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!

[Anna Smith]

I would be interested in knowing more. We are looking for three or so properties in the Memphis area to total $375,00 or more for a 1031 exchange. They probably aren't in the area we are looking, but let's talk.

Can you PM me some details?

[Andrey Y.]

Originally posted by @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.

 Is this true across the board.. With all Turnkey companies in all markets?

[Larry Fried]

@Andrey Y. I don't think it is true across the board by a long shot.  @Dean Letfus was over stating the case.  It is so dependent on where, when and what you buy.  However, one shouldn't plan on buying turnkey properties unless you anticipate holding them at least 5-10 years IMHO.

[Dean Letfus]

@Larry Fried, no I am talking only about Memphis, our appreciation rates are low and most turnkey's sell well above retail in areas with very few home owners.

[Curt Davis]

@Dean Letfus

I don't know how you can make a blanket statement that all turnkey companies sell above market value. There are at best 1 maybe 2 at best. Most investors on average use bank financing so the home has to appraise.  

[Andrey Y.]

Originally posted by @Curt Davis:

@Dean Letfus

I don't know how you can make a blanket statement that all turnkey companies sell above market value. There are at best 1 maybe 2 at best. Most investors on average use bank financing so the home has to appraise.  

 What are the 1 or 2 companies that sell above market value?

[Curt Davis]

Prefer to not say. Someone else may give you their thoughts on this one. 

[Dean Letfus]

@Curt Davis, I never said all, learn to read. I said most.  And you know it's true.

[Alex Craig]

@Dean Letfus selling above appraised value would mean on a conventional loan bringing in more  cash than the required 20% down of the appraised value.  Are you saying there are several doing this?  I  network with just about everybody in the market and I would disagree. 

 A turnkey transaction is simply a real estate transaction. Just like the homeowner whose home is in pristine condition he will sell it at top above market value. The homeowner who has deferred maintenance and home is outdated will sell at a discount.  It is up to the buyer to determine what method will make them the most cash flow. In Memphis where there is a little appreciation I think without a doubt the home in pristine condition will cash flow far more than the home that has the deferred maintenance and is not updated. In Memphis real estate, money (cash flow) is made on condition of home, area of home and probably most important, property management. 

[Brent Coombs]

It's arguable that MANY homes would be unable to sell in a reasonable time at their (official) APPRAISED price. Sure, in hot markets there's the phenomenon of getting multiple offers ABOVE asking price, but what about cold/cool markets? Nada. This may be what @Dean Letfus is referring to by suggesting that "most turnkey's sell well above retail in areas with very few home owners" ie. They may APPRAISE at their "above retail" selling price, but, would not normally sell at that price if only marketed to the local owner-occupier market.

ie. Seller-Turnkey companies seem to be able to smell the money that out-of-state investors have, and know exactly how to extract much more of that money than if those investors were local!

So, does that mean that appraisals can be wrong? By definition: yes.

But so long the appraisals go in your favor to re-fi all your initial deposit/s back (as required for BRRRR), the ACTUAL market value is not too much of a concern. (But, don't OVER-leverage)!

On the other hand, if you RELY on appraisals being correct because of a need to sell, then you risk the very same thing happening to YOU as happened / is happening to the OP. All the best Sabrina!

[Tiffany Shan]

Sorry if this is a dumb question or someone's already asked but - how useful has Roofstock been for offloading these types of properties?

[Dean Letfus]

@Alex Craig, the question isn't cashflow but about value. How many houses have you ever seen in Memphis sell at appraised value when an investor is trying to sell?  The Turnkeys have to sell high to create enough margin.  So investors frequently, (in fact almost always), lose money if they have to sell in the first few years.

As my original mentor always said: "When you buy in Memphis it's like a tattoo, you have to keep it for life".

[Curt Davis]

@Dean Letfus

Since from the time we met you back in the middle of 2010 until now, home prices have been increasing every year. Homes we were selling for $49,900 that was a 3 bed 2 bath with rent of $850 are now selling for on average $75,000. 

You are correct in that if an investor tried to sell their home for market value through the MLS it would not sell depending on the area of Memphis. You know as I do that we sell homes to investors either through a relationship like an affiliate or the investor finds us through word of mouth. We are selling a full service package. The investor who lists the home on the MLS will get lower offers from investors or if they do get a home owner to make an offer even close to what they paid, they will then have all the other fees that go along with selling retail.

We sold a home to one of our clients back in September of 2014. He recently asked me to help him sell it, not bc its a bad investment but bc he wants to invest in a larger project in California. The home is located in 38125. We sold it to him all cash with repairs for $92,000 and based on market comps we listed it for $114,900. Right next door at the same time we sold this home to our client another turnkey company in town sold the same type of home to their client for $114,900. I listed his home on the MLS about 7 days ago, it has had 9 showings with a verbal offer coming in from the other Realtor in the next day. Homes can bring good retail offers if its in the right area.

The "tattoo homes " most likely are homes under the $75k range.

[Dean Letfus]

@Curt Davis, you're not one of the over priced ones :-).

[Curt Davis]

hahah thx @Dean Letfus 

[Diane G.]

@Dean Letfus Thank you for your complete honesty on this issue

@Curt Davis I understand the turkey business is a "full service package" and TK providers are charging $$ for that, which is all fair if done correctly...

My big question is that do you think the investors, especially the "IT people from Palo Alto", understand they are paying above market? I am of the impression that they are thinking they got "a good deal"....

[Dean Letfus]

My big question is that do you think the investors, especially the "IT people from Palo Alto", understand they are paying above market? I am of the impression that they are thinking they got "a good deal"....

 Generally they are blinded by the overall low price compared with their own market so they have no idea that they are paying too much........

[Curt Davis]

@Diane G.

If the investors you are referring to buy a home using bank financing and the home appraises for the sale price or greater then I do not think they are paying above market value.  Above market value would be they are buying for $80k and the home appraises for $75k and then they have to bring an additional $5k to the table. That is over paying. 

We have even had cash buyers in the past still get an appraisal just to verify they are not over paying.

Also buy and hold strategy through turnkey providers is that it is to be buy and hold with the mindset of keeping for at least 10yrs or longer. If something comes up and should an investor have to sell, there is a possibility of either breaking even or a possible loss. Unfortunately that is part of the risk in general when investing. 

[Sabrina Brown]

What I learned throughout this process when I got financing for these properties is that one should NEVER use an appraiser that is recommended or linked to the lender.  My appraisals were way too high, then I got the loan approved at a much higher value, then the lender goes out of business and Chase swoops up the loans with higher interests and one can not refinance because it won't appraise for as much.  I believe that laws have changed since but these crooks got away with it. I am just saying it as it is and we must stand up not allowing crooks to get away from it anymore, especially in Memphis where sadly many take great advantage of out of state investors.  

[Sabrina Brown]

Another thing that is hard for out of state investors to figure out:  Zillow's values are completely wrong!  If one doesn't live or know a particular street in Memphis, you would not know this piece of crucial information.  As hard as it is for me to want to support larger banks, sometimes the positive side is that they will use "general comps", not the "real comps" among local investors.  Memphis itself is probably the trickiest market I have come across and experienced personally.  It is such a great city with its genuine people but there is also a very dark sad side to it with lots of crime and poverty.

[Alex Craig]

@Dean Letfus agree, an investor will lose money if selling a few years after they buy a home that has been renovated to retail standards for the area, but so would a homeowner too in a linear market.  The first few years on a 30 yr mortgage are virtually all interest payments. Realtor commissions and closing cost will eat up 8 to 10% of the sell. That is why I see more younger people renting instead of buying. The starter home really does not make sense.  I fell into that trap as I thought that was what I was supposed to do; get married, buy a house and have a baby. We did that all within 4 years. Then in year 6, baby # 2 comes and all of a sudden we grew out of the house. I bought for $119,000, which was top of market because of the condition. The market went up to $125,000.  My option was to sell at $125,000, but after Realtor fees and closing cost, I would have netted around $115,000. I think I owed more then that, so we kept it. Next month, that tenant will have been there for 8 years.

 Like I said earlier, a TK transaction is no different then any other RE transaction. Whether your a home owner or investor, if you buy a home that is the nicest on the block, you will pay full retail value.  If you get a discount on a home, whether or not your are an investor or home owner, you are likely getting a home not updated or partially updated and likely inheriting some deferred maintenance or large capital expenses within the first 5 years. 

The mistake a lot of investor make is thinking they got a good deal on a discounted home because there are comps in the area that tell them they are getting a 30% equity position. Problem is, there home is really worth what they paid because the other homes in the area that command the high comps are fixed up all the way and CAPEX items are newer. If those investors want to sell, they either can sell to another investor, who will also expect a discount because of the condition or they can spend the money to get it to what the high comps in the area are selling for --- which is basically TK and homeowners with nice homes. Bottom line, you are going to pay the piper, on the front end if you go TK or the backend if you go the discounted property route. The argument we see all the time on BP is, which do you make more money doing? If you want consistent cash flow, I can't see an good argument for the discounted home with deferred maintenance and CAPEX expenses in the first 5 years.

[Hadar Orkibi]

The Fact that if investor will sell within the next 5 year or even 2 years (unless there is a major downturn) and loose money is major mistake and doesn't make any financial sense. 

if this is the case it means that the asset you buy is over capitalized.  at the worse one wants to get his or hers money back.

I purchased a property in Christchurch NZ at the top of the 2007 market and thought im getting a good deal at the time. (about 15% under valuation). Later on, after the 2010 Earthquake I sold it and got my money back, do to having some buffer there.

In my view, not allowing for some upside or equity in any financial transaction is amateur and recipe for disaster, one should allways have at list 2 exit strategies while offloading under preforming asset should be one of them.

Saying that i purchased a Credit Agricole bond in 2009 for 100k. 3 years after it was worth 45k (its European french bank bond)  I sold it 2 weeks ago and got about 94k back which im using as deposit to buy in the USA. 

Moral of the story: Understand what you are investing in and getting in to, if you are not willing to learn and understand be prepare to get bellow average results and sometime loose money. 

[Josue Garcia]

Sabrina,

Still having issues with your Memphis properties?

Josh

[Sabrina Brown]

@Josue Garcia I am in good hands with my new and awesome contractor now and things are looking up.  Thank you for asking!

[Todd M.]

Wow! Crazy story Sabrina, so sorry to hear of your nightmare situation(s)! This story caught my eye because I as well am an out of state owner of multiple properties in the Memphis area for the last 4/5 years but have not shared the same experience at all. I'm not sure if I have just been lucky or the PM's are making the difference. I do have a couple properties managed by MidSouth, which I see at one time you had good things to say about but did that go sour for you as well? Also, do you mind sharing your contractor information? I'm always looking for a good trustworthy local contractor for CapEx maintenance. Also, were you able to get the thugs out of your Kings Arms property? That is one of my biggest nightmares, dealing with that type of situation. Best of luck on your future investing!!!