To all you experienced rein guys,I have a question. I put down a 10 % (35K) deposit on a apartment style condo last March of 07. The condo sales agreement is for $353K and is continuing to be built. They say it will be ready by November,5 months away. The almost identical new building beside it built by the same builder has recently been finished and the same units are selling for about $280k-$305K. Ouch! What to do? Should I walk away from the 35K deposit and risk being sued by the builder, or plunk down everything I`ve made(from my successful flips) for a deposit of 143K (with the initial 35K down this will be a total of 178K down) bringing the morgage to an affordable $176K which I could break even on with the rent. However, the property would be worth some 70K leass than what I paid for it. It could take a loooong time to appreciate back to what I paid, assuming the market moves in the right direction. The condo low rise is in Sherwood Park, Alberta. I know I bought at peak, speculated, and lost.(my bad) What would all you much wiser folk than me advise?
novice speculator needs advice
- Thread starter meggie
- Start date
Part of your title is wrong, this is not an investment, it is a speculation. The best thing would to have done proper due diligence and not be in this situation, however I think you already know that.
You should not walk away from your initial deposit - it is the wrong thing morally and legally to do.
Can you supply a little more background info? Why do you feel the property will be in a break even situation with your substantial top up of the downpayment? Have you done a property data spreadsheet? What are projected rents, costs, etc? In fact, what type of unit is it? How many bedrooms, what class of unit?
What is the average appreciation in the last couple of years in this area for your type of unit? You may find that running in negative or break even cash flow for a period of time until the property attains the price you paid for it will cost less than the $35k you are thinking of walking away from. Not to mention the cost to your reputation for breaking your comittment.
You should not walk away from your initial deposit - it is the wrong thing morally and legally to do.
Can you supply a little more background info? Why do you feel the property will be in a break even situation with your substantial top up of the downpayment? Have you done a property data spreadsheet? What are projected rents, costs, etc? In fact, what type of unit is it? How many bedrooms, what class of unit?
What is the average appreciation in the last couple of years in this area for your type of unit? You may find that running in negative or break even cash flow for a period of time until the property attains the price you paid for it will cost less than the $35k you are thinking of walking away from. Not to mention the cost to your reputation for breaking your comittment.
QUOTE (mark186 @ Jun 6 2008, 08:53 PM) Part of your title is wrong, this is not an investment, it is a speculation. The best thing would to have done proper due diligence and not be in this situation, however I think you already know that.
You should not walk away from your initial deposit - it is the wrong thing morally and legally to do.
Can you supply a little more background info? Why do you feel the property will be in a break even situation with your substantial top up of the downpayment? Have you done a property data spreadsheet? What are projected rents, costs, etc? In fact, what type of unit is it? How many bedrooms, what class of unit?
What is the average appreciation in the last couple of years in this area for your type of unit? You may find that running in negative or break even cash flow for a period of time until the property attains the price you paid for it will cost less than the $35k you are thinking of walking away from. Not to mention the cost to your reputation for breaking your comittment.
I`m a newbie but I`m digging into the materials that I`ve got. I`d say keep it and try to make some cashflow out of it, or at the very least, a very little loss. Read Don`s book, consider joining Rein and use all that cash from the flips to buy a few good investment properties in some of the hotter areas. Not for a flip but for a hold with positive cash flow. Build up some equity and buy more.
Research the new Condo, visit it. There is a good chance that, although the building is shaped and designed the same, the fixtures and layouts could be designed to attract the lower end market since the higher end might be tapped out. It might not be the exact same.
I re-state that this is newbie advice but give it a thought.
Real
You should not walk away from your initial deposit - it is the wrong thing morally and legally to do.
Can you supply a little more background info? Why do you feel the property will be in a break even situation with your substantial top up of the downpayment? Have you done a property data spreadsheet? What are projected rents, costs, etc? In fact, what type of unit is it? How many bedrooms, what class of unit?
What is the average appreciation in the last couple of years in this area for your type of unit? You may find that running in negative or break even cash flow for a period of time until the property attains the price you paid for it will cost less than the $35k you are thinking of walking away from. Not to mention the cost to your reputation for breaking your comittment.
I`m a newbie but I`m digging into the materials that I`ve got. I`d say keep it and try to make some cashflow out of it, or at the very least, a very little loss. Read Don`s book, consider joining Rein and use all that cash from the flips to buy a few good investment properties in some of the hotter areas. Not for a flip but for a hold with positive cash flow. Build up some equity and buy more.
Research the new Condo, visit it. There is a good chance that, although the building is shaped and designed the same, the fixtures and layouts could be designed to attract the lower end market since the higher end might be tapped out. It might not be the exact same.
I re-state that this is newbie advice but give it a thought.
Real
QUOTE (mark186 @ Jun 6 2008, 09:53 PM) Part of your title is wrong, this is not an investment, it is a speculation. The best thing would to have done proper due diligence and not be in this situation, however I think you already know that.
You should not walk away from your initial deposit - it is the wrong thing morally and legally to do.
Can you supply a little more background info? Why do you feel the property will be in a break even situation with your substantial top up of the downpayment? Have you done a property data spreadsheet? What are projected rents, costs, etc? In fact, what type of unit is it? How many bedrooms, what class of unit?
What is the average appreciation in the last couple of years in this area for your type of unit? You may find that running in negative or break even cash flow for a period of time until the property attains the price you paid for it will cost less than the $35k you are thinking of walking away from. Not to mention the cost to your reputation for breaking your comittment.
You should not walk away from your initial deposit - it is the wrong thing morally and legally to do.
Can you supply a little more background info? Why do you feel the property will be in a break even situation with your substantial top up of the downpayment? Have you done a property data spreadsheet? What are projected rents, costs, etc? In fact, what type of unit is it? How many bedrooms, what class of unit?
What is the average appreciation in the last couple of years in this area for your type of unit? You may find that running in negative or break even cash flow for a period of time until the property attains the price you paid for it will cost less than the $35k you are thinking of walking away from. Not to mention the cost to your reputation for breaking your comittment.
A little more info: this is a 1100sq` 2bedroom 2bathroom (full) small den apartment-style low-rise condo in a steel and concrete structure. YesI have figured out my interest costs, utilities, insurance,taxes, condo fees,ect and the normal going rental rate would put me in a break even situation (given I`ve put down the large downpayment). The area has appreciated wildly in the years from around 04 to mid 07. They have corrected substantially since (as you can see from the going price now)
QUOTE (meggie @ Jun 6 2008, 11:48 PM) A little more info: this is a 1100sq` 2bedroom 2bathroom (full) small den apartment-style low-rise condo in a steel and concrete structure. YesI have figured out my interest costs, utilities, insurance,taxes, condo fees,ect and the normal going rental rate would put me in a break even situation (given I`ve put down the large downpayment). The area has appreciated wildly in the years from around 04 to mid 07. They have corrected substantially since (as you can see from the going price now)
Personally, with a price correction in the market (if that is the case, I am not familiar with your area at all), this could be a great opportunity to pick up a few more properties before the prices bounce back. I would make sure it is not done on speculation though. Look for properties with positive cash flow. You still have a relatively long time unit the condo is ready. By the time it is ready to move in, it may appreaciate some as the market bounces back. It`s a correction not a crash?
Personally, with a price correction in the market (if that is the case, I am not familiar with your area at all), this could be a great opportunity to pick up a few more properties before the prices bounce back. I would make sure it is not done on speculation though. Look for properties with positive cash flow. You still have a relatively long time unit the condo is ready. By the time it is ready to move in, it may appreaciate some as the market bounces back. It`s a correction not a crash?
I am afraid I CANNOT pick up any more properties, like I said, I need every penny of what we have to put down just to make this thing fly(or crawl,whatever the case may be). Has anyone heard of builders renegotiating their contracts if the property is worth significantly less than what the sales contract agreed to? Especiallly if the loaning bank now refuses to lend that amount as the property isn`t worth it anymore? (I am not saying this is the case with my bank)
Before I joined REIN I dealt with a lot of people doing prebuilds and was involved in 2 that made great money.
I know one person who renogotiated the contract after purchasing but before closing ie Free garage and landscaping.
I would ask the builder what they can do for you
Talk to a lawer I also know people who have walked away from these prebuilds and not got sued.
I doubt that your rent will cover any costs I have a former tennant that rents the same thing for $1200 and they can not sell them for $275000
Don`t buy any prebuilds the easy money is gone
Do you have any experience being a landlord?
Are you willing to hold property for 5+ years?
I know one person who renogotiated the contract after purchasing but before closing ie Free garage and landscaping.
I would ask the builder what they can do for you
Talk to a lawer I also know people who have walked away from these prebuilds and not got sued.
I doubt that your rent will cover any costs I have a former tennant that rents the same thing for $1200 and they can not sell them for $275000
Don`t buy any prebuilds the easy money is gone
Do you have any experience being a landlord?
Are you willing to hold property for 5+ years?
Meggie, you are likely the best person to mitigate the damage here. If you don`t close, the Builder could, and may, dump the property at a great loss and he will come looking to you to for the spread between the fire sale price and your contract price. If you close on it, you will probably end of exiting at a higher price point that the Builder would and mitigate the lost. The Quickstart this weekend is a great conduit for what is going to happen in Edmonton and surrounding areas over the next couple of years.
I will probably have to rent it, however I will talk to the builder also. No, I have no experience renting but I think I`m going to have a crash course in it in a few months. What does happen if the banks appraisers refuse to loan the money now that the property has depreciated?
QUOTE (meggie @ Jun 7 2008, 04:49 PM) I will probably have to rent it, however I will talk to the builder also. No, I have no experience renting but I think I`m going to have a crash course in it in a few months. What does happen if the banks appraisers refuse to loan the money now that the property has depreciated?
The bank will lend based on the appraised value. If you were approved for a mortgage of 80% of purchase price, they will likely lend on 80% of appraised value - you will have to make up the difference.
The bank will lend based on the appraised value. If you were approved for a mortgage of 80% of purchase price, they will likely lend on 80% of appraised value - you will have to make up the difference.
QUOTE (SamEfford @ Jun 7 2008, 06:17 PM) Do you still have the "subject to financing" condition to get you out of the deal?
No there was no such clause on this new condo to be constructed. They have "infinite" wording in the sales contract drawn up by their lawyers to protect them so I have no recourse with that. I will try to talk to the builder (as I know there are about 80% of us speculators purchased in the same building, so I can`t be the only one with these thoughts,maybe just the only one risking posting on this website what a stupid thing I did for all to read about) If I rent,I can only guess when things will come back, and, as I said, I will need to put every penny down to get this thing to break even on the rent.
No there was no such clause on this new condo to be constructed. They have "infinite" wording in the sales contract drawn up by their lawyers to protect them so I have no recourse with that. I will try to talk to the builder (as I know there are about 80% of us speculators purchased in the same building, so I can`t be the only one with these thoughts,maybe just the only one risking posting on this website what a stupid thing I did for all to read about) If I rent,I can only guess when things will come back, and, as I said, I will need to put every penny down to get this thing to break even on the rent.
QUOTE (meggie @ Jun 6 2008, 09:12 PM) To all you experienced rein guys,I have a question. I put down a 10 % (35K) deposit on a apartment style condo last March of 07. The condo sales agreement is for $353K and is continuing to be built. They say it will be ready by November,5 months away. The almost identical new building beside it built by the same builder has recently been finished and the same units are selling for about $280k-$305K. Ouch! What to do? Should I walk away from the 35K deposit and risk being sued by the builder, or plunk down everything I`ve made(from my successful flips) for a deposit of 143K (with the initial 35K down this will be a total of 178K down) bringing the morgage to an affordable $176K which I could break even on with the rent. However, the property would be worth some 70K leass than what I paid for it. It could take a loooong time to appreciate back to what I paid, assuming the market moves in the right direction. The condo low rise is in Sherwood Park, Alberta. I know I bought at peak, speculated, and lost.(my bad) What would all you much wiser folk than me advise?
Hey Meggie;
As it sits, I see three options:
1) You can always talk to the builder as some of the previous posters mentioned but if you were in his shoes, would you be willing to renegotiate the deal?
2) Close on the property using your cash reserves and then turn around and sell the property for whatever you can get for it. If that means taking a $70K bath, so be it.
3) My advice would be to increase your down payment, rent the unit out and wait for the market to catch up to your purchase price. It should rent out for somewhere between $1,200 and $1,400/mth. If landlording isn`t your thing, hire a property manager to do the work for you.
Just walking away from the deposit and the deal wouldn`t be an option for me. First, you and the builder made a deal and he`s lived up to his end of the bargain so now it`s your turn. Even if you remove the morals and ethics from the deal, I can`t imagine the builder being happy with only your $35K deposit. I`d think he`d get his lawyer and come after you for the difference and then this could turn into a real nightmare.
If this episode doesn`t turn you off of real estate, I`d recommend that you set some money aside to join REIN. I started out flipping houses and was lucky enough to not get caught with my pants down. After I joined REIN, I went from focusing on quick flips to longterm cashflow and I can`t tell you how much less stress there is when you`re in it for the long haul.
Best of luck.
Hey Meggie;
As it sits, I see three options:
1) You can always talk to the builder as some of the previous posters mentioned but if you were in his shoes, would you be willing to renegotiate the deal?
2) Close on the property using your cash reserves and then turn around and sell the property for whatever you can get for it. If that means taking a $70K bath, so be it.
3) My advice would be to increase your down payment, rent the unit out and wait for the market to catch up to your purchase price. It should rent out for somewhere between $1,200 and $1,400/mth. If landlording isn`t your thing, hire a property manager to do the work for you.
Just walking away from the deposit and the deal wouldn`t be an option for me. First, you and the builder made a deal and he`s lived up to his end of the bargain so now it`s your turn. Even if you remove the morals and ethics from the deal, I can`t imagine the builder being happy with only your $35K deposit. I`d think he`d get his lawyer and come after you for the difference and then this could turn into a real nightmare.
If this episode doesn`t turn you off of real estate, I`d recommend that you set some money aside to join REIN. I started out flipping houses and was lucky enough to not get caught with my pants down. After I joined REIN, I went from focusing on quick flips to longterm cashflow and I can`t tell you how much less stress there is when you`re in it for the long haul.
Best of luck.
Thankyou all for your insight and experience. As I kind of expected, It looks like I will be renting it out and hoping and praying the market comes back to at least my break even point. Live and learn. My first 4 flips went so well but i should have clued in this couldn`t last forever. I will talk to the builder but perhaps i thought i should wait til a little closer to finishing when perhaps more similar customers are coming forward with the same dilemma and they`d be more likely to negotiate abit? Also, what`s better, taking out a morgage or using my HELOC for the amount left owing?
Hi Meggie,
One more thought to add to the pile...
You need to talk to a mortgage broker to see if you are going to be able to do this...
Buy the unit, with as much of a down payment as you need to make it cash flow. Get a line of credit on the unit (up to 80% of the value of the unit - minus the mortgage of course), and then INVEST (not speculate) with the money from the line of credit. Then if you are careful (and lucky), you MAY have enough cash flow from the other property that you purchase to cover your interest on your LOC on this condo.
Of course, joining REIN and learning how to do this would help...
Yevgeni
One more thought to add to the pile...
You need to talk to a mortgage broker to see if you are going to be able to do this...
Buy the unit, with as much of a down payment as you need to make it cash flow. Get a line of credit on the unit (up to 80% of the value of the unit - minus the mortgage of course), and then INVEST (not speculate) with the money from the line of credit. Then if you are careful (and lucky), you MAY have enough cash flow from the other property that you purchase to cover your interest on your LOC on this condo.
Of course, joining REIN and learning how to do this would help...
Yevgeni
Here is my take on your situation.
Based on the amount you need to put down and the possibility that rent will fall short of break even
(it usually does when you try to force the numbers) I estimate you will lose about $20,000 per year.
That is a combination of rent falling short and the loss of income on the cash you put down to make
the property work (mostly lost income on cash).
I would also guess that the value of the unit will take a sharp drop when large numbers of speculators abandon ship as soon as the place opens.
It will take many years to break even (probably never based on lost income) and in the mean time your cash will be tied up in a money pit.
I would find a way out ASAP even at a loss.
Based on the amount you need to put down and the possibility that rent will fall short of break even
(it usually does when you try to force the numbers) I estimate you will lose about $20,000 per year.
That is a combination of rent falling short and the loss of income on the cash you put down to make
the property work (mostly lost income on cash).
I would also guess that the value of the unit will take a sharp drop when large numbers of speculators abandon ship as soon as the place opens.
It will take many years to break even (probably never based on lost income) and in the mean time your cash will be tied up in a money pit.
I would find a way out ASAP even at a loss.
The real question is: can you afford to have all of your money tied up in a lost cause for the next 10 years or do you want to move on to other deals with what ever you can salvage from your potential investment of $176,000.