Killing the Golden Goose!

Before I could even form a well thought out response my tongue started moving; my lips started flapping; I think I may have even started drooling. And then I heard my answer; my one word answer. The word came out before I even started thinking; like a trained response. If Mom asks this question, then I respond this way. Well, I’d been waiting for her to ask me this question for a long time and the time had finally come. What’s there to think about? What’s there to discuss? I already know the answer. So, before even having to engage my brain, my mouth uttered the trained response, “YES!”

“I already asked all your brothers and sisters and they all said No.” She continued as if she didn’t hear my response.

Mom delivers her sales talk

“I’ll give you a good price of course. No realtor commission and I’ll knock off some more because you’re my son. I gave the others a chance but they all said they didn’t want it. I knew you’d want it so I didn’t ask you until last.”

“Now you realize, David, you don’t have to buy it, right?”

She seemed to be in the middle of her sales pitch and I wasn’t giving her the opportunity to deliver it. I wanted the house. She was trying her best to give me the entire rundown. The good points the bad points, and then let me make a decision.

I’d already made up my mind; the house would be a great addition to our portfolio. I knew she’d give me a good deal. I knew she’d give me a better deal than anything I could find on the open market. I’d let her dictate the terms and I would accept. In the back of my mind I did leave myself some negotiating room. For instance, if the deal didn’t stack up, I’d plead my case and see if Mom would accommodate. But, I’d first listen to her offer. She proved my first instinct correct. She was offering a good deal; there’s no need to negotiate.

“Dave, I’ll sell it to you for $95,000. That’s well below the market price. Nancy (the sales agent) says she’d put it on the market for about $110,000. So, from there I just took off the commission, which at 6%, brings it down to about $105,000. Then I figured I’d give you another discount because you’re my son. And, I only owe about $80,000 so if I sell it to you for $95,000, I get my money with a little extra and you get a good deal. Does that sound fair?”

I responded with a splash of excitement, “Of course it sounds fair! That’s a great deal and as long as you’re happy with it, I’ll take it.”

Closer look at the deal.

Let’s take a closer look at the deal and why I was so keen to buy.

I knew the house and the neighborhood very well. We already had two houses in the same area. A place called Citrus Hills in Citrus County, Florida. About two hours drive north of Tampa on the Gulf Side, just west of I-75, one of the major north-south highways on the east coast.

Her house was in a prestigious area of Citrus Hills. Underground power lines, nicer and bigger homes marked it as such. And, hers was one of the larger three bedroom homes sitting on one acre of land. Big house on big land. Nice combo.

And, I knew the market well. We had bought our second rental property in the same development a few years before. It was a smaller house on a smaller lot. It was a “three bedder” but not nearly as roomy as Mom’s rental. And, it only sat on a half acre of land. We bought it for $89,000 which I considered a very good buy. And it was happily rented for $750 a month. If you run the numbers, you’ll see that’s not a bad return for a residential investment property. At least in my book it’s a good deal. I’ve heard of folks striking amazing deals that are outside my experience base. Huge returns, no money down, no issues; just money coming in. And, that’s great if you can get it. But, to me, if you can set up a rental property and have the rent pay all outgoings – therefore you don’t have to reach in your pocket every month – then, that’s a good deal. Over the years I’ve struggled to find such deals. So, when I come across one, I tend to jump at it!

And now, I was jumping at Mom’s deal.

Her house was renting for $850 a month. At a $95,000 price tag the numbers stacked up. I figured the ideal figures would be $950 a month at the same price or $850 a month at $85,000. Both represent a 10% return and to me that’s a “no-brainer” deal. The ten percent deals are not easy to come by. I haven’t come across one yet in residential real estate, so, to me it’s the ideal. But still, the deal as presented was a good one; better than any I’d seen in a long time.

Interest rates play a roll in all property calculations. The interest rates at the time were under 6%. So, my yearly interest payments would be about $5,700. The rent would pull in $10,200. That leaves plenty of money for expenses and principal payments. The deal worked; at least from a numbers perspective.

A word about principal payments … I have principal and interest mortgages on all my US investment properties. This is not my recommended strategy. I would rather just pay interest only. But, since I live in Australia, I’ve found it difficult to organize my loans in a more streamlined and efficient fashion. I’m working to correct this. Hopefully, soon, I’ll tackle this issue and get a better loan setup. I have found it extremely difficult to work with Bank of America from overseas. I’m beginning to wonder if I have my money with the right bank.

Now, what about other considerations? What about it’s rent-ability? What about repairs and house condition?

Well, the house was already rented at $850 a month. And, my mother told me in the ten years of ownership, the house had been vacant only about two weeks. And, that was to have some repairs done between tenants. So, rental looked pretty good.

Repairs were a little suspect but Mom reassured me and even added a great sweetener. She told me the house had a termite problem at one time. But, they had it corrected and now the house is termite free. Also, she told me the roof needs to be replaced. I didn’t want to hear that. But, then she offered to pay for the roof replacement as part of the sale. She’d have the roof done and then once complete, I’d buy the house. This was a gift of about $8,000! Thanks Mom.

This was turning into a great deal. My only question was, “Why did none of my brothers or sisters want it?” I couldn’t understand. This house seemed like an easy way to get into the rental property business. Low risk; a known product and a good deal from Mom. But, it didn’t all go swimmingly as I’ll explain.

Why Won’t You Give Me a Loan?

First, I had some issues getting a loan. It was a real pain dealing with the US bank while living in Australia. But, after much haggling, we got a loan and bought the house. My Mom was beginning to wonder if I was going to buy it. It took months of haggling to get the loan organized.

Why was the loan so difficult? I’m not really sure. It was a mystery to me. It was a time when banks were lending to everyone. Credit was easy. “You want money; here take some money!” Seemed to be the bank’s motto. I thought it would be a very simple and straight forward procedure. It wasn’t.

We already had two loans with Bank of America (BOA). I figured we’d just call BOA and it would be a snap. But, as amazing as it sounds, this was not the case. I couldn’t get BOA to even look at it. The lending business was on fire at the time and it seemed like my little itty bitty $90,000 loan wasn’t worth the bank’s precious time. I even had a representative on the ground in Florida who more or less “blew me off.” He was a nice enough guy, but couldn’t be bothered dealing with my loan. I was amazed.

I finally and begrudgingly talked to my other bank and they gladly lent me the money. I’d been with PNC Bank for years and they were happy to have my business. Still the process was cumbersome and drawn out but we finally got there.

I suppose at the time BOA was too busy making high risk loans. Remember, it was only a few years later when BOA got caught up in the GFC and received a massive bailout courtesy of the US taxpayers. Their lending practices were questionable. But, they wouldn’t lend me money. I would have paid it back. As a taxpayer, I thought we might get a thank you letter from BOA. I never did get one, did you?

So, in September 2003, the new roof was in place and the loan came through. The house was happily rented at $850 a month. It virtually paid for itself; except when the maintenance bills started coming in; except when the rent stopped coming in.

Slam-Dunker to Clunker

For some reason, the house turned out to be a clunker.

First, the management team had a difficult time keeping it rented. I was surprised for two reasons. First, it was the same management team my mother used; it was the same team we used for our other two properties. They never seemed to have a problem in the past – what changed?

The management team did confess they made a mistake with one of our tenants. They tried to do a “friend” a favor and let them rent our house. But, it was a mistake. The “friend” didn’t pay the rent and were using the house for suspect activities like taking drugs. My agent apologized and promised never to cave in to a “friend” like that again.

Next, the house seemed to have a never ending list of maintenance items. In 2004 we ran up a maintenance bill of over $4,500! Fix wood rot in the dining room, tree cutting, clearing storm debris, were some of the major contributors to the large bill.

Things didn’t improve in 2005. The maintenance bill went up. We hit almost $6,000! More tree cutting, yard cleaning, sprinkler system faults, new blinds, etc. And, to make it worse – to add insult to injury – the total rent collected was only $2,750! We couldn’t get a decent tenant. Our good deal was not working out.

Decision Time; Kill the Goose

So, Marieta and I made a fateful decision. A decision not made lightly, but one that seemed the most logical, and, as it turns out, profitable. We decided to sell.

I don’t like to sell real estate. To me it’s like selling the goose that lays the golden eggs. Why would you do that? The only reason you’d sell the goose is if you had more where it came from. This was part of my rationale for selling this rental property. We already had two houses in this development. Selling one would still leave us two “golden geese” to generate cash flow. And this goose was sputtering big time; she virtually stopped laying golden eggs. She wasn’t the old goose she used to be. She needed some loving; maybe an owner occupier who would put some life back into her.

We directed the rental agency to put the house on the market. They were also in the business of sales. That’s their main business.

The market was hot. Everyone was buying. Everyone was paying too much for real estate. By late December 2005 we had a contract to sell for the price of $198,000. I was amazed. Settlement took place in January 2006, after which, our bank account looked very healthy.

I was relieved to have the house off the books and to have achieved such a good price for the home. We dodged a bullet. Had we waited too long we would have crashed into the GFC. We would have had a lame goose and no buyers. It would have been cash flow ugly.

Timing matters.

If we tried to sell that home today, we’d be lucky to get $100,000. The market in Florida, as of this writing (Apr 2010) is still suffering from the effects of the Global Financial Crisis. But, the two properties we still own are both happily rented and generating positive cash flow. The deals still stack up. Even though the capital values have decreased, the deals still work. We’re still getting a rent sufficient to cover expenses and a little left over as income.

Was it the best course of action?

So, again, we got out of a tight jam. But, even if we didn’t sell, I have confidence we could have done the necessary maintenance to get the property back up and generating a decent cash flow. It would have been a challenge, but in the end I have confidence it would work. It’s just that selling was the expedient thing to do. It got us out of the situation relatively fast with a windfall profit. But, if we didn’t have the other properties, I probably would have opted to keep this clunker and somehow turn it into a clincher.

But, the “what if” isn’t nearly as important as the “what happened.” So, instead of wondering “what if”, I’ll just say we sold and it worked out well. That’s what happened.

Was it the best course of action? Not sure. Was it the most eloquent solution? Not sure. Was it what Donald Trump would have done? Not sure. But, it worked. And, it’s what happened. It’s part of my story now.

Is There a Lesson Here?

So, what’s the lesson? Again, not sure. Weight up the pros and cons of selling, and then make a decision. I would highly recommend against selling as virtually every time I’ve sold I’ve regretted it. Except once. And that’s this case. In this case I believe selling was a great option. But, in all the other cases, I’ve regretted it. So, I guess the lesson is this; “Sell at your own peril.”

Selling: The Last Option

Why I believe selling should be a last option:

1) Once the sale goes through, that’s the last income you’ll receive from the deal. Your golden goose is dead.

2) Once you sell, how are you going to replace the golden goose you’ve just killed? To get another goose is probably going to cost you more money and associated buying costs. Why would you go through that when you’ve already got a goose? Why not fix the goose you have?

3) How are you going to feel when 10 years later you discover the goose you killed is now generating huge cash flows for someone else? And, the value of the goose has doubled or tripled? I suppose you can brag to your friends how you bought it for such a cheap price. But, bragging about the past never seems to help with paying the bills in the present. Paying the bills requires cash flow; cash flow from many different income producing “golden geese.”