I tapped keys on my laptop, researching a property my buyers wanted to see.
Not flagged as a grow-op? Check.
Offers specs they need (# of bedrooms / #bathrooms etc.)? Check.
Asking price fits within – wait a second…
For some reason the property showed that it had sold only three years earlier, but for $60,000 more than the current asking price.
In this market, $60,000 discounts were not normal. Something was wrong.
“What’s wrong with the house?” I asked the agent.
I didn’t get a clear answer. All I knew was that the owners had bought it three years ago for a relative who then decided not to move in. So they rented it out, and were now selling it.
“Well, my buyer would like to see it. When’s a good time?”
Days later, when my buyer and I set foot in that vacant house, I knew exactly why the asking price was so much lower. The owner occupied-turned-rental house had been absolutely destroyed.
To put it gently, it was a friggin’ disaster.
Everything from the walls to the floors to even the finishing trims on windows and doors, had been abused. It looked like the Tazmanian Devil had lived there. Angrily. Hungrily. And his destruction left no room or surface untouched.
That tenant’s damage devalued the house to the tune of $60,000. And that’s just a conservative estimate of their losses, which doesn’t include mortgage payments, property taxes, heating bills, and other maintenance charges that continued after the tenant moved out. I expect their losses would land closer to $80,000, all in.
Here’s the common mistake they could have avoided. Actually, there were two critical mistakes made there.
Mistake #1: Turning a Home into a Rental
I’m all for real estate investing and creating passive income, and all that.
What I’m NOT in favor of, are inexperienced, solo homeowners taking on the massive risk and responsibility of rentals without so much as a mentor. Actually, without so much as a quick glance at the rules and laws that guide Landlord and Tenancies relationships.
Renting out a home ties you to a renter. It restricts and limits your control over your own property, and leaves you vulnerable to things just like this.
PLUS, if you’re doing this with your own home – if you move and decide to rent out your old home – you now add Capital Gains in the mix, meaning you’ll pay taxes whenever you sell that property for the period it's use was changed from Principal Residence to a revenue generating property, when you wouldn’t normally pay any at all had you just sold your personal home. BIG financial difference there, and so few even consider it.
Mistake #2: Mixing Business and Family
I can only imagine how awkward the Christmas gathering would be between that homeowner and the mind-changing relative they bought the house for.
“Gee, thanks, Cousin Carl. Now we’re stuck with a house that’s worth $60,000 LESS than what we paid for it!”
And it usually is. Mixing business and family, or family and money is just a bad idea. Money brings out the worst in people, and can cause huge problems.
It pains me to tell this story, by the way. I don’t get joy out of seeing people lose their shirts in real estate deals gone wrong, and I hate seeing families struggle in relationship.
I don’t tell this painful story lightly, but with a sense of responsibility to you. I don’t want you to accidentally be that guy. I don’t want you to suffer huge losses.
And I don’t want to be the guy who knew the pitfalls and dangers lurking around the next corner, but who said nothing. Because that’s not me.
So now you know.
If you’re thinking about turning your house into a rental, or thinking about buying, selling, or renting with family… I really hope you don’t. I see it often enough to know that most of the time, it’s not worth it. At minimum, call a professional such as myself and have a discussion first.