Should I sell or renovate? (San Jose, Oakland: hardwood floors, real estate market, rental)

[Oorah]

Hi,
I posted this in the San Jose thread. I figured I'd post here too because Fremont, CA falls right between San Jose and SF/Oakland. I have a house that is located in Fremont, CA. It's 1230 square feet and located in the Mission San Jose High district. I've got about $20,000 left on the mortgage. Here's the story:
I inherited this house from my father who passed away recently. Unfortunately, he let the house go to *****. I did a lot of research, brought in a few contractors to look at it. Cost to renovate will be ~$120,000.

Questions: should I put in the money and time to renovate the house and rent it out? Or should I leave it as is and try to sell it?

Some factors are what is the real estate market like in Fremont, CA and where will it most likely be 2 or 3 years from now?

Other factors to consider: I have the money to pay for renovations out of pocket without taking out a loan.

Thank you.

[NoMoreSnowForMe]

What needs to be done that will cost that much money? It seems like you could practically build a new 1200 sq ft house for that much money.

Fremont is a pretty desirable location and it's said the schools are good, too. If you want to sell it, consider what you could get for it with or without renovating it. I am doubting putting that kind of money into such a small house would be worth it, investment wise.

And I would bet Fremont would have a good rental market. You could rent to people who have dogs and/or cats, if you don't want to replace flooring, for instance. You can even get higher rents if you accept dogs/cats, because most landlords won't allow them.

The real estate market seems pretty healthy. And the worse housing gets in SF, the more demand there will be for housing further and further out.

I'm thinking you should do the minimum necessary to get it rented out, make it decent, but not fancy. Fix the roof, fix the pipes, repair the appliances, hire pest control, use lots of paint.

Then, hire a prop mgr if you don't want to deal with managing it, set the rent a little above market rates, and offer to rent to people with pets, and see how it goes. If you don't want to continue dealing with a rental after a year, THEN rip up the floors.

[Ceece]

Do you want to be a landlord? I used to think I did but I've changed my mind.

[Oorah]

Thanks for all the feedback. I'll list all the issues with the house:
1. Kitchen needs to be gutted out and completely replaced
2. Both bathrooms gutted out and replaced. There is dry rot in walls and damage to subfloor
3. Cracks and holes in dry walls
4. House needs to be repiped
5. Popcorn ceiling replaced
6. All windows have cracks or holes in them
7. Screen doors need to be replaced
8. Hardwood floors have Unremovable stains and need to be replaced
9. Ceiling has water damage which means weak spots in the roof
10. House might need to be re-wired
11. There may be damage to subfloor in other parts of the house
12. Interior doors and front door need to be replaced
13. Interior needs a paint job
14. Garage door needs to be replaced
15. Rotting deck in backyard needs to be ripped out

Having said that, do you all still think the average Asian family is going to buy a rundown house like this and put in the time to renovate it? In its current state, I can't imagine selling the house for anymore than half it's value, which would be $350000 (house is valued at $700,000). I have the money to fix it up and pay for it upfront. I'm just trying to figure out if it will be worth the time and effort.

Here is another factor to consider: I live and work in Southern California. So that throws a wrench in any plans to eiher renovate or sell the house.

[lrmsd]

Originally Posted by Oorah

Thanks for all the feedback. I'll list all the issues with the house:
1. Kitchen needs to be gutted out and completely replaced
2. Both bathrooms gutted out and replaced. There is dry rot in walls and damage to subfloor
3. Cracks and holes in dry walls
4. House needs to be repiped
5. Popcorn ceiling replaced
6. All windows have cracks or holes in them
7. Screen doors need to be replaced
8. Hardwood floors have Unremovable stains and need to be replaced
9. Ceiling has water damage which means weak spots in the roof
10. House might need to be re-wired
11. There may be damage to subfloor in other parts of the house
12. Interior doors and front door need to be replaced
13. Interior needs a paint job
14. Garage door needs to be replaced
15. Rotting deck in backyard needs to be ripped out

Having said that, do you all still think the average Asian family is going to buy a rundown house like this and put in the time to renovate it? In its current state, I can't imagine selling the house for anymore than half it's value, which would be $350000 (house is valued at $700,000). I have the money to fix it up and pay for it upfront. I'm just trying to figure out if it will be worth the time and effort.

Here is another factor to consider: I live and work in Southern California. So that throws a wrench in any plans to eiher renovate or sell the house.

I don't get why it throws a wrench in any plans to either sell or renovate? Don't you still have those two choices? I would think selling would be easier than renting and being a landlord, even if you use property mgmt. Depends on your overhead, though, and other factors.

Questions: Could you put in carpet and not replace hardwood floors yet? Are there variations on the popcorn ceiling theme? ie, shave some of it off or remove in the main room but not the bedrooms? [yes, I have lived in places where that was done! It does improve the appearance, even if a little lazy-but for renters' sake]. The other repairs seem integral to renting (though some of the items are not that pricey or difficult to replace/repair).
Even if an asian family as you suggested, might not buy the house for 350k, an investor/flipper would (and that is probably your best target buyer if you sell as-is, IMO).

So, you could sell for 350k as is [maybe more since bidding wars happen all the time]. Or sell for 700k [or more!] minus the 120k repairs. Repairing and selling would net the most gain. This is just playing around with the basic numbers you gave, not an exact science. Though, that involves likely a bit of headache, stress and hassle-dealing with contractors and repairs always does, even in the best of circumstances.

So, will it be worth the time and effort to you? That's subjective. If it's worth making extra money off the investment in repairs and then selling, or long term holding it as a rental, then it will be worth it, if that makes sense. Personally, I would either sell as is if I could find a cash buyer/investor/flipper, or renovate [after getting a second and third contractor opinion/bid!] and then sell for what it will go for [possibly more than what it's valued at, in today's crazy market, if you time the listing right.] And, I'd probably base my decision on whether or not making the extra money was important or necessary for me right now. I mean, money is always nice, but if I were in a good position in my own life and had other assets, I'd likely just dump it and have closure and move on (rather than take on the headache of repairs, etc).

Good luck w/your decision!

[NoMoreSnowForMe]

Originally Posted by Oorah

I can't imagine selling the house for anymore than half it's value, which would be $350000 (house is valued at $700,000). I have the money to fix it up and pay for it upfront. I'm just trying to figure out if it will be worth the time and effort.

Here is another factor to consider: I live and work in Southern California. So that throws a wrench in any plans to eiher renovate or sell the house.

I don't think you should trust your assessment of what the place will sell for. In this market, you may be surprised.

I'm confused about the house being "valued at $700,000." Where did you get that figure? It's worth that as is?

Why don't you get an agent and an appraisal and list it high, "as-is" and see what happens?

[Jasmine658]

Easy answer. Fix the place up. You need to do it either which way you decide to go. If you decide to sell right away, someone like me who used to buy fixer-uppers for a living will offer a low price, spend the $120K, and then resell for $400K profit if surrounding homes are like what you say they are - about $700K.

Make sure to get many bids, with references. There are lots of bad contractors out there, but I would say some of the best ones I have had were from Fremont.

Good luck.

[Oakformonday]

Hi,

I would first establish your basis in the property. It would be the fair market value on date of death (you said you inherited the house, right). I would then have a the house assessed at its current condition and then the price after renovation. Run the numbers and see what kind of profit you will make after subtracting the mortgage payoff and renovation cost (if you do that). The total profit over basis will be taxed. You may be able to add some of the capital improvements to your basis so that your profit is lowered and not taxed. That's what I would do.

[Jasmine658]

The tax basis advice is good one above. Remember, though, you can remodel perhaps in 6 months time, and do something called a 1031 exchange using an Intermediary - usually a CPA, to shelter you from capital gains tax, and if you are OK owning another investment property. I can recommend one who specializes in this.

Other choice, and the one I usually do, is just live in the home for 2 years after you remodel, then sell, and you get your section 121 of Fed tax code for the $250K exemption if single, $500K if married. That way you have some cash to play with unlike with a 1031 exchange that commits you to managing another property, that you can not live in for a period of 2 years.

Remember to keep PDF copies of all receipts from your contractors or materials for your "Capital Improvements" file, and keep those files on your computer. I learned the hard way all those thermal receipts fade to white over the years, especially the cash register receipts from Home Depot.

Your best return is on paint, updating countertops, faucets, light fixtures, outlets, switches, and especially windows. The popcorn ceiling needs to be tested for asbestos first, and I had a specialist contractor who removes those (full enclosures & space suit outfits) - but it's well worth it.

[Oakformonday]

The Like Kind 1031 Exchange is a good one if the OP wants to be in the rental business. I'd exchange for a local rental in thier area.

Also, S/He says they live in Southern CA so moving up here for the 121 exclusion probably won't work but that is something many probably do not know about -- so good suggestion.