4 Condos in Houston, Great Cash flow - Why won't they sell?

Question

Good Afternoon Fellow Investors,

I'm a wholesaler with what I feel like is a great opportunity on paper, but no one wants it and I'm wondering what I'm missing here.

I've got four condos under contract in southeast Houston. All in the same building. Not the best, nor the worst neighborhood. (3) 2/2 and (1) 3/2.5. Rent is $2,700 a month, could be $250 more a month.

Selling for $109,000 = 29% gross cap rate.

HOA is on the high side, $225 per month per unit, but that covers water, trash and outside maintenance. Taxes are low, turnover is lower.

Comps are hard to come by as well. There are two units selling for $25k per, then 8 units selling for $35k per.

Am I missing something here?

David Dey · Answer

You just stepped into your best and passingly only chance at selling these suckers I your statement.

Talking to the owners.

Get a list of every owner in this complex.  You will see a number of them with multiple units, (like your owner, I assume) reach out to them and see if they want this package.

As my mentor always used to say, "you can market all over the world, but your real buyer is just a stone's throw away."

Heck, you may be able to sell them to a regular buyer in there that wants to choose their own neighbor.

Steve Rozenberg · Answer

I have made the mistake of owning many of these in the past and as they always look awesome on paper with the potential cashflow numbers and ROI they are very time intensive projects.

Both maintenance and tenant-wise, it doesn't matter if they have been rehabbed by mr handyman himself. When the tenants fall behind and do not pay and you go thru the eviction process they will take many parting gifts with them, if they dont then the neighbors come by for a quick shopping spree.

Section 8 has become so tough with all their inspections and red tape it can take months just to get it to pass inspection and who knows how many other people you turned away because of this "Sure-thing", even though they need to government to run their lives and pay their bills. So we eventually gave up even taking them. Although pretty soon they are going to become a protected class by the Fair Housing Administration and you will not be able to discriminate against them soon.

Normally lower end tenants like the ones I had and you will if you purchase these types of properties are a lot rougher on the units, so when they do leave its not a light make-ready its a light rehab.

So the potential cashflow and revenue this was supposed to produce on paper is evaporated with the make ready cost to find a new tenant. Also to get a good tenant it will stay vacant longer which makes if prime for vandalism and theft. We had many places stripped of wiring when trying to lease out homes. If you do then I recommend as soon as you know the tenant is gone get the power turned on. Thieves look for the red tag on the meter and then they go in and strip the home.

Our average tenant timeframe in those areas were about 8-9 months and double the staff time to deal with all their issues of month to month life, so from my experience unless you want another job of adult daycare those are the things you are going get coming down your funnel of fun.

We ended up selling all of ours in that area and we do not even manage them because it was just too time intensive and problematic.

I have done many speech's and had many conversations with investors about when I did "My Time" in the South-East. I would be happy to share with anyone if you want to know more in detal

Chris Soignier · Answer

I can see several things potentially wrong:

1) Cap rate is being incorrectly applied and incorrectly calculated.   First, it's intended to be used for multi-family deals, though that's not overly critical here.  More importantly, you're way overstating cap rate by calculating on rent rev instead of NOI.

2) I've seen some really lackluster attempts at remote wholesaling, which cause me to not be a big fan of it.   Have you personally walked the properties?    Do you have fresh pics you've taken or hired to have taken?    Do you have a repair estimate for each property?   Do you have a good-sized list of Houston-area buyers?

3) I would never invest in condos, nor encourage anyone else to do so.   Plenty of other investors feel the same way, which limits your demand.

Good luck!

Wayne Brooks · Answer

One suggestion.....there's no such thing as a "gross cap rate", and using/applying that term eliminates credibility.

Account Closed · Answer

Nothing wrong with high end condos that are in prime spots that can't be duplicated.  In Hawaii a lot of these are second homes so usually they are rental friendly.

Account Closed · Answer

And obviously no one wants these rentals if the asking is only 3.4 times the gross rents!!  Danger, Will Robinson.

Matt McConkey · Answer

And this is exactly why I love Bigger Pockets. Such a wealth of knowledge at my fingertips. So many different and great takes on the situation. I truly appreciate everyone responding and giving me their feedback.

It all makes sense, so I'll take this and see where it leads. Best regards!

Chris Soignier · Answer

Southeast Houston and Hawaii couldn't be much further apart.    Nobody wants a vacation home in SE Houston!

Jerry Ta · Answer

The most a 2 bedroom ever sold was $34,900 and the most a 3 bedroom ever sold in there was $42,000.

There is also 2 two bedrooms available on the market for $25,000/unit.

John Thedford · Answer

The numbers don't make sense. I too stay away from condos. There are too many people dictating what you can do with your property. We call them condo commandos here in SW Florida. You have more negatives than positives...so WHY would any investor want to buy them?

4 Condos in Houston, Great Cash flow - Why won't they sell?

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