First, we’re so sorry for your loss. This can be a very challenging time for many reasons, and dealing with property ownership is tough at the best of times.
You’re thinking, “I inherited a house, what to do with this house?” Should I rent it? Should I sell it? How should I sell it?
There are lots of options available to you in Salem, McMinnville, and throughout the Willamette Valley, and we can help you figure out which one will work best for your situation.
We’re seasoned investors in Salem real estate, and we’re looking to buy several houses each month in the Willamette Valley. Every month we get calls from those who have inherited a house and are looking to sell the house… so the info below are some tips to help you navigate the process.
I Inherited A House, What To Do Next?
Here’s a few important considerations to help you make the right decision:
1) Make sure the mortgage is paid.
It’s easy to forget that a house you inherit might still have a mortgage on it. After all, you’re expecting to receive assets, not take on another monthly payment. But until the will is executed, it’s the estate, not you, that has to keep paying the bank. If you’re the executor of the estate one of your responsibilities is to make sure this step is completed. If you’re not the executor but you expect to receive the property, it might be a good idea to work with the executor to make sure the payments are being made.
Once probate is completed your name will be on the title, and you can ask the lender to have your name added to the mortgage as well. From there you can pay off the loan, request a modification to the loan based on your ability to make payments, refinance into a new loan, or continue paying the existing loan as-is.
While mortgage payments are arguably the most important bill to worry about, don’t forget about utility bills as well. If these bills aren’t paid there’s a chance the utility will put a lien against the house, which will have to be paid if and when the house is sold.
Of course if the house was owned free and clear, you don’t have to worry about payments or debt. But either way, you’ll need to decide what to do with the house.
2) Decide whether to keep or sell the house.
There are lots of considerations that should go into this decision. If you sell the house immediately, you will avoid capital gains taxes and get to keep the proceeds of the sale (minus any debt owed against the property). If you sell the house later, you will usually have to pay taxes on the value appreciation that occurs between the time you inherit the house and the time you sell it.
Your tax burden is affected by whether you move into the house yourself or not. It’s a good idea to speak to a tax advisor before you make a decision on what to do with the house.
If there is no equity or negative equity in the house, you can try to negotiate a short sale with the lender, or sign a deed in lieu of foreclosure. You definitely don’t want to just abandon the property and let the bank take it back. If you do, the foreclosure will likely go on your credit report. Fortunately, the housing market has been so strong in Oregon lately that it’s very unlikely you’ll have to deal with negative equity.
After taking these things into consideration, let’s say you decide to keep the house as an investment property.
3) The investment is only as good as the manager.
At Willamette Home Buyers we love investing in real estate! That’s why we’re in this business, and we are always encouraging of people that are getting started in real estate investing. But understand that it’s not a get-rich-quick scheme or easy money. An investment property has to be managed or it quickly becomes a money pit.
So you’re thinking about renting out the house. Are you prepared to deal with brokers, maintenance, tenants, rent collection and all the nuances of property management? The first time a tenant calls you at 3:00 a.m. to report a broken pipe you’re going to realize there’s more to being a landlord than depositing rent checks. Many investors hire a professional property manager to take those late night phone calls. Hiring a property manager can cost you over 10% of your rental income, and as the owner you still need to pay attention to make sure the property is being managed properly.
Renting a property out can be a great way to earn some passive income, but you need to be prepared to actively manage the property yourself or pay a professional to do it.
4) Property ownership costs money.
As people age it’s very common for them to start to let some basic home maintenance tasks slide. Either they used to maintain the house themselves and are no longer able to, or they are on a limited income in retirement and simply can’t afford to keep the house perfectly maintained.
Many inherited houses are in need of some major work to get the maintenance caught up. Contractors are expensive and it’s hard to know which ones to trust. If you do want to hire a contractor to make repairs to your inherited house, ask for referrals from friends and family, and anyone you know in a business related to real estate (mortgage brokers, real estate agents, etc.).
Doing the work yourself will save money but will take up a lot of your time. And if you’re not skilled at the maintenance/repair tasks, you may end up paying more to have it redone right than if you’d paid to have it done professionally to start with.
Many renovations can cost tens of thousands of dollars, even if you are doing the work yourself.
Consider hiring a professional property inspector (usually $300-$400) to give you a detailed rundown on what you’ll need to do within the next five years, along with estimated costs. Surprises are very, very expensive.
Once you’ve made all the initial repairs the house will continue to require maintenance, and you’ll still have holding costs that come with owning an investment property. Be prepared to pay property taxes and insurance. And don’t forget about vacancy…. every month the house sits empty between renters is a loss of income, which is a type of expense.
This section is definitely not intended to discourage you from keeping your inherited house as a rental. Owning rental properties is a great way to increase your income. Just be aware of the expenses and responsibilities that come with being a landlord.
5) Selling a property for top dollar costs money.
So let’s say you’ve decided against being a landlord and you’re ready to sell the house. In order to get the highest price for the property, you’re going to need an agent to list it.
Real estate agents typically take 6% of the sale price as their commission. Many buyers will demand you pay at least part of the closing costs. And it can take several months for a property listed on the MLS to sell. The holding costs I described in the previous section apply even if you are just waiting for a buyer to come along with an offer.
But wait, what condition is the house in? In the section above I discussed why many inherited houses need some major renovations in order to be rented out. The same renovations may be necessary if you’re selling the house on the MLS. Most traditional buyers are not looking for a house that needs a lot of work, and the bank that is going to give them a mortgage won’t loan on the house unless it’s in good shape. So you’re either going to have to repair it upfront or negotiate repairs with buyers.
If you don’t want to deal with making repairs, updating kitchens, improving landscaping and overall cleanup, don’t worry. We buy Salem houses in any condition, and we can close fast on your schedule.
6) If the market will continue to grow faster than your other options, hang on to the investment.
Oregon has a housing shortage, so home prices are expected to keep rising. We can help you analyze the value of your property today versus the long-term benefits of renting. If you can use the equity in your property in another way that outpaces the performance of the real estate market, you should. If you don’t have anything better to do with the money and the neighborhood is rising in value, hang on – real estate can be a great investment if you know how to correctly read the market.
7) Uncle Sam wants a piece of the action.
Don’t forget to discuss your inheritance with tax and legal professionals before you take action. There are major property and income tax consequences that will dramatically impact the cost of owning your investment.
8) Consider all your options.
In certain situations we may be able to help you structure a lease-option agreement that allows you to rent and sell at the same time – capturing the best of both worlds. These kinds of deals can be complicated, but our Willamette Valley investment experience can help you win.
9) Compare a few scenarios.
We’ll help you determine prices for any property near Salem – if you sold it today without doing any work, the highest price the market will bear, and the projected value of keeping it as a rental (along with the costs).