1

I bought a foreclosed home all cash for $165,000 (no mortgage) so that I could use it as a rental property. It had some mold growth in the basement and I thought it was something I could fix by ripping down the wall, applying anti-microbial formula and some scrubbing, and rebuilding that portion of the wall. Big mistake.

8 years later, I am finding myself still dealing with mold growth despite my efforts of getting rid of it (mainly because of water continuing to leak into the basement).

In the past 8 years I've spent approximately $40,000 "flipping" the house. So you could say I've put in $165,000 + $40,000 = $205,000 into the house. But I've made a decent amount on rental income as well. A fully rented house will give me $2000/month. The house was not rented all 8 years , there were definitely periods of many months in which the house was not rented.

Now I really want to sell the house and fixing the mold problem + water leakage problem could cost anywhere between $10000 - $15000.

After I've temporarily resolved the mold / water leakage problem, I want to sell the house. I looked up zillow.com's zestimate and it is $287,000.

It makes financial sense to sell the house instead of keeping it as a rental property, right?

user1068636
  • 333
  • 2
  • 5
  • 2
    What makes you think you'd find a buyer that wouldn't make you either fix the problems or discount the price such that it would cover fixing the problems? – quid Nov 06 '16 at 01:54
  • I know for sure there won't be any buyers if the mold problem isn't fixed. Thats why I'm willing to spend 10k-15k to make the place sellable. Then I have a chance of finding a buyer. But I would continue to rent it out until a buyer comes along. I guess my question is should I bother to put it out on the market after fixing the mold problem and see what happens, or would I be wasting my time? – user1068636 Nov 06 '16 at 02:18
  • 1
    If that's your question then the mold problem really has no bearing on the answer. You'll have a cost on the house of $165,000 + $40,000 + $15,000 for $220,000. If you think you're asking if you should sell it than continue to collect rent you'd need to include the details of your rents, not the mold problem. I think if you can clear $60,000 selling the place that seems like a pretty good result to me. – quid Nov 06 '16 at 02:39
  • Dump the house. Sell it at any cost, with the next buyer understanding that there's a mold problem. Get rid of it. – Fattie Nov 06 '16 at 12:22
  • 2
    You have to be careful here. Depending on type and extent of mold, you may have no choice but to fix it properly before you can legally sell it. If, for example, the house has black mold then you'll have to hire a remediation company to do it, because it's incredibly hazardous and has to be disposed of properly (very similar to asbestos). You may also be required to disclose the mold problem as part of the sale process, so that will make it very difficult. Get rid of the mold the right way first, then consider your options. – Daniel Anderson Nov 06 '16 at 12:38

1 Answers1

2

I'm going to assume that you will spend the money to fix the mold problem correctly.

Using your numbers, after that is done, the home is worth perhaps $280k. To evaluate whether or not to sell, the amount you have spent on the house is irrelevant. The only thing you need to ask yourself is this:

Would I spend $280k to buy this house today?

You might, if you were happy with the rental income that you were getting. If the house is fully rented, it earns you $24k/year, which is an 8.6% return if you had purchased the house today at $280k. Of course, you will have vacancies, taxes, and other expenses bringing that return number down. Figure out what that is, and see if you are happy with the return based on those numbers.

If you decide it would be a bad investment for you at $280k, then sell the house.

By the way, this question works for any investment, not just real estate. When deciding whether or not to sell stock, the same thing applies. It is irrelevant what your cost basis is. You only need to ask yourself if the stock would be a good buy for you at the current price.

Ben Miller
  • 115,533
  • 30
  • 329
  • 423
  • The only edit, I would make is that you have to deduct closing cost when you sell a home. So figure, about 260K rather than 280K as the decision point. – Pete B. Nov 07 '16 at 14:41