Difficulty selling rental properties at loan amount

[Sabrina Brown]

I own 3 rental properties in Memphis and have been renting them out since I got them.  However, last year I tried to sell them at 25% below market value and still only got offers for less than the loan amount.  I ended up having to put tenants in it again after not receiving any income for a year in addition to putting in another 20K to fix these properties up to make them turn key.  I can't refi because I am self employed and I can't do a short sale or approach the banks as to not to jeopardize my excellent credit rating.  

I would like to sell these properties as a package. They generate at least 1K/month in net profits (after PITI and management fees) and don't need any repairs.

Is there any other strategy I could use to offload these properties at a minimum of breaking even or just a tiny bit of a profit?  

I am currently looking for MFH's in CA and would also consider an exchange or other unique options.  Please advise!

[James Wachob]

Originally posted by @Frank Jiang:

Originally posted by @Account Closed:

The thread is quite long and I didn't see specific addresses, only areas, zip codes and street names. I am local to Memphis and looking for a certain type of property, this I was trying but to determine if yours fit my niche market. Thanks anyway.

3381 Kings Arms

3958 Chelsea Hill

9265 Lazzini Cv

 want to sell these homes?

[Jon Holdman]

@Sabrina Brown if you want to get the maximum price for these properties you will need to kick out the tenants, fix them up to sale (not rental) standards and put them on the MLS individually. Selling them as a package or to investors will get a lower price.

How much you owe on the loan is absolutely irrelevant to the price you can sell them for.  The loan balance affects whether or not you'll bring cash to the table to sell, but it has no effect at all on the market value of a property.

You say you put them on the market at 25% below market and couldn't get an acceptable offer.  That does not add up.  If the were on the market at 25% below market given the condition of the property (both physical and occupancy), they would have sold.  You write:

The condition of my properties are turn key/fully rehabbed/move in ready...no major repairs are needed, only cosmetic

Sorry, but here again, I have to push back.  If they are move in ready, NO repairs are needed.  Not major, not cosmetic, nothing.  Many buyers, especially at the low end, become very house poor after they buy a house.  They put all their savings into the down payment and closing costs and have very little left even for cosmetic improvements.  So, even something as simple as bad paint or stained carpets can significantly affect the value of your property.

Have you seen these properties in person?  Have you looked at other properties in the area?  If not, I think you need to buy a plane ticket and go have a look.

[Account Closed]

Originally posted by @Jon Holdman:

@Sabrina Brown if you want to get the maximum price for these properties you will need to kick out the tenants, fix them up to sale (not rental) standards and put them on the MLS individually. Selling them as a package or to investors will get a lower price.

How much you owe on the loan is absolutely irrelevant to the price you can sell them for.  The loan balance affects whether or not you'll bring cash to the table to sell, but it has no effect at all on the market value of a property.

You say you put them on the market at 25% below market and couldn't get an acceptable offer.  That does not add up.  If the were on the market at 25% below market given the condition of the property (both physical and occupancy), they would have sold.  You write:

The condition of my properties are turn key/fully rehabbed/move in ready...no major repairs are needed, only cosmetic

Sorry, but here again, I have to push back.  If they are move in ready, NO repairs are needed.  Not major, not cosmetic, nothing.  Many buyers, especially at the low end, become very house poor after they buy a house.  They put all their savings into the down payment and closing costs and have very little left even for cosmetic improvements.  So, even something as simple as bad paint or stained carpets can significantly affect the value of your property.

Have you seen these properties in person?  Have you looked at other properties in the area?  If not, I think you need to buy a plane ticket and go have a look.

This thread is chock full of things that don't add up.  You would probably find most of it somewhat entertaining.  The OP didn't offer the properties for sale at 25% of value.  She's trying to get out for loan value and to recoup her costs.  She bought these from a TK provider then refi-ed out for max value so she ended up in for essentially zero cash out of pocket. From the numbers provided by at least one of her PMs, she's still in the black.....but horribly upside down.  And as she periodically reminds us, they are "cash flowing", even though one is boarded up and vacant (again). However, depending on when she's posting and which PM or TK company she is angry with, they are either POS props or really a-ok props.  IMO this is where the rubber really meets the road on TK strategy.  How do you get out if you got in for more than they are worth?  How do you get out when no one wants them?  Exit has to be a consideration on any rental purchase, not just TK.

[Mark S.]

As an investor that's getting ready to buy TK in Memphis, this is a little scary.  I'm planning long term buy-and-hold, but knowing that "selling" as an exit strategy could yield a disappointment like this isn't helping.  I'm hoping this is an exception.  

[Dean Letfus]

@Mark S. if you buy turnkey you absolutely would sell at a loss in the first ten years. Not necessarily lower than loan value but quite likely if you get 80% lending.

[Curt Davis]

I would say a lot of it depends on where you buy your homes at. Some neighborhoods appreciate more then others. Homes we were selling for $62,900 back in 2012 are now selling for $79,900 so there is appreciation happening.

[Alexander Price]

@Mark S.

One thing to ask when looking to buy, is if there is a retail market for the neighborhood. Ask for OO comps in the area, and not just one. @Ben Leybovich had previously stated to underwrite your buy using an IRR. When you do this, assume you sell for what you bought it and check the return.

[Ben Leybovich]

Originally posted by @Alexander Price:

@Mark S.

One thing to ask when looking to buy, is if there is a retail market for the neighborhood. Ask for OO comps in the area, and not just one. @Ben Leybovich had previously stated to underwrite your buy using an IRR. When you do this, assume you sell for what you bought it and check the return.

Actually, you will not make any money if you sell for what you bought. There must be some projected appreciation one way or another. The IRR will never work without the back end, if you are honest about CF numbers :)

[Jay Hinrichs]

@Alexander Price  I am in the middle of doing this right now. in the Nicest areas of Jackson MS  Madison county and Rankin county.. golf course communities  and other high end.. I bought 11 brand new homes for go zone tax bene's 10 years ago... the value play at the time @Ben Leybovich was 50% bonus depreciation.. so I put 10% down average of 20k per property. and I wrote off 100k per property the same year.. I bought 2.2 million worth over a 24 month period.. Now not only did uncle pay for my down payment in tax savings but I saved another 25k per transaction I would have sent uncle in those years.. ( pre 08 melt down and our lending and real estate business was smoking)

OK that's why I bought them... they were cash flow neutral all these years.. almost zero cap ex because they were brand new and I bought only once with stained concrete floors and they were brick homes.. Hail damage does not count as that can happen to anyone..

So here we are selling them.. for basically what I paid for them or a little less.. Market never fully rebounded past the peaks..

the issue though is these are all going owner occ... the homes to get full retail ( if your thinking an OO exit) I have been putting another 5 to 10k per property in them.. plus they go vacant for an average of 6 months during the sale cycle.. VERY difficult to sell a rental retail with a tenant in it.. unless its like SF bay area real estate.. that is in such a high demand.

YOur competing against new construction for just about the same price in those areas.. this will play out in all mid west markets the exact same way... the only areas I see were there is significant up side is were your buying in INFIL now that you would not really make sense of as a cash flow investment.. but houses are torn down new one's built or big pop tops are being done.. then there is some nice profit to be made so if the home just stays neutral and or a little negative the big money is in the exit. 

This is what we are doing in Charleston SC  right now and in Indy.. if you can find a rental in these areas that are CURRENTLY being gentrified in a big way.. you have some pretty good hope of big dollars down the road..

So bottom line Alexander thinking you have a OO exit for a used 40 year old rental.. is not reality in MOST instances... these are very long term play's .. and you need to be able to scale to make it work

[Alexander Price]

@Jay Hinrichs  

@Ben Leybovich

You both make fair points. 

[Jay Hinrichs]

@Alexander Price  simply reality  and exactly how it plays out.... 6 months of vacant homes is costing me another 8 to 9k on top of the rehab dough.. then you deduct sales commission and this is about 25k each property to exit.. So just to break even on these things you need substantial appreciation..  I choose to exit as I am retiring from the rental game.  and well I can't really figure out if I am breaking even all these years losing my A@@@ or making a few bucks..

But at the end of the day.. I saved about 500 to 600k in CASH buying them that I would have sent to uncle sam that I would never have gotten back.  ( Go Zone tax bene's that were only available to those who derived 80% of their income from those asset class's IE real estate professionals)

So Katrina givith and takith away..  depending on if you were flooded out or were a carpet bagger.

So with any rental to sell to a OO you can figure about 20 to 25k in added expense to do that.. no matter the price point. maybe a little less is they are 100k homes.. ( which not a lot of those go to OO in those areas)

[Ben Leybovich]

The IRR is just a formula. The output is a function of the in-puts. In-puts are the hardest thing you will do as an investor, specifically one without a lot of experience. I know how people behave and what that does to my cash flow. Otherwise it's just meaningless numbers...

[Jay Hinrichs]

@Ben Leybovich  ergo I have no clue what I have made in the rental game  .. LOL.. I know when I am in a new build for 350k and net on the hud 425k  I made 75k... that I know..  just need to do a few a month and well who cares about cash flow.. LOL

[Diane G.]

Out-of-state investors routinely overpaid, that is no secret, because they don't understand the local market......

I am now in a situation where I tried to negotiate on a property asking $2M down to $1.2M... Out of state investor, from LA actually, bought in bay area back in 2015 for $1.5M... Wanting to unload at $2M now... Well, the purchase price of $1.5 was really a super stretch to begin with, but he probably thought he got a deal....Will see how this goes...

@Jay Hinrichs

if you are not making money on those 11 property, I don't know who can.....

[Jay Hinrichs]

@Diane G.  I made 600k when I bought them  .. money was in the bank 10 years ago.. my point is I just don't follow this stuff much so I really don't know if they cost me anything to won or not.

too busy making money in my day job to worry about if I make 100 a month or lose 100 a month

[Naveen Desai]

@Sabrina Brown, 

   I would recommend few options, and it may be possible to do - but you may have to do some more research and decide if its for you. 

Talk to an online auction company and list them there and see if it works out. The best part of auction is you can set the reserve price.  I bought many auction properties between 2009 till 2013 and then stopped because the auction bids always crossed the zillow estimates. If that would hold true on any of your property, you would be in great luck.

The other option is to get creative. I am not sure if you want to sell them due to headache of finding tenants often or any other purpose. If it is infact the challenge of being a landlord, you can alleviate that by doing a lease option. In that case, you may have to find an investor-partner that will buy out from remaining part of your loan and then you both together do a lease option. Over a period of time you can actually get significant profits- and there is no property management/tax, maintenance etc to you. 

Thanks. 

Naveen. 

[Naveen Desai]

@Diane G.

        Like to talk to you. How & where do you find properties that you could bargain upto 30 % lower. My last CA purchase/sale was in 2014.  Actively looking to get back into investments in bay area.

From 2013 I invested out of state in DFW region, FL and OH. The DFW properties have literally doubled and will cash out this summer. Want to bring that back to bay area, but need to know how to find good deals in this crowded &(crazy) market :).  Pls advise. 

Thanks. 

Naveen. 

[Diane G.]

@Naveen Desai

Once I am in contract, I will post more details....Now is not the time.... Lol

[Diane G.]

@Naveen Desai

By the way, let me clarify.... Don't think I am getting a 30% discount from market price... instead, I think the current owner (from LA) overpaid when he bought, and now he is trying to get out....What I offered is simply market price....

[Sabrina Brown]

Hello everyone again,

I have numerous updates:

1) Lazzini property - sold in June 2016 at breakeven to loan amount

2) Chelsea property - got vandalized again (3 times in 3 years) because boarding up apparently wasn't good enough and having this so-called "honest and reliable" management company that promised to drive by 1x/month and charged me for gardening 2x/month did NOT DO ANYTHING!  I had a potential buyer who wanted to see the property and he was the one telling me that the property had been vandalized.  I then contact my insurance company and they told me my insurance policy was cancelled about 6 months prior BECAUSE the property was vandalized.  So basically, the management company did nothing and just ripped me off and the insurance agent forgot to inform me because she was busy planning a wedding.  The claim has still not been resolved after 3 1/2 months because the management company dragged their feet in providing a police report filing (they said they were stood up by police 3x but then I insisted on them just simply going to the police station - duh! - and it still took them 3 weeks to do so) and they had no record whatsoever of going to my property.  I found a great contractor now, who almost feels like a concierge service to me, who was referred by a great investor from Bigger Pockets.  The contractor has removed the code violations due to the property not being boarded up and trash sitting outside, including a chair from the inside of the property that I had paid for the management to clean out and remove the debris, which they obviously didn't.  

I still owe about $43,000 on this property and have now sold another out of state property that I owned outright (even though I lost another $20,000 due to that management company there letting the tenant move out during escrow and the first buyer pulled out), thus, I offered the property in as is condition at $29,500 but no matter what, every time I lowered the price, I got offered another $10,000 less.  

Several investors in Memphis finally confirmed that there is a different market for out of state investors than local investors.  We are being taken for a ride and pay about 30-50% more on every single transaction: purchase, rehab, repairs, etc.  and we are being lied to that work had been done when it wasn't done.  Most crooks in Memphis get away with it, even if you have a legal title against them.

Contractor is now helping me fix up the property for $10,000 in total while someone trusted will be living there for free and house sitting and reporting back to us so the property won't get vandalized again until we have found a rent to own tenant. Plan is to get $7,000 minimum down and then covering my PITI plus additional cushion, which will be around market rent in that area. There are 3 other properties nearby that are boarded up, too, but they will be fixed up within a year providing each other higher market value.

3) Kings Arms property - the tenants had paid rent before timely, even though they didn't seem the best candidate.  They offered $100/month more but since they paid, I was okay with it, even though it was still below market and what this large property would go for.  However, I asked the management company to do a full checkup of the property and provide pictures, which they didn't and I kept pulling teeth asking about the status.  Supposedly, a person left and they fell behind on following up. Two months after lease expiration, they just sent me the lease renewal without pictures or information who actually lives at my property.  Two months after that, the tenants fell behind on rent.  I kept pulling more teeth to find out whether they had paid or not.  Then tenants filed Chapter 13 (I am still waiting for any funds to come from the bankruptcy trustee) owing me 2 months rent but were given an automatic stay by the court as long as they paid timely starting the October 2016 rent again.  Sure enough, the tenants ended up falling behind again (management company still didn't inform me and I only saw it a month later when I got their reports).  Bankruptcy court issued another automatic stay extension due to a reorganization because tenant was supposedly very ill.  One month got paid, then they fell behind again, which I found out again a month later from my rent reports instead of management informing me by the 5th of the month.  Then I asked the same contractor I am now using to drive by.  He found out that there are hood rats living at my property of at least 10 people.  Again, when I confronted management, they didn't tell me that they had knowledge of the tenants living with many others and the tenants violate several codes.  I was told by management that they "NEVER drive by a property once it is rented!" and "we have over 1,600 properties to manage so we don't have time to drive by each one of them!"  What?  Hello?  I was shocked to hear this.  So basically the plan now is to evict the tenants ASAP,  if no other criminal/domestic issues happen to get them out immediately (they have stolen tools and almost a cell phone from the management company's plumber, which they also didn't tell me about when it happened).  Management company personnel is lame - they don't want to do any work but if there are high repairs, they will do it without your permission and then just send you the bill a week or two later costing you several thousands.  Management made over $13,000 on me last year and they made me feel like I had to beg them to do something that is standard!

Plan with this property is to get tenants out, fix up a bit to make it sell better.  Hopefully, there is a bit of equity left to do so but again, there are two different markets and it all depends who might be making an offer.

It's all about not getting screwed over by your management company or contractors or even lawyers!  Official market is online, which lenders use, but reality in Memphis is that one gets taken for a ride as soon as you know you are out of state!  Please be careful!

[Diane G.]

@Sabrina Brown

Good God, who needs all these stress??

I am so sorry to hear your story... I hope you can get out of the remaining 2 properties asap, and put your life back on track again.... It will happen soon......

[Charles Kao]

Sabrina Brown Something does not sound right but if you list a house for a year and it does not sell then you generally are not listing it below market. If your property cashflows well then you should have no problem selling. Why are you selling if it cashflows so well?

[Joe Splitrock]

@Sabrina Brown there was a post on BP from an out-of-state investor last week who just purchased a duplex in Memphis and was having trouble renting it. I looked at it on Zillow and saw that someone was trying to rent the property for six months before he purchased it. He paid $20K less than what it sold for in 2013, which was $20K less than it was purchased for in 2001. He was insistent that he got a great deal and his rent level was fair, even though someone else couldn't rent it for months and dumped it for a big loss. Hopefully it works out for him, but your story should be a warning for others.

Part of the advantage that local investors have is knowing the good streets, schools and neighborhoods. They can meet a contractor face-to-face and they can drive by the property. 

Sorry you are going through this. 

[Sam Wilson]

Absolutely sorry you are dealing with this. It may give you a bad taste for Memphis and out of state investing, but as a whole there are a lot of great people to work with here. May not be the least expensive on the front end, but in the long run would be well worth it.  All the best! As @James Wachob said, let any of us know if we can help.

[Tina Sandoval]

@Sabrina Brown what a nightmare! Sorry for all your headaches - Let me know if i can help as well.