Many new investors gravitate towards the lower cost SFH's because they are easy to finance, abundant in many markets and are the easiest pathway to completing the BRRRR which most new investors view as the ultimate real estate success story. Unfortunately very few who seek out these assets take the time to consider their exit and fail to realize they are the most costly assets to exit, let me explain why:

Here's how that disposition process to an owner occupant looks:

-You will incur turn over expenses associated with vacating the tenant in preparation of the sale

-The natural buyer in this price point is the FHA buyer who will normally seek a 5-6% seller assist

-Passing a Section 8 inspection/preparing a home for a low income tenant is very different than the expectations of a home owner, particularly the FHA buyer who cannot afford to take on any deferred maintenance. Therefore expect a 15 page home inspection report filled with corrective measures you must satisfy otherwise the buyer walks.

All in between turning over the home, ordinary transactional costs ( broker fees, transfer tax, loan payoff fees etc.) seller assist, repair addendum repairs its very possible for your exit fees to approach 13-15% of the properties sale price.

Next the investor: Investors will not pay retail for these assets because there are no barriers of entry and they can complete the same process you completed given the abundance of distressed assets available in these markets. Alternatively they can purchase a portfolio of occupied homes at a discounted price because the seller of the portfolio in most instances first tried their hand at selling the homes individually to the owner occupant and after experiencing 13-15% in disposition fees and expenses realized its not worth the effort and better to package the assets and sell discounted to another investor.

Keep in mind, most of these SFH's are in stagnant markets meaning limited appreciation and if you ever took the time to look at an amortization schedule there's no meaningful principal paydown for many years. Some may say they can pay down the principal more aggressively with cash flow, but reserves are necessary in this asset class because Capex disproportionally impacts these lower priced SFH's and ordinary repairs can easily wipe out months of cash flow.

If you chose to go this route, the home must have meaningful appreciation otherwise you will be running in place and the only people to make out are the transaction fee earners (Sales Agents, PM's, Lenders) and perhaps FHA buyers who get a home with a 3.5% down payment with the benefit of a seller assist and a 15 page corrective report completely satisfied. Unfortunately satisfying a BRRRR & marveling at the spreadsheet cash flow and equity are what lead to purchases in stagnant markets and very few who invest in these assets pay any attention to the fundamentals that lead to meaningful appreciation where a gain can actually be realized.

Stuart Udis

[email protected]

5 Votes