Rehap or Sell Home to Developer

Q: I inherited my parent's house in an in-town Atlanta neighborhood. The house is outdated and needs new wiring, plumbing, a driveway, and lots of other expensive improvements.
 

I could pay for them, but I'd have to use my retirement money. I can live without my retirement cash, but I’m concerned about spending it.

A friend told me I'd just be wasting my time and money because whoever buys the house will probably tear it down and build a Mcmansion. He said I shouldn't even bother to paint it.

He may be right. The house next door to my parents’ was gutted, and the developer added a second story to it. It is now listed for $1.2 million. That owner has made inquiries about buying my house, and he’s already torn down several other homes in the neighborhood.

He'd want to buy it cheaply, of course, and I hate the idea of selling for so little money.

What should I do, Ilyce? Should I not bother to event paint the house or anything?

A: It's tough to think about selling a house you've inherited from your parents. There's an emotional tie we have to the home our parents lived in and in which we grew up. Often we feel the need to keep those memories going and also to make the most of what they've given you.

But even you recognize that their house, while fine for them, is outdated by today’s standards. And you acknowledge that it would take a tremendous amount of cash for you to fix it up the way it would need to be done to attract the kind of attention (and command the price) your neighbor is getting.

No one likes to leave money on the table, but let's analyze the deal to see if this is something that makes sense for you financially: You'd have to hire a contractor, gut the interior, exterior and redo the landscaping, and probably spend several hundred thousand dollars fixing up this house. Then, you'll need to hire a real estate agent and sell the home.

Let's say the house, as is, is worth $400,000. You'd spend maybe $300,000 to $400,000 fixing it up. That means you’d have maybe $800,000 in the property. Then, you'd be able to turn around and sell it for $1 million.

There's definitely some profit in this formula. You might make $200,000 after you pay the broker's commission, transfer taxes, interest on the cash (if you borrow it) and other expenses of selling. Then, you'll pay federal and state taxes on the profit and walk away with between $100,000 and $150,000.

But you'd also have to make this your virtual full-time job for the better part of a year. And, you'll have to deal with the emotional toll of working on your parents' house, knowing you'll sell it in the end.

If you're prepared to make the sacrifice of time, and deal with your emotions, you've got the potential to clear in excess of $150,000, in addition to the $400,000 the house is worth. That's no small chunk of change.

It's true, if you sell the house to your developer neighbor, you'll leave some of that cash on the table. But that's okay, too. If you take the $400,000 the developer is offering, get that cash today and invest it in the bank, you may be able to move on with your life in other ways as well.

Unfortunately, I can't make this choice for you. But I can tell you that you'll be fine either way you go.

NOTE: This column is distributed by Real Estate Matters Syndicate, PO Box 366, Glencoe, Illinois, 60022. This column may not be resold, reprinted, resyndicated or redistributed without written permission from the publisher.