Part 2: Decision what to Sell
Posted on April 2, 2008 - Filed Under My Strategy |
Once my finances had come together in one place, the decision that something had to go was simple. The next question: Which property to sell?
Looking at my income statement, Property #1 is the biggest negative in my financial picture. Selling Property #1 would alleviate a large, monthly expense.
But there is more than just a negative expense.
The purpose of the Property #1 HELOC was two-fold. (1) get rid of my credit card debt (2) have cash to do the next deal. When the market went soft, the area of Long Beach where Project#1 is located decreased in value between 3 and 6%. Suddenly I found myself in a situation where more was owed on the house than what the value was.
If Property #1 were to be sold, the bank would obviously want their money from the HELOC. Can’t forget taxes. The last expense involved with selling a house are the real estate agent fees. I’ve been told to prepare for 6% expenses. Realistically speaking, tens of thousands of dollars would have to be paid and with no visible means to pay them.
Property #2 has a lot of untapped equity. All loans and taxes owed on Property #2 could be paid. Any proceeds gained from the sale of Property #2 could be put against the HELOC on Property #1. The large, negative HELOC would be drastically reduced.
Putting finances to the side, Property #2 has several benefits over Property #1.
- Property#2 is in a nicer area than Property #1.
- Property #2 fits families nicer, since it is a three bedroom, two bath house.
Yeah Property #2 may not be the logical choice but it is the better choice.
Tomorrow, I’ll discuss the error (or optimistically-caused oversight) with calculating the ROI.
If you liked that post, then try these...
Engineer X asks . . . on September 7th, 2006
From .
Part 1: Deciding to Sell on April 1st, 2008
Last week, some of you indicating that seeing numbers would help understand more why I decided to sell Project #2.
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5 Responses to “Part 2: Decision what to Sell”
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You are caught in a classic liquidity squeeze, just like those Wall Street investment banks. You can’t sell the overleveraged inferior asset that has dropped in value, so you are forced to sell the higher quality asset that is more saleable and in which you have equity.
As Trisha pointed out in her comment on Part 1, there are many folks caught in this position now. A lot of them have no equity in or cash flow from any of their investments and many will be in foreclosure or bankruptcy as a result.
I’m sure you tried to restructure your financing to rid yourself of the inferior asset and keep the better one. You are taking the right steps to reduce risk. If real estate investing is the business for you, you will find your way out of this mess and move on.
That’s exactly it AI.
Back in December, we tried hard to figure out a way to dump property #1 and keep property #2. No matter what scenario we ran, it never worked. That’s when I decided a break was in order, help clear my head.
It pains me to end that I can’t keep Property #2 or at least figure out a way to make both of them work. They’re both great properties and would do good long-term. I just can’t sustain them long term.
Make sure you select an agent who is experienced in selling REO’s so that you get good advice on what to expect and guidance . Not all agents have done this kind of business, and it is definitely different from a typical sale. They generally get profit through their commission from the bank, so you don’t pay for it yet you benefit.
I don’t understand wepaycash’s comment at all. This isn’t an REO. And, an agent would definitely look to Clifford for payment of commissions. He’s the seller, after all. I think what they’re trying to say is that you will need the services of an agent who is experienced with selling investment properties.
But, I would like to add to that. You would be wise to find an agent who isn’t already working much bigger deals than yours (apartments, retail, etc). Your deals may fall by the wayside if that is the case. It isn’t something they mean to happen–it’s just the natural order of things. So, if you can find an agent who sells lots of small multifamilies, that person would be ideal for your situation.
Trisha’s last blog post..Plan D
You’re right Trisha. My real estate agent deals 90% of the time with single family, duplexes or four plexes. He explained to me once why he doesn’t do commercial real estate but I can’t recall what that is.
Clifford’s last blog post..Part 2: Decision what to Sell