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!

[Sabrina Brown]

@Account Closed

I am literally driving through areas, speaking with neighbors, etc. and am looking for properties myself.  I went to an auction today to observe and meet other cash buyers that usually pay too much for properties.  The only way I "came out of the situation" is to write off the work I put in and the cash I lost but am starting over again in my life.  And soon I should have a few deals under my belt going both ways for investor purchases and sales.

[John P.]

Great information @Sabrina Brown. Thank you for sharing.  I learned a lot in this thread. I hope moving to Memphis works out for you.

[Liwen Gu]

Thanks for the useful information @Sabrina Brown! It's definitely giving me second thoughts about investing out of state and going with turnkey providers. You mentioned that the Memphis market is quite tricky and estimates are often unreliable...do you think it's possible for an out of state investor to be successful with a good contractor and PM or is it better to just stay away? Thanks!

[Sabrina Brown]

@Liwen Gu

Good to hear that this post has been useful to you.  I do think it is possible for an out of state investor to be successful but only with a good and reliable team, someone you can trust and personally know.  However, I got screwed over by someone I personally trusted and have known, and so have others, too.  This applied to the Memphis market.  

In the Indianapolis market I had a well known property management company that rented out properties too low and was not checking on my property.  After all, if there isn't an emergency, which they can bill at 3-5 times the rate, there is no need for them to do the job they are getting paid to do with the monthly management fee (being facetious here!). I was going to sell the property and informed the management company that the buyer will honor the lease agreement as it is by law.  The property management company then pushed the tenant to move out into another one of their properties while I was in escrow. Therefore, the first buyer rescinded their contract.  Then there was a hail storm on the street of my property and it was on the Indianapolis news.  My management company did not notify me that there was hail damage to the entire roof and siding of the house.  I found out at the time I was going to sell my property that everyone on the street had their roofs replaced.  There was a delay in the second closing because of the insurance claim I had to file.  Altogether, I lost $21,000 in cash plus monthly upkeep for 5 months due to the "handling" of this property management company and having to sell my property at much less because I had to sell off season, was out of monthly rental income and had to pay for upkeep.  

My advice is to be extremely cautious when you never hear from your management company.  Don't assume all is well when the reality is that they are just not checking until they get notified of an emergency.  Ask for proof of logs of their drive bys, before and after pictures, etc etc.  Baby sit like it is your baby (but then, what are you paying someone else for?).  Make sure you are able to visit your properties frequently.  Don't give your management company advance notice of your visit because they will then try to do the tasks they are supposed to do at that time (while they may have charged you monthly for it but never performed the work), or they will try to cover it up and use excuses why you can't see something when you visit.  Be diligent!  Always ask for proof, which is not their verbal promise.  I learned that so many people lie with all kinds of backgrounds while they preach of being honest.  It's sad that this is what it has come to.  Make sure you talk to a lot of investors, locals, tenants, etc. and find out what they say about the companies you are trying to do business with.   Although this doesn't guarantee that you won't be taken for your money, but if you get one honest answer from someone how they handled a situation, it may prevent you from having future headaches.

Sorry for the lengthy response.  I was asked to write a book, or two, about my experiences, as I have many examples.  I am still trying to recover from my financial losses but won't give up moving in the right direction and trying to avoid middle men that could cause me financial harm again.

Sabrina

[Liwen Gu]

@Sabrina Brown Thank you for the very thorough response, I would read your book if you end up writing it! I hope everything works out for you in TN! Please keep us updated here periodically on how everything is going for you! It sounds like you are taking the right approach now by living in the market you're investing in and driving through the neighborhoods so you can see the houses you're buying and talking to the neighbors.

[Vivek Khoche]

@Liwen Gu - Don't shy away from investing. There are lot of helpful folks on BP. Start your REI journey from where you live and see how far your pocket takes you.

Thanks
Vivek

[Sabrina Brown]

Hello everyone again,

I wanted to provide an update to continue "the saga" :  In the meanwhile, I have had one of the contractors civilly served and given a statement to the Economic Crimes division of the City of Memphis to go after him criminally as well after identifying him in a picture line up. My court appointment is within 2 weeks for the criminal case.  Please keep your fingers crossed that not only I get the judgment but also restitution for a reasonable amount and time frame.

In the meanwhile, I have made many great connections with honest and successful people in Memphis through the Memphis Investors Group (MIG) who not only offered their help based on their long presence in Memphis but also want to assist me with helping out of state investors, especially since I have gone down this bad road and lost a good chunk of my hard earned money.  

We are currently working on a structure so that we can be the go-to people for these out of state investors and negotiate with sellers and turnkey providers so that they will be getting the fair investment value with properties in conditions up to or above par, reviewing areas for determination of rent vs. own market, contracts with vendors and management companies, negotiating with lenders as needed, etc.  We would like to see every investor get into properties the right and honest way so that they can get the returns and value that they should expect without spending thousands and thousands of dollars later on realizing that their investment has gone bad.  I have heard of several California investors filing for bankruptcy after buying properties from turnkey providers and wish that this will not ever happen to anybody.

Do you think this is something out of state investors would want?  If so, what specifics are most important and helpful in getting them into an out of state market they don't know too well besides internet searches and conversations? Would someone be willing to pay a small fee in order to prevent them from losing money or overpriced properties beforehand that they would never be able to recoup even in 20-30 years?  

I would appreciate your input and suggestions.  And if you have had current bad experiences that aren't already listed in this string, please let me know.  

Thank you so much!  

[Curt Davis]

Your assumption of a blanket statement grouping all turnkey companies being terrible is false. There are many good and probably many bad with many in between. Turnkey is a specific buying model for out of state investors and if you plan to sell within a few years you do stand to have a hard time selling to break even, this is not a secret.

[Sabrina Brown]

I am not saying that we want to work "with" turnkey providers.  We would evaluate an investor's deal and help negotiate, if possible, and provide local and honest feedback going over exit strategies, looking at the property ourselves, their intent to see if it makes sense and if it meets their criteria.  Yes, there were some investors that had great experiences but unfortunately, most that I know didn't, including myself, and it cost me a fortune getting out of this misery.  

[Sabrina Brown]

@George Jetson

Sorry, I forgot to mention that I held onto my properties for 7 years.  I would say that I bought my properties even ABOVE retail (the appraiser back then was most likely in business with the lender arriving at exactly 25% equity) and investment properties sell for 70% minus repairs or you put more money in to fix up and sell at retail.  There is not much appreciation here in Memphis unless you go above $150K in property values.  

I agree completely with you that TK providers know exactly what they are doing (I don't know how they can sleep at night) and we are in the business of doing it the right way.  There is no need to screw people over for everyone to be successful!  I know I can sleep better that way!

[David Song]

@Sabrina Brown

This is a helpful thread. Too many newbies get screwed by out of state TK. Very sad.

There is no free lunch in this world. Trying to take the shortcut usually is not a smart thing to do.

In my view, new investors shall never look for OOS TK. That is a dead end, especially for newbies with limited funds.

OOS investing might work for experienced investors with deep pockets, buying a whole street or commercial buildings. With limited funds, it is even less feasible than investing locally in more expensive areas. You will be scammed to ---.

[Hank Keller]

@David Song - I would have a different viewpoint on OOS TK's being that I've been successful over the past four years. Further I know of another 400 other investors that are using the same company that I do that continue to go back and buy more. If I had the time or skills to run a RE company myself I would definitely make an additional 20-40% return, but 7% year in and year out works for me. 

Limited funds in California can buy multiple houses in Indiana, it's all relative. While I agree that TK's aren't for everyone, for those that don't have the experience in RE or have full time jobs and busy lives, TK's are a great solution but just like any other transaction require the investor to complete their due diligence. There's plenty of guides on how to buy, people to talk with that have been successful and good companies. just have to find them!

[John P.]

@Sabrina Brown what's your vision for your business? Sort of a buyers realtor for people buying turnkey? Or a manager of the property manager on an ongoing basis? 

[Jay Hinrichs]

@Sabrina Brown@Account Closed  the reality of buying ANY rental in ANY market is if you have no appreciation over a given time U will lose money If you exit before appreciation happens.. its just simple math... sales cost eat up your equity since it never went up in value.

One of my first posts on BP which was quite raucous  200 or 300 responses like this one was  "2% rule kills values".. lots of arguing but I was right.

fact is you have these homes they are sold are rate of return.. value ONLY increase's is rents increase substantially and cash flow is consistent...

I bought 12 homes in Mississippi all brand new construction A grade.. and am now selling 10 years later.. I am losing money on each and everyone of them as I sell them off.. they never appreciated.. and I am selling them for about what I paid for them or a little less.. you have to boot the tenant.. you have to do 5 to 7k of fix up work to sell retail ( at least ) and you have sales costs.. now I made my money when I bought them because I took go zone tax bene's that I was allowed to take.. so at the end of the day not sure if I made money or not.. but I know I broke even at least..

When you buy in any non appreciating market your buying for the long haul and I mean until its paid for..  Or if you buy in an area that is  RE gentrifying.. like say Fountain square in INdy or even Bates  we have made appreciation there.. but just vanilla residential areas of the mid west.. you need to as the buyer understand that there is no exit in a short amount time that will not cost you money..

Homeowners do not buy these.. you do not have a marketing company that sells out of state representing you.. your limited to what locals ( generally speaking will pay for a given cash flow) and that is usually a lot less than someone else from out of area will pay....   this is how you end up getting stuck

Jetson,  Morris is simply selling the hood.. most of the top Memphis providers have moved out of the hood .. as Craig who responded on this.. Fetke is a broker she is not a provider which is OK that's how real estate is sold..

Sabrina has a great idea I wrote a Book For Aussie investors about the exact same thing.. they were getting absolutely killed in Memphis  since they did not know what they did not know..   Its not turn key its math.. its non appreciating markets and its investor expectation.. you have a CA bias or expectation you can't take it to Memphis.. if your going to go down the mid west rental path you need a way to scale to 10 homes.. you need to know how to find the right deals put in some time and effort to make sure you not getting hosed up front.. and you need to pay these homes off..  then give them to your kids ..

this idea of max leverage for 30 years in this asset class is just plain wrong. you want them paid for as soon as possible that's when you make money. and the idea floated up by some of the TK brokers on this site that buying rentals turn key or not is a set it and forget it investment is just plain bad advice and sales hyperbole..

Sabrina is right you need to be fully engaged owning rentals takes time effort and work if your going to maximize your cash flow .. I know I suck at it too.

this weekend I was chasing one renter that that is 7 months behind and another that is 2.. now granted I admit I am bad at this and its why I am selling out even if it cost me 10 to 20k per deal to get rid of them..

So that's both sides of the coin.. buy rentals and buy for long term get engaged and stay in engaged..

[Brian M.]

@Jay Hinrichs 7 months behind?  How does that happen and you haven't already evicted them?  There must be a good  story  there.. ha.

[Curt Davis]

I have lived in Memphis for over 10yrs now. All of my rental homes were purchased using the zero down to refi program. I can tell you that all of my homes I purchased back then have had some level of appreciation along with low mortgage pay down. When I have had tenant issues or repairs I have had to pay them and deal with the issues Bc that is a part of this process. There is no guarantee of success and I certainly do not have anyone to point my finger at to blame for my troubles when they happen. I expect this will happen at some point and I have never thought about selling my homes Bc of some problems. Owning investment homes is not for everyone. All my homes I own (24 of them ) are in most of the same areas that are considered B type areas. Some C and some A. I even use property management.  the only difference from buying from a turnkey and from the mls is when you buy  from turnkey you have someone to blame when problems come up. You are not really getting a better deal or a home in better condition. 

[Vina Real]

Thanks for bringing this up. I'm also thinking of buying TK properties in out of state areas but this is an eye opener for me.

[Curt Davis]

I am simply stating that I purchased my homes similar to others who used the hard money purchase to refi program.  I also use a management company. My only real difference is that I saved a few dollars on my purchase but aside from that my process is not that different. 

[Jay Hinrichs]

@Brian M.  all I can say is I don't need the money so I don't follow it much.. unlike others who may not be able to handle negative cash flow.. have no other excuse other than that.. and the fact that I hate being a landlord and even looking at the stuff..

[Jay Hinrichs]

@Curt Davis  you make my point perfectly... you live there you have scale and your on top of it.. if not the units themselves the managers... you are probably no more than a 20 minute drive from any of your doors.. big difference.. and one I totally subscribe too.. If I lived in the mid west I would be right back to were I was 5 years ago when I owned 350 of these homes.. but for me trying to run them from Oregon was kind of tough and frankly as I state I simply don't have the mind set and patience to be a landlord.. I prefer to work with professionals not professional tenants.. and peoples drama in their lives.. and that is what landlording is at its base..

Now we can mitigate that somewhat with A class SFR's and our west coast stuff is a little easier but no immune.. IE here in pdx were we have less than 1% vacancy you can really dictate to a tenant and they know it.. don't have a 720 fico your not going to get a great place.. have a 580 fico and your renting in Memphis.

[Brent Coombs]

Originally posted by @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!

You're looking for MFH's in CA - but don't have a W-2 income (according to your posts)? Even if you are able to sell these to pay off those loans, how will that help you get MFHs in CA? (After all, your net income will go DOWN by $1k/m, right?) 

@Dean Letfus quoted his mentor earlier: "When you buy in Memphis it's like a tattoo, you have to keep it for life".

But if they DO cash flow, with your TENANTS paying them off - why wouldn't you WANT to keep them?

It's not the worst thing in the world to have made the rookie mistake of paying too much - if the numbers STILL work!

As far as I saw, you didn't have MUCH skin in the game to begin with? It was only the year of vacancy while you tried your hand at being a Flipper that REALLY set you back, right? Was that $20k ALSO borrowed? [Sorry if I misspoke]...

[Mark S.]

I think most investors expect to potentially take a loss on a TK deal if they have to sell early on. Can you really expect to "flip" a house twice in a short period of time and make two consecutive profits?

[Jim O.]

Following

[Brian Ploszay]

You put them on the market and the market spoke:   They are worth less than you want.

Selling single family rentals is super tricky.   There is a defined market to sell apartment buildings, but not as much for single family rentals.  I almost feel they are worth more vacant.   A vacant house can be bought by a home buyer or a landlord.   

You might have to stick with them for awhile.   Some of the properties that I bought before the great real estate crash of 2008 took many years before they were not upside down anymore.   The alternative would have been foreclosure, which I couldn't handle.    I stuck it out.

[Sabrina Brown]

@John P.

I would not be either.  What I have been figuring out with other trustworthy and successful investors here in Memphis is how to help other out of state investors so they will get a good deal that makes sense just as if they were local people.  If they have a property in mind, we can go look at it, be their second set of eyes, tell them about the area, pros/cons, talk about the investor's goals and help them meet their goals based on the "real" current market.

I don't wish anybody to go through what happened to me.  Thankfully, I have always been able to pull myself back up but others may not have the willpower or energy, especially when one loses a lot of money.  If I had known back then what I know now, and had I known the great people I know now, I would have definitely made money.  However, I would have ONLY made money WITHOUT TK Providers!  I am happy for those that say that they have made money WITH TK Providers but if they knew how much they overpay for often less than standard services, they may change their minds, too.