Using Taxable Account for Bank Owned Foreclosure

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Topic Author
austin757
Posts: 198
Joined: Wed Jun 06, 2018 11:48 am

Using Taxable Account for Bank Owned Foreclosure

Post by austin757 »

Hi all,

The house literally across the street from me is REO (bank owned) and is currently being bid on at auction.com. I am considering bidding on the home since I am familiar with the area and know the house is in good condition.

The Zillow estimate for the house is $660k and the current bid is $400k. If I was to win the auction, I would have to come up with the amount in cash.

I would have to use a good portion of my taxable account to make the purchase (currently ~700k in 100% equities). Would selling off a lot of my funds in the account to make this investment seem reasonable to you? I can't see the bank letting this house go for any less than 550-600k, so there isn't a huge amount of profit built in there. But I could be wrong and it goes for less.

I'm just not sure if it's worth taking the big capital gains hit on these shares and then having to pay more tax when I decide to sell this house in the future. What do you think? Just keep piling money in the taxable and let this one go? FWIW, I am aware of short vs. long-term capital gains. The property taxes are $13k/year and that would make monthly cash flow a little tight if I held on for at least a year.
RPA59
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Joined: Mon Aug 12, 2019 9:41 am

Re: Using Taxable Account for Bank Owned Foreclosure

Post by RPA59 »

Are you looking to rent this house? Spend some money improving it and flip it? What's the goal here?
If you are looking to rent it, how much can you rent it for per month?
Doctor Rhythm
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Re: Using Taxable Account for Bank Owned Foreclosure

Post by Doctor Rhythm »

Doesn't seem like it's worth the tax costs and risks. You're going to pay capital gains tax on the sale on equities, pay $13000 in property tax, and then pay capital gains tax again (hopefully) and realtor commission(s) when you sell the home in a year. After all this is over, how much higher is your net worth likely to be? How much would your net worth be if you just stayed invested in equities? If you aren't reasonably confident that the former will be substantially higher than the latter, why put in the effort?

Also, I wouldn't want to live across the street from the family that I sold a house to. I can imagine getting the stink-eye whenever they encounter a maintenance problem.
Last edited by Doctor Rhythm on Tue Nov 03, 2020 7:11 pm, edited 1 time in total.
Topic Author
austin757
Posts: 198
Joined: Wed Jun 06, 2018 11:48 am

Re: Using Taxable Account for Bank Owned Foreclosure

Post by austin757 »

RPA59 wrote: Tue Nov 03, 2020 6:10 pm Are you looking to rent this house? Spend some money improving it and flip it? What's the goal here?
If you are looking to rent it, how much can you rent it for per month?
That's the interesting part. The home is rented by a family. I believe they are just renting for around ~3k/month. I can't verify the exact amount, but I do know they are not the owners.

I am friendly with them and I see them still taking good care of the home. My plan would be to hold on for a bit and make some improvements before selling.
Topic Author
austin757
Posts: 198
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Re: Using Taxable Account for Bank Owned Foreclosure

Post by austin757 »

RPA59 wrote: Tue Nov 03, 2020 6:10 pm Are you looking to rent this house? Spend some money improving it and flip it? What's the goal here?
If you are looking to rent it, how much can you rent it for per month?
I believe it is currently rented for ~3k/month. If I was to get the house, I wouldn't be in too much of a rush to sell it. I would probably try to wait at least 1 year to avoid the short-term tax hit.
megabad
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Re: Using Taxable Account for Bank Owned Foreclosure

Post by megabad »

Doesn’t seem like much return potential for the trouble. I mean you could always bid low at the auction and hope to win but I’ve not found banks to be very generous. I would say the possible exception is if you have insider knowledge of the home (you know it has more value than a 3rd party would see). For example, if the house was pristine on the inside and trashed on the outside and you knew this and no one else could get inside, this might tip the scales.

Edit: I see it has a tenant. Never mind the above, hard pass.
Topic Author
austin757
Posts: 198
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Re: Using Taxable Account for Bank Owned Foreclosure

Post by austin757 »

Doctor Rhythm wrote: Tue Nov 03, 2020 7:01 pm Doesn't seem like it's worth the tax costs and risks. You're going to pay capital gains tax on the sale on equities, pay $13000 in property tax, and then pay capital gains tax again (hopefully) and a realtor commission when you sell the home in a year. After all this is over, how much higher is your net worth likely to be? How much would your net worth be if you just stayed invested in equities? If you aren't reasonably confident that the former will be substantially higher than the latter, why put in the effort?

Also, I wouldn't want to live across the street from the family that I sold a house to. I can imagine getting the stink-eye whenever they encounter a maintenance problem.
This is what I am thinking. Do you think there's a price that would make you pull the trigger and do it? Say if it goes for less than the amount I am thinking?
Topic Author
austin757
Posts: 198
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Re: Using Taxable Account for Bank Owned Foreclosure

Post by austin757 »

megabad wrote: Tue Nov 03, 2020 7:09 pm Doesn’t seem like much return potential for the trouble. I mean you could always bid low at the auction and hope to win but I’ve not found banks to be very generous. I would say the possible exception is if you have insider knowledge of the home (you know it has more value than a 3rd party would see). For example, if the house was pristine on the inside and trashed on the outside and you knew this and no one else could get inside, this might tip the scales.

Edit: I see it has a tenant. Never mind the above, hard pass.
Yeah, the tenant issue I find to be concerning in this scenario. They wave when I see them outside and I assume the house looks good on the inside, but I wonder why they haven't moved on to somewhere new yet if they think the house is going to be sold.

This is my first experience with a REO. I only have experience with properties on the MLS or vacant ones. Part of me thinks I should just leave the Taxable account alone and let it grow and compound these next few decades.
Doctor Rhythm
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Re: Using Taxable Account for Bank Owned Foreclosure

Post by Doctor Rhythm »

austin757 wrote: Tue Nov 03, 2020 7:10 pm
Doctor Rhythm wrote: Tue Nov 03, 2020 7:01 pm Doesn't seem like it's worth the tax costs and risks. You're going to pay capital gains tax on the sale on equities, pay $13000 in property tax, and then pay capital gains tax again (hopefully) and a realtor commission when you sell the home in a year. After all this is over, how much higher is your net worth likely to be? How much would your net worth be if you just stayed invested in equities? If you aren't reasonably confident that the former will be substantially higher than the latter, why put in the effort?

Also, I wouldn't want to live across the street from the family that I sold a house to. I can imagine getting the stink-eye whenever they encounter a maintenance problem.
This is what I am thinking. Do you think there's a price that would make you pull the trigger and do it? Say if it goes for less than the amount I am thinking?
Our financial situations and the price we place on our effort and inconvenience may differ enough to invalidate my answer. That said, I wouldn't consider buying this house under any reasonable assumptions for the purchase and selling prices.
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jfn111
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Re: Using Taxable Account for Bank Owned Foreclosure

Post by jfn111 »

Just a caveat but the winning bid on Auction.com doesn't mean much. The winning bid just becomes an offer to the bank and they have a number in mind they want.
I spent a year helping a buyer buy from them and we got it for $50,000 less then they turned down 12 months earlier. I don't know your market but here in MN I can see what the sheriffs sale price was and that's the ball park they are looking for...until they give up. YMMV :beer
123
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Re: Using Taxable Account for Bank Owned Foreclosure

Post by 123 »

You should evaluate the sales and foreclosure history of the house. Some properties seem to have a string of sales and may have multiple foreclosures. These "unlucky" properties may accept lower offers because the bank just wants them off their books. Anyone who buys the house is likely looking for a good deal, particularly if they're paying cash, so the offers may be considerably less than what the bank has suggested for value. If you make an offer you have to price in the risk that you may not know for a number of months if the offer is accepted, you could be passing up other opportunities in that time.
The closest helping hand is at the end of your own arm.
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