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!

[Account Closed]

This is a good example of cash faux.  If you do not have appreciation and rent growth how do you expect to get cash flow?  What you are being sold is cash faux.  Cash faux is receiving your money back over time in small increments.  Hopefully.

[Michael Lauther]

@Sabrina Brown It appears that you may have overpaid for these properties or at best paid what an investor might pay. How do the numbers stack up as an investment? what are the gross rents?. What net return can an investor look for from your package?

I am a buy and hold investor in Dayton OH and find that the only market for my property there are other investors who of course will not pay retail. For now my best option is to hold and recoup as much as I can of my cash investment. Memphis is a similar market from what I have read. Investors I know are looking for at least a 12% Cash on cash return after PITI , management and maintenance. The expected return will vary depending on the characteristics of the neighborhood. A poorer demographic and older homes require a larger return to offset the larger risks.

[Troy Sheets]

Originally posted by @Aaron Mazzrillo:

Originally posted by @Account Closed:

Sabrina: something isn't adding up. If the properties are desirable to owner occupant buyers, that's always your best buyer. If you received no offers from OO buyers, then the properties are not in a good area or are not desirable to them. Or, they area not being marketed properly. Were these properties offered separately? You cannot sell a package to OO buyers. IMO you need the help and opinion of value and desirability from outside the TK world.

Sounds to me like somebody drank the TK Kool-aid and now the reality of the situation is revealing itself. I think every person interested in buying turnkey houses should read this thread. It is the most honest and real information related to an exit strategy - extremely limited even at supposedly 75% of ARV - I've ever read on BP.

I'm waiting for the usual suspects that're always pushing turnkey to pop up! Any time someone mentions they're interested in TK you get several TK cheerleaders showing up saying how great TK is in X city, they own several themselves, and they can connect you with a great TK provider. Where ya'll at?! 

[Tammy Wise]

I guess I don't understand why most of these houses can't be sold to OO for retail if they are in great shape and good areas? Why only investors interested? If the houses were originally sold below or close to retail (as TK operators always advertise they do) she should break even at least. I must be missing something. This will definitely make me think twice on buying TK since there won't be an exit strategy if needed which is sad since I live in CA and one of my only options...

[Sabrina Brown]

Thank you everyone for your valuable information.  I am glad all of you caught the writing in between my lines.  I was "screwed over" (for a lack of a better term but still not strong enough to really express what I truly feel about it) by many so called "professional companies" that are circling in the same areas (just to name one example, the prior closing attorney is in jail!).  

One of my major problems is that I do not have W-2 income, thus, I cannot refinance through conventional lending (while they are giving me the run around to take the properties out of LLC without even giving me options to begin with). In addition, I cannot jeopardize my excellent credit rating or I will never be able to do business in finance or real estate again. All loans have been current.

Jay Hinrichs understands the market correctly and I am glad he pointed out a few things that are happening in Memphis and what has happened to me as well.

There is nothing wrong with the properties or the areas. One needs to understand the different needs in each of these areas (low income vs. prime, family home vs. starter home, investment property vs owning, etc.) They are great properties with only cosmetic issues on one of the properties. I have had these properties for 5 years and even though prices have dipped a bit, the values/sales prices are still strong enough for an OO buyer to be able to finance them through conventional loans. Most OO buyers in Memphis don't seem to have the credit but some cash but even after having tried out lease purchase options, it always comes back to the same: they are not better than any tenant, costly repairs have to be made after move-out because deposit doesn't cover the damage so one invests in repairs once again, and the list just goes on with not being able to rely on management companies, contractors, realtors, etc. telling you the truth (yes, I have tried out numerous that were even in different circles!). One of the challenges is being an out of state owner. As soon as these companies know about it, one gets the short end of the stick.

Because I couldn't sell these properties in almost a year as OO, I started the cycle over by putting tenants in it, now having another challenge to not being able to sell to possible OO buyers, hence dealing with investors/TK providers, etc. once again.

So this is truly a catch22!  Please feel free to use this thread as an example as I know many other investors having the same issues (most of them having done business in the same circle of providers).  They are just not comfortable openly talking about it because a couple of them had to file bankruptcy or mess up their credit rating.

[John McConnell]

This opens my eyes a little more to TK investments as well.  I am wondering if there is not another viable exit for this dilemma.  What about lease option (to buy) or something like that..  but I guess if the only ones who are calling are investors and they are shooting below market then this option really doesn't work.  I really know not that much about TK investments other than what I have heard on BP.  I always thought that TK investments would be a nice entry point for a new investor who may just want to get their feet wet with a "cashflowing" property out of the gate.  Of course the numbers have to be run up front either way... whether TK or looking at pro formas.  Learn something new today... check.

[Aaron Mazzrillo]

Originally posted by @Account Closed:

Originally posted by @Sabrina Brown:

even if the investor asks the properties to be taken back by the TK provider in better shape than it was taken over.

Sabrina:  Did you ask the TK provider to buy back the properties and if so, for how much? It's an extreme solution and understandably not a precedent any seller wants to set.  But one that a TK provider with an unhappy customer should seriously consider.

 I would buy back every single house I ever sold at 75% of value. I couldn't even begin to tell you how happy it would make me to have the current owners of the hundreds of houses I've sold completely fill my inbox with requests to be bought back at that price point. A 25% discount on a fully rehabbed house! Oh, I'm driving my imaginary fleet of Bentley's as I type this!!! A different color for every day of the week. 

That being said, if the OP is struggling to sell these houses even on the retail market, well, I have to quote Ludacris (also a great name for TK company - Ludicrous Investments) "Yeah, things ain't always what they seem or cracked up to be." 

There used to be a guy named Marshall Reddick who sold turnkey rentals. He offered to buy back any house bought through his program if the buyer wasn't happy with the results. Only in the fine print did one learn that he bought the house back subject to the loan leaving the original borrower on the hook still.

I don't think much of that business model as I've repeatedly pointed out. Maybe 1 out of every 50 buyers it might actually make sense for, but probably not even then. Personally, I think these are worse than the guy selling $10K wholesaling boot camps to newbs using the "No risk or credit needed" sales pitch. At least with that model, the person is done losing once the boot camp is over. It doesn't drag on and on for years.

[Sabrina Brown]

I have also tried lease purchase options, which are usually offered to OO with less than ideal credit. A lot of Memphis people don't seem to have the drive to truly care for someone else's possessions so that the lease purchase cost doesn't cover the damage they may have done to the house (who knows, this may have only happened to my property but with "regular" tenants I experienced the same). It is known to Memphis people that going after them legally isn't going to do much: they just switch employers over and over or move from one property to another (and with the owner's risk once again to run into unprofessional services "trying to help the owner" in this situation).

I was raised in Europe to be honest and reliable and will not switch to the bad side just because it now seems to be the norm to also be taken advantage of "professionals".  It appears that there are less and less companies one can trust here in the US and many are just out to "get" someone.  

Aaron, you pointed out perfectly what takes place in fine print.  When I purchased these properties 5 years ago, I was an executive in the corporate world and worked very hard to put money aside while sacrificing my health, only to be robbed by some of these companies and ungrateful people.

Okay, I think I have expressed enough of my personal thoughts.  I am still looking for ways to get them sold professionally! :-)

[Cal C.]

@Sabrina Brown can you please share which company sold you these properties? 

Also can you give a synopsis of the exit part of the contract?

[David Hodge]

Where are the pro TK people? I would like to see a debate on here where the issues are really hashed out. I have never invested in a rental property but will be buying my first couple TK properties very soon. I have read all the arguments for and against turnkey and decided TK is the best fit for me for a few reasons... 1) I work on average 60 hours a week right now and don't have time to search for properties and rehab them. 2) I live in CA. Finding a property that cash flows in CA sounds like a full time job. I'm sure it's possible, but how much more time away from my family will this require? 3) I don't expect amazing returns going this route, but they are still better than the 401k I've been contributing to. My calculations give me an average COC return of 12%. If there is even just 2% of appreciation then since I'm putting 20% down that's a 10% return from appreciation. So I have a total return of 22%. That's significantly more than my 401k which might give me an average return of 6 or 7% after management fees! So even if I'm off a bit somewhere, I'm better off doing this than what I've been doing by buying mutual funds. Please correct me if I'm wrong here! TK may not be the BEST but isn't it better than the alternative?? Even though TK seems to make the most sense for me, it does concern me when I hear things like this. I would love to see a thorough debate on this!

[Mike H.]

I guess thats the real trick there. At the end of the day, it doesn't matter what you put down. The fact is that you were all in at the refi for 75% of the appraisal value and you would think that you'd have that paid down at least a little. Maybe to 72 or 73%?

So if you aren't getting an investor to come in close enough to your loan amount, then something is off. Either the home values dropped or the original appraisals were extremely liberal in your favor.

One way or another though, I would think you would have been able to sell them retail given the size of the discount you were offering and the fact that you rehabbed.  That, to me, would be the biggest concern.

There's no retail exit in Memphis? Or in the areas in Memphis you happened to have bought. That would scare me - especially when I see most turnkey companies selling their homes at 100% of market value.  And now you're saying that you can't even sell yours at 75% of market value even if you update the houses from rent ready to retail ready.

Thats crazy scary to me.....  Something is really off in that scenario though.

Its one thing to say another investor wouldn't want to buy them at 75% because maybe they only pay 65%.  But when you can't even sell them retail at 75% and they're move in ready, something is wrong there that would really have me concerned if I was going to buy in that area.  

But again, maybe its the specific areas your houses were in.  So its tough to say. 

To me, the one suggestion would seem to be to target other investors looking for turn key stuff. You have it. Your houses are updated to retail ready. Sounds like they're rented again. And you're offering a MUCH bigger discount than any turnkey investor they'll ever find.

So I would keep listing them on the sites that a turnkey buyer might be considering. I do know that Brie Schmidt has some turnkey review site she's created. Maybe ask to put an ad there.  I have to think turnkey buyers would be the main people going there. 

There's clearly an opportunity for a win win here. You to sell your property at the 75% rate and a potential turnkey buyer to buy a house and pick up 25% more equity than they would be otherwise and probably get a house in a little bit better condition than rent ready as well.

Still. It makes you really wonder if when you're buying a turnkey house if you aren't doing something similar to buying a car. Drive it off the lot and you lost about 20%?  Seems to be exactly what happened here.  The house appraised out at x when it can't even be sold for 75% of x even though its been updated even further.....

Thats not a good position to be in when you have no exit strategy on SFHs other than having to sell to other investors at 60 to 70% LTV......

[Cal C.]

Originally posted by @Mike H.:

I guess thats the real trick there. At the end of the day, it doesn't matter what you put down. The fact is that you were all in at the refi for 75% of the appraisal value and you would think that you'd have that paid down at least a little. Maybe to 72 or 73%?

So if you aren't getting an investor to come in close enough to your loan amount, then something is off. Either the home values dropped or the original appraisals were extremely liberal in your favor.

One way or another though, I would think you would have been able to sell them retail given the size of the discount you were offering and the fact that you rehabbed.  That, to me, would be the biggest concern.

There's no retail exit in Memphis? Or in the areas in Memphis you happened to have bought. That would scare me - especially when I see most turnkey companies selling their homes at 100% of market value.  And now you're saying that you can't even sell yours at 75% of market value even if you update the houses from rent ready to retail ready.

Thats crazy scary to me.....  Something is really off in that scenario though.

Its one thing to say another investor wouldn't want to buy them at 75% because maybe they only pay 65%.  But when you can't even sell them retail at 75% and they're move in ready, something is wrong there that would really have me concerned if I was going to buy in that area.  

But again, maybe its the specific areas your houses were in.  So its tough to say. 

To me, the one suggestion would seem to be to target other investors looking for turn key stuff. You have it. Your houses are updated to retail ready. Sounds like they're rented again. And you're offering a MUCH bigger discount than any turnkey investor they'll ever find.

So I would keep listing them on the sites that a turnkey buyer might be considering. I do know that Brie Schmidt has some turnkey review site she's created. Maybe ask to put an ad there.  I have to think turnkey buyers would be the main people going there. 

There's clearly an opportunity for a win win here. You to sell your property at the 75% rate and a potential turnkey buyer to buy a house and pick up 25% more equity than they would be otherwise and probably get a house in a little bit better condition than rent ready as well.

Still. It makes you really wonder if when you're buying a turnkey house if you aren't doing something similar to buying a car. Drive it off the lot and you lost about 20%?  Seems to be exactly what happened here.  The house appraised out at x when it can't even be sold for 75% of x even though its been updated even further.....

Thats not a good position to be in when you have no exit strategy on SFHs other than having to sell to other investors at 60 to 70% LTV......

 You're forgetting the cut for the turnkey provider.  

[Derek B.]

And this is why so many TK operators focus on cash flow and not IRR in selling their product. If the OP buys turn key at retail and there is no exit other than investors at a discount, then the IRR is negative or paltry comparedd to other investments.

[Cal C.]

Originally posted by @David Hodge:
Where are the pro TK people? I would like to see a debate on here where the issues are really hashed out.

I have never invested in a rental property but will be buying my first couple TK properties very soon. I have read all the arguments for and against turnkey and decided TK is the best fit for me for a few reasons...

1) I work on average 60 hours a week right now and don't have time to search for properties and rehab them.

2) I live in CA. Finding a property that cash flows in CA sounds like a full time job. I'm sure it's possible, but how much more time away from my family will this require?

3) I don't expect amazing returns going this route, but they are still better than the 401k I've been contributing to. My calculations give me an average COC return of 12%. If there is even just 2% of appreciation then since I'm putting 20% down that's a 10% return from appreciation. So I have a total return of 22%. That's significantly more than my 401k which might give me an average return of 6 or 7% after management fees! So even if I'm off a bit somewhere, I'm better off doing this than what I've been doing by buying mutual funds. Please correct me if I'm wrong here! TK may not be the BEST but isn't it better than the alternative??

Even though TK seems to make the most sense for me, it does concern me when I hear things like this. I would love to see a thorough debate on this!

Somehow I don't think the OP made 22% COC return or even close to it.

[Cal C.]

Originally posted by @David Hodge:
Where are the pro TK people? I would like to see a debate on here where the issues are really hashed out.

I have never invested in a rental property but will be buying my first couple TK properties very soon. I have read all the arguments for and against turnkey and decided TK is the best fit for me for a few reasons...

1) I work on average 60 hours a week right now and don't have time to search for properties and rehab them.

2) I live in CA. Finding a property that cash flows in CA sounds like a full time job. I'm sure it's possible, but how much more time away from my family will this require?

3) I don't expect amazing returns going this route, but they are still better than the 401k I've been contributing to. My calculations give me an average COC return of 12%. If there is even just 2% of appreciation then since I'm putting 20% down that's a 10% return from appreciation. So I have a total return of 22%. That's significantly more than my 401k which might give me an average return of 6 or 7% after management fees! So even if I'm off a bit somewhere, I'm better off doing this than what I've been doing by buying mutual funds. Please correct me if I'm wrong here! TK may not be the BEST but isn't it better than the alternative??

Even though TK seems to make the most sense for me, it does concern me when I hear things like this. I would love to see a thorough debate on this!

 For the turnkey operators the faster this thread gets forgotten the better.  I'd be willing to bet that there has been at least one request to delete this thread.  What do you say @Joshua Dorkin has anyone asked for this thread to be deleted?   

[Michael Lauther]

@Sabrina Brown I have been checking in on your post and see lots of talk about LTV, and Turn Key properties, but very little analysis of the investment worth of your particular property.

I briefly looked at the zip codes you posted and see that at least one of your houses are in an area with a price point of between $30000 and $60,000 . In my experience these properties are in neighborhoods that have over 50% non owner occupancy and often have an abundance of foreclosures and vacant property. Investors in these areas are looking for a price point that will cash flow immediately and look for a 1 1/2 to 2% rent ration to purchase price. This is known as the 2% rule of thumb. for instance if you had a gross rental income of $800 monthly a purchase price of $40,000 would be a starting point for an investor to consider the property. If we estimate expenses such as taxes , insurance, management and repairs at 50% of rental income or $4800 that would generate a cash flow of $4800 a year from a $40k investment.

This is how many investors look at these type of properties. How do yours stack up using this type of analysis?

[Derrick Craig]

Hi @Sabrina Brown

I would like to know the company that sold you the properties as well it would help us here on BP... Also I would be interested to look at some of the homes please PM me the addresses.

[Curt Davis]

Everyone is making this out to seem like a Memphis issue when it reality I am sure this issue happens in every market.  Investors who buy from a TK provider do so for many reasons and they know that they do pay a little more of a premium for doing so.  

Regarding selling the home retail, some of this could be attributed to having the right Realtor to market the home.  I recently have helped several sellers list their home as their listing agent and have had some cash buyers who were investors come in and pay only a few thousand below list price.  

Sabrina should be able to sell her houses, it just might take a little longer. She should have them listed online with a local Realtor for starters and then possibly have to do some self marketing like she is here in BP. I would be interested in the homes but I have yet to receive any info on the homes so I dont know what the current LTV or anything is on them so I can not offer any suggestions or advice.

Another thing to think about, most investors looking to buy TK are not looking on the MLS and unless the Realtor states in the Realtor remarks section that the home is TK with a renter in place, it might get passed over and not show up on someones search criteria for MLS listings.

It could come down to how the home is or has been marketed.

[Sabrina Brown]

Yes, the problem is that the calculations given to the investor do not include the profit the TK provider makes, or it is somehow worded so it is very difficult to find the accurate information.  TK Providers are very slick sales people and know how to word it with all the bells and whistles.  Or, if you have a bad experience with one group, they let another group know that contacts you without even realizing they are somehow working together and/or bouncing investor off each other.

It also comes down to having a great management company and a terrific tenant but we know, this is just very rare (like I have at one of my other properties in IN).  Usually the TK provider also has their own management company (often in a different name), which they refer so they make multi fold on your investment. I have tried giving the properties back to the TK provider but it would have been a pure ripoff!  It appeared as if they were trying to make another huge profit like they did when selling the property to me.

Surprisingly, nobody has asked me to delete this post - quite the opposite actually.  

[Stephen Akindona]

I absolutely agree with @Curt Davis on this, when you pay a premium on a property in a market that is not traditionally known for great appreciation then it is going to take a little longer to sell. The marketing and means by which you are trying to sell the house can make all the difference in wether it will sell or sit. If you are willing to share info on the addresses of the properties we can help you get these properties sold!

[Curt Davis]

If my memory serves me her homes were purchased through an affiliate marketing person who at the time was promoting the whole " little to no money down " purchase strategy.  This was something that was done a lot back in 2007-2009 and was very hard to do during her time when she was purchasing these homes.  I believe the person who acted as affiliate marketing person helped her buy them through the TK provider is no longer promoting this type of buying model as it is almost extinct.  

The actual TK provider is a legit company here in our market but I will let her name them if she chooses ( or at least I know one of the tk providers is still a legit company, dont know if all were purchased from the same TK company ).

[Sabrina Brown]

Properties were listed with a realtor at a discount when all 3 properties were vacant for about 9 months.  I now have invested more money to fix these properties up but had to put tenants in it to get some sort of income. Then I got ripped off by yet another management company that I had to fire last week for not sending me rent payments and doing repairs in time while I then found out they don't even have a license (will get attorney involved to recover damages).

Here is the scoop about these properties, which I all bought in 2010 at zero down with 25% equity at the time:

zip code 38128: paid 49K (not including other repairs after purchase), low income area, rents $750-800, value 65k (has possible lease purchase tenant in place)

zip code 38115: paid 84K (not including other repairs after purchase), medium income area, rents $1,050-1,200, value 125K (currently rented)

zip code 38016: paid 82K, prime area, rents $1,050-$1,150, value 100K (ready for sale and/or rent)

[Cal C.]

Originally posted by @Sabrina Brown:

Yes, the problem is that the calculations given to the investor do not include the profit the TK provider makes, or it is somehow worded so it is very difficult to find the accurate information.  TK Providers are very slick sales people and know how to word it with all the bells and whistles.  Or, if you have a bad experience with one group, they let another group know that contacts you without even realizing they are somehow working together and/or bouncing investor off each other.

It also comes down to having a great management company and a terrific tenant but we know, this is just very rare (like I have at one of my other properties in IN).  Usually the TK provider also has their own management company (often in a different name), which they refer so they make multi fold on your investment. I have tried giving the properties back to the TK provider but it would have been a pure ripoff!  It appeared as if they were trying to make another huge profit like they did when selling the property to me.

Surprisingly, nobody has asked me to delete this post - quite the opposite actually.  

 I think only moderators can delete posts. 

[Sabrina Brown]

@curtdavis : could you name the reason/s why this type of buying model is almost distinct?  Thank you.

[Derek B.]

I think both Jay and K Marie alluded to this earlier and I am still trying to understand:

These were bought 5 years ago with no $ down but they were bought with an equity position.  That 25% equity should be at 28% or more by now. The OP, in theory, should be able to list on the mls and sell. If only investors and TK are offering, then these are C class or lower I presume.

Did the market there erode away the equity position?

Was the appraisal too liberal?

This story remains an excellent reminder to check and recheck your exit options, actual value based on a willing buyer who can perform (even if the only buyers are investors), and as I have said before, your expected IRR - not just cash flow or CoC. You have to factor consider IRR which factors your exit value.