount; so much of the monthly rent rent goes towards the purchase price (15 to 40% both are then vested and have an interest in clsoing) and you close in 2 yrs (can be any time limit) Set the price now with reasonalbe option cost that is non-refundable if the option is not execised but goes towards cloing if the option goes to closing. good luck -- Dudley
"On the other hand I am truly afraid that if I don't handle this problem correctly it could seriously sink my business."
If that's the case why not underprice it to attract a buyer.
Make less of a profit, stop giving yourself an ulcer, and keep moving...Buic
Im not sure where hes at, but 7 years ago i bought a house for 150 payments 900, i rent it for 900, now its worth 390 rents still go for 900. The rents dont cover the payments nowadays.
I think you are on the right track... get it finished.. put in a 52" plasma screen tv... I swear a dude is doing it here and his houses are the first to sell... 30 unsold houses in your direct market... heading into winter... people tend to move once the kids are out of school... so june ish?
I think the election in a couple weeks is keeping people on the sidelines also...
if you remember the big tech stock bust... everyone was talk'n, buy'n & sell'n stocks... then got slammed.... last few years all the shows on TV are about houses prices & profits... when everyone starts doing it... it's time to bolt... I think thats what you are seeing in many areas... low interest rates made it heat up / happen... rise'n rates are cool'n it off... will be an interesting next few years...
look at it take'n 6 mo to sell... realtor fees ect... deduct all that now and see if it sells... the other builders in the area will hate you because it will devalue the other inventory in the area... and screw up comps...
or you can move in get a 30 or 50 yr loan will cost you about 2k a month at current rates... which is better than bleed'n
p
Josh, I'd be very concerned that you couldn't sell that 200k house. What happens if that won't sell?
What market are you in?
blue
Our Skytrak is for sale. It has 500 hrs on it. We want 50k (you pay the freight) and we'll finance it. Drop me an email; it's a good buy.
How tight a spot our you in?
We always go for the 2 year plan when we buy & sell. Capital Gains!
You live in a house for 2 years, sell & the 1st $250K 0r $500K (if your married) is tax FREE!
Some of the Biggest checks I ever have had were due to following the above program!
Its what makes this Country such a Great place to Live!
Thanks for the feedback everyone.
I'm in Anchorage Alaska. Our economy is not normally dictated by the lower 48, but all the hype in the media lately has really put a damper on the market. As far as selling my 200k house, I don't think it will be a huge problem. That is considered a low end starter home in this market and they always seem to move quickly.
One other other concern I have is qualifying for a 410,000 mortgage, I'm going in to prequalify tomorrow so we'll see. I checked my credit score last night and it was 803 but that was on a scale that went to 990(Experian) I thought they only went to 900, so I'm a little confused about that. Well I guess this will teach me to go out on a limb, I think I'll stick to customs, but man that spec was easy to build without a HO!
Josh
Finish the new one, move into it, and take care of it. You're gonna stay there, using it as your primary residence, for the two years required to escape the capital gains tax on a primary residence. Then you're gonna sell it in a markedly improved market, as compared to today's.
The older house out of which you'll move, is either held as rental property, or sold at a liquidation-type price.
Consider the tax consequence of a sale right now on the new one, and how much you will save on that by taking all the gain and keeping it after the sale, two years hence. Factor that savings into the fire sale pricing of the old house you live in now.
>>> ... in a markedly improved market
Maybe not.
My idea of "markedly improved" is one in which the inventory is not nearly so high as now. I don't know how far down pricing may rumble, but to me, it is inconceiveable that by late '08 there will be the number of "for sale" homes on the market as now.
Furthermore, by then I hope we will have a better idea of what "market" pricing will be. Right now, there is a lot of stuff sitting out there at "hoped-for" pricing, the kinds of numbers people thought they could get when the market was going crazy.
Edited 10/31/2006 3:13 pm ET by Gene_Davis
Nobody knows what's gonna happen, here's a couple things on my mind
1) >>> it is inconceiveable that by late '08 there will be the number of "for sale" homes on the market as now.
This is exactly the type of thinking that I hear a lot that concerns me. It is the reverse of what most folks were saying a few years ago, "I can't believe prices will be going much higher from here..." well they did, for much more than 2 years too.
Also, inventories can shrink from what they are now, with a corresponding reduction in prices. The slower prices drop, the longer it will take for the correction to work itself out. I wouldnt call that a better market.
2) All these real estate discussions and the amount/type of correction are much dependent on the geography, location and the type of property WRT the neighborhood.
I am not saying that I think its gonna be worse, I have no idea. I too "hope" it doesn't. My wife just made an offer on a second house, not a big reduction in price either.
"Finish the new one, move into it, and take care of it. You're gonna stay there, using it as your primary residence, for the two years required to escape the capital gains tax on a primary residence. Then you're gonna sell it in a markedly improved market, as compared to today's."While I am sure that it is done I don't think that it is kosher.Converting a business assest to personal use.At the least he won't be able to deduct any expenses for material, subs, and labor from his business return.They would be added to his cost basis.And he would have to make some arragnements for renting his tools from his business, etc.
I know all that. I wasn't telling him to be a shyster, I was just giving him the big picture view. Obviously, there would be some accounting to do.
Builders build themselves houses all the time, and do the every-two-year move, and it is a great way to make money in a "normal" housing market.
In this guy's situation, it may be the best approach.
Josh,
What about putting them both on the market and just living in whichever one doesn't sell first. It's getting cold up there, not sure what the winter market is like up there, but if it slows way down you might want to wait until spring.
Or if you think this could really sink you, figure out how much loss you can take and still survive. Subtract that from the asking price on the spec house. Sell it for that and count it as tuition. It usually takes more than a year for a housing market to turn around.
"we are not going to go from 300 million people to 400 million people without having houses for them to buy"
Or rent. Not all will be lower income and a $200K house may be rentable for tehm but too much to buy, depending on rental rates in your area. .
I'll bet (in 08') there will be more for sale than there are now. The ARMS are going to wreck a WHOLE lot of budgets and the time to pay up will come hard. Hard to cover the new payment, the new car lease payments, eating ,drinking, the club dues, the landscaper and all those credit card payments.
Hey, it was a hel-p of a party, we drank our arses off....but that morning after hangover is gonna kill..hehehehehe.
I really don't see what all the fuss is about anyway. I heard on the radio yesterday the economy is the strongest it's ever been, interest rates are at a historic low, the market is at an all time high and unemployment is at very low manageable rate( those unemployed don't want to work anyway...will always be around 2%) an we have a 1-1/2 more years of GW so it will only get better.
Me... save when the rest are spending, buy when the rest are having to sell. Live well below your means...be humble.
Keith
Bkcbuilder , "live well below your means" this is the advise that thousands of Americans pay financial advisors handsomely for. Why is this so hard to understand?
My neighbor purchased a 600 grand diesel MH.....I have a tent. (nice one) Live well below your means...do it. stinky
"live well below your means"
I love the philosophy, but why is it so damned impossible to do? I was born in a little log cabin in the mountains with no running water or electrictity. And now I'm debating wether or not I should pay 45,000 a year for my "home". What's wrong with this picture. I wish I could have a little shop in the woods making trinkets and be content. Instead I'm working fourteen hours a day justs to stay ahead.
Well theres my rant.
Josh
Hi Daiku-san If your paying 45 gs for a mortgage you must have one fine home. I know digs around San Francisco are huge but most places are not so. Living within your means means working to save for the future. stinky
By finding a renter you'll be able to use that income when you go to prequalify. A house without a rental contract may or may not impress the bank, can't say.
Instead of firing the realtor, you might change the listing to one which allows you the option to sell it if you find a buyer before the realtor does. When I was a realtor this was sometimes done, although the realtor will squeal and complain about it. Raising their percentage will help the squeeling.
The only legalities of this arangement are that you can't personally sell it to a potential buyer who learned of it through the realtor to skirt the fees.
If you like talking to people, you might look into alternative sources of renters/leasors in places like hospitals who lease homes for visiting medical staff. You could approach them with a deal on a nice place. Of course it helps if the house is nearby.
Anchorage is such a hub for all sorts of things that there are probably 30 organizations that lease houses for visting staff.
What part of town are you in?
Beer was created so carpenters wouldn't rule the world.
enjoy the new home until I can sell it for what it's worth next year.
Houses pretty much always sell for what they are worth. Unfortunately, how much they cost to build is not always the same as what they are worth. Maybe next year the market will be better, maybe it will be worse. Don't succumb to a blind hope that things will be better. You gambled and lost-cut your losses now. The market is full of sellers who want more than they can get and keep lowering their price but never to the level at which they can sell.
If it cost 410 and no one wants it for 550, lower the price until someone buys it. If it is worth only 350, the fact that it cost you more than that is meaningless. Good luck.
Forget the rent with option to buy or just a straight rental, just get rid of it.
Edited 11/9/2006 11:38 am ET by smslaw
In the early 80s i broke the rule of RE by buying a fixup in a bad location, Times were good and i figured i would cut a fat hog but the market went down and i bailed for what i had in it, Ya know it would have taken 10 years to get what i wanted, A good move to sell but painfull to my pride.
You and the other posters have pretty much covered your options - and the great thing is, that at present, you have options.
That said, what the bankers around here always say when the market goes south is "Don't surprise your banker." "Tell us what's going on and let us advise and work with you." "We'd much rather work with you to save your home than for both of us to take a beating when we have to auction off your house."... as auctioned houses often go for dimes on the dollar and you still owe the bank for the difference.
I don't know what the bankers are like in Anchorage, but it's a small town, and in my experience, small-town bankers often manage to be more human than those in the mega-markets.
Good luck to you!
Mike D