The flipper turned flopper owner needs to sell them. He needs $650,000. the houses are not worth $650,000 and therein lies the problem. Link to the bungalow in back here.
Link to the front house here.
The deal works for my sister as the front house rents out for enough to justify the purchase so they can use the smaller house summers. What then is the problem? Price. You see the flopper bought these properties with a 1031 exchange and then spent a truckload of cash renovating and is now bleeding serious green. 1031 Starker exchanges are great investment vehicles. You can roll over gains form one property to like kind properties tax free. Tax free that is until you cash out. Were the flopper to accept $615,000 he'll end up owing taxes on the $350,000 or so from the previous rollover. That's regular income State and Federal. Ouch. Truth is he cannot afford to sell the houses that are slowly killing him. I guess we'll just have to see if the courthouse steps have the same problems.
25 comments:
Tax consequences affecting the ability to sell a house? Again, another borrower/investor with some screwed up thinking.
Oh yeah, First!
Sac RE,
I imagine you "know of" many a Sacto Area would be seller who appears to have equity but would still need to bring a check to the deal.
Listed for $650k. Sister offered $615k and ability to close in either tax year. Seller countered with $648,500. Freakin' one freakin' quarter of one freakin' percent price freakin' drop. The sellers agent was genuinely embarrassed to present the counter. My advice was for her to meet him "half way" and offer $615,750. I also told her to tell the realtor "in confidence" that she knew all about the 1031 tax realization issue and it wasn't her problem as the buyer.
I bet if she waits a few months, the seller might become a LOT more reasonable... Don't waste time now, someone that set on the price will not budge.
She could let them know when they're ready to talk they should contact her - not a guarantee, but when they get desperate, they may come calling.
The guy is bleeding money and cannot afford to do a deal at market prices. He's already underwater and the sink rate is accelerating. He can't do this deal. Next March he'll be even less able to do this deal nevermind the lower offer waiting 6 months from now. Obviously despite this property looking like a mere flip gone bad it represents a deeper darker and scarier reality. Everyone who is thinking the reported numbers of residual equity and asset values are accurate are being criminally unobservant.
I wouldn't mind finding a property like that for 650K around here.
That property doesn't look like it's worth 215k, let alone 615k.
I also wonder how much property tax is on that place.
I think she should wait until 2009 or later to buy anything. Where's the incentive of buying anything now? Prices are going down quite a bit more from here.
@anonymous,
Do you think this similar property is worth 1.7 million?
Chatham is one of the premier addresses on Cape Cod. The summer/seasonal rental of the big house will probably come to close to $30k/yr. A substantial down payment and cash flow comes close to justifying the value of being able to use the bungalow. My relatives own houses all over New England. I've lost track but I did talk about the Newport, RI house last summer. Anyway, If you are stationed in Ohio after living in Hawaii and other great places a summer house on the cape is a medical necessity.
Anon,
Our posts crossed. Let me address your observations. Yes, You, I and my sister all agree that this property of similar properties will be worth far less in the next two years at least and in my opinion 5 years at least.
The front property generating $30k/yr in seasonal rentals changes the value. The tax benefits including depreciation against regular income also makes the property more valuable to some investors.
Places like Chatham are limited cachements. This isn't like choosing which of a dozen identical Phoenix subdivisions in which to buy.
You should post to the forums over at bostonbubble.com and see what folks think. I've never understood MA real estate, I think people there are crazy.
I agree with anon, that place isn't worth $215k, but then again I'm not wealthy like everyone else on the internetz is. ;-)
Interesting investment situation. IF I were the flopper I'd do everything I could to service the loan and hang on to the properties but I'm not. I guess the question is whether someone else will pop up to gazump your sister.....
Key word is 'sister'. It's ovahhh! Done deal, unless you smack that bitch up...
http://www.youtube.com/watch?v=2nw8KCNYWls
@Dawg,
I don't know anything about real estate there (relatives in the vicinity are crazy - like the ones in L.A. - so I haven't visited in years), however I do agree with this point and that is why I've been looking for the right four-plex to live in for "sweet" write-offs (pays the way at the right price - and then some as rent rises):
The tax benefits including depreciation against regular income also makes the property more valuable to some investors.
Make depreciation work for you!
If PoS corporations regularly write off billions, why shouldn't *you* do whatever you can to *legally* avoid taxes? Our tax system fucks the middle class and there are plenty of loopholes the wealthy get away with...With the interwebz one doesn't need an overpaid accountant to tell you how to do it.
And, BTW, I don't want my money funding the war in Iraq.
Ain't no snowballs in the Cape Cod real estate market of hell. Gazumped? My sister is a serious buyer. She probably feels like the prom queen. Two buyers for the same property? What are the odds? As long as she doesn't fall in love with the property this will still be for sale in the spring and only come off for the summer as whomsoever owns it by then is renting out for $2k per week.
Fits Casey like a glove. notice it states houses in foreclosure now are investment properties. the ones next year will be owner occupied.
http://biz.yahoo.com/ap/071114/foreclosure_rates.html
Dave Webb, co-owner of Hudson & Marshall, a foreclosure auction firm based in Dallas, said most of the properties being auctioned by his firm in inland areas of California are investment properties that ended up being repossessed by lenders after the market tanked.
"What I'm selling this week -- 700 homes in the Stockton-Oakland area -- these properties were probably foreclosed a good year-and-a-half ago," Webb said.
The properties that end up in foreclosure now, however, will likely be homes bought by first-time buyers and others with adjustable rate mortgages due to reset to higher monthly payments, he said.
"You'll see when we come back late next year," Webb said. "It will be mostly owner-occupied homes."
I would recommend holding off on the purchase. First, the decline in home values in MA, Cape or no Cape, is likely to be more than any equity she'd build up over the same time period; a conservative estimate would be a 6% drop in home prices, vs a 3% buildup in equity.
Second, I suspect the vacation rental market will soften next year. Consumer spending has been very strong as the "party" continues, but when consumer spending inevitably comes crashing down, the hospitality sector, including vacation homes, will get hit hard, as consumers cut back on luxuries.
P-V:
" I suspect the vacation rental market will soften next year"
Two words...gas prices.
PV,
The working assumption is that the property will LOSE 6-10% in value over the period decline and recovery that could be 7-8 years. The value is in years of income and tax benefits while the equity is "dead." That and having a Cape Cod bungalow at your disposal for personal use. The seasonal rental income is through a multi-year corporate agreement so no matter how soft the rental market gets on the margins this particular house will be insulated. Ultra-tony destinations like Chatham are always special cases. My first reaction was overpriced POS. Then learning of the income component I switched to "overpriced POS that pays for itself." Free is good.
As to gas prices. Two edged sword is it not? An hour or so from both a 3 million Metro and a 1 million Metro is a lot better than 3 hrs to some Vermont cabin. Besides macro speaking gas just isn't the fraction of disposable income it used to be. We are going to $4/gal I suspect before other factors intervene. People paying $2000/week are not going to compensate for $4 gas by asking $1960/week rents.
I was thinking of buying the Marriot on Waikiki, but the spa is rather small and the promenade needs updating.
@Edgar,
I think I'll just have to snap up that Marriot instead.
@akubi,
Okay, I'll let my bid expire. ;-)
Rob
$3k/wk for that pos?
Used to rent the house of a millionare on the water down there for that kind of money. But we were talking 5 bedrooms plus 3 more for the servants. Hellva deck too!
Stay away.
The cape is going to crash.
A lot of fools refinanced with ARMs and took out cash to pay for the down payment on that cape cod abode.
When the resets hit and they see the new nut for the combined houses, they will sell the home on the cape. That is when the prices are going to crash. Just like the late 80s (had some buddies get burned).
As for rentals, a close friend has close to a dozen homes on the maine coast. Things had been going gangbusters for years. But this August, there was a sea change to point they had to get a real job to suppliment income.
The cape is not immune. The islands maybe, but not the cape. For ski rentals you have to be slope side. On the ocean, it is waterviews. Did not see it in that photo.
Wait. There will be plenty of these coming up from the banks soon enough.
h.
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