Can't understand why a Property Will Not Sell!

Alex CraigBusiness Member

Real Estate Professional · Memphis, TN · Member since 2009 · 1k+ posts · 1k+ votes

In the past month, I have sold properties for $15,000k and under that sat in so-so areas (ROI potential though is over 25%), properties that needed tons of renovation, but for some reason I can't sell a property that already has a tenant, offered a property is a solid area at .67 on the dollar, rented for $900 a month by a great family, that returns 13% ROI. What gives? Am I missing something?

901-848-9028

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Jon Holdman

Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes

16y

I would not claim a property that rents for $1000 must be purchased below $50K to make it a good deal. I would say a property that rents for $500 would need to be purchased around $25K, but as the rent increases, the rent/price ratio can go down.

Even after appling the 50% rule (which is NOT the same as the 2% rule), and assuming 30% down payment, a property like this would return $215 a month in true cash flow for a 17% ROI.

The duplex for $52K with $1050 in rent is a good deal, too.

Equity matters because you need to be able to take a down turn and cover your sales costs. If there are numerous similar duplexes selling for $50-55K, I'd have to think twice, even though the cash flow is good. If you had to sell shortly after you bought it (hey, life happens), you'd take a 10% hit between the buying and selling costs. If there's any more decline in prices (entirely possible, IMHO, as the government starts backing away from supporting home prices), then you take a bigger hit. Having some equity cushion gives you some protection.

IMHO, you need three factors for a rental property to be a good deal:
1) cash flow, per the evaluation we all discuss and debate
2) equity, at least enough to cover your costs and to protect against some downward movement.
3) demand, if you can't fill the units, its not a deal at any price.

Two out of three is not good enough.

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Brian LevredgePro Member
Investor · Chattanooga, TN · Member since 2009 · 1k+ posts · 903 votes
16y
I think you kind of answered your own question. I don't like to buy anything less than 20% cash on cash and I only do that when there is a ton of equity in a deal. Having equity is great but it doesn't do you any good until you sell. In your case that means buying a property with a 13% ROI.
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Peter Giardini
Rental Property Investor · Baltimore, MD · Member since 2009 · 624 posts · 559 votes
16y
This would not be anywhere enough of a return for me... not would I recomend this my clients.

It is possible that investors can purchase a property, renovate it and place their own tenant and achieve a much higher rate of return.

Best of luck!
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Jon Holdman
Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes
16y
Not to mention when a seller says "12% ROI" I hear "(rent - PITI)*12/price = 12%". I want that to be rent*12/2/price = 12%. But I have to agree with Peter and Brian, 12% ROI on rentals is too low.

You don't state a price. What's the price? Memphis looks to be a pretty good place to invest. If you're priced below alternative properties, you shouldn't be having a problem selling. The fact you are tells me you have it priced too high. Simple as that.
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Alex CraigBusiness Member
OP
Real Estate Professional · Memphis, TN · Member since 2009 · 1k+ posts · 1k+ votes
16y
Thanks all for the advice. I have sold quiet a few properties that return closer to 20% (to a bigger pockets member who gave me a good write up at that too), but I thought maybe being in an area that still has a ton of retails sales and would return substanial cash in 2 years upon a sale would turn some investors my way. The good thing is that I own the property and I don't mind the 13% return (----yes, I am sellling at cost). Thanks for the input!
901-848-9028
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Alex CraigBusiness Member
OP
Real Estate Professional · Memphis, TN · Member since 2009 · 1k+ posts · 1k+ votes
16y
Jon, I did not answer your question. Price is $59,950. After taxes and insurance, the ROI is 13%. Property was just appraised at $94,000. Funny thing is that I put a tenant in place in the second month I owned the property (January), now I am getting several calls on individuals that want to buy and move in the house as a primary home. O well, I like the return b/c I think it is a solid family living there and I like the chances they could be there for a while. However, don't think I the property was vacant to get the retail offer!
901-848-9028
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Art Jackson
Real Estate Investor · Johnstown, PA · Member since 2009 · 33 posts · 0 votes
16y
Alex, Is the tenant you put in place on a 1 year lease? I have a few suggestions for you, call me at [PHONE NUMBER REMOVED]. Art
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Alex Cortez
Real Estate Broker · Maui, HI · Member since 2010 · 25 posts · 3 votes
16y
Alex, first of all, great name. ;-) And I think investors will shy away from the 13% ROI, but it seems as though you may be keeping it after all. Good luck with all your projects.
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Mike McKinzie
Investor · Westminster, CO · Member since 2009 · 1k+ posts · 1k+ votes
16y
Jon
Is Benolyn Craig related to you? Is this the house for sale in the property section? If so, I have used your example as what I call an "average" investment. Not bad, but not great. One problem I see is that it takes more than 2 months rent just to pay the property taxes. If we use the common rent that BP investors want, the house would need to sell for $45,000 with the $900 rent amount. If we also use the 50% rule, then the NOI would be $5,400 which gives us a cap rate of 12% (5400/45000). If it were purchased for $59,950, cap rate is now 9% (5400/59950)

If you disagree with the 50% rule, consider this.
Management Fee-10%
Property Tax-17%
Repair Reserve-20%
Vacancy Allowance-8%
Woops, we are already at 55%

With the number of deals out there getting investors a 20% Cap Rate, your house has some very tough competition!

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Jon Holdman
Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes
16y
Benolyn is not related to me in any way. But this isn't my deal, so I'm not sure you're really asking me.
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Steve Babiak
Real Estate Investor · Audubon, PA · Member since 2009 · 13k+ posts · 8k+ votes
16y
I think Mike meant to address his post to Alex Craig - same last name as Benolyn.
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Mike McKinzie
Investor · Westminster, CO · Member since 2009 · 1k+ posts · 1k+ votes
16y
Jon, sorry, I meant ALEX.

Benolyn Craig posted the following for sale:

Jon,
You are correct some more details were in need.

4415 Boyce
Memphis, TN
ARV 94,000
Sales Price $59,950

I was just wondering if this was the same property?
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Alex CraigBusiness Member
OP
Real Estate Professional · Memphis, TN · Member since 2009 · 1k+ posts · 1k+ votes
16y
Hey Mike, Benolyn is my wife.

I hear what you are saying, and by your #'s, yes you are correct it is an average deal. If this property was in an area of decline or flat appreciation rate, then I would say the ROI is avg. However, we had this listed for a month and got several bites and a contract in the high 80's, however, the contract failed. When I got a great renter to move in whose plan was to buy it down the road when their credit gets better, I thought this would be a great investor deal. Also, I would say the repair reserve is pretty high, considering I would cover all reparis for 1 year. We restored the house to practically new, so I would not expect to many repairs. Especially since the tenants is responsible for appliances. I don't mind holding it b/c I am returning 14% on my cash, but it sure would be nice to move on to the next project. Thanks for the input.
901-848-9028
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Curt DavisBusiness Member
Flipper/Rehabber · Memphis, TN · Member since 2008 · 5k+ posts · 2k+ votes
16y
As a seller of investment property as I am sure many others on this post are, people all have this ideas that if the home is being sold all in with repairs for example at $50,000 then it should rent for $1,000. I can tell you this is almost impossible to do. The average Memphis deal lets call it a 3 bed 2 bath home, about 1,450 sqft will rent for about $850 and the purchase price all in is about $50,000.

If we go by what Mike M said that the home should be sold at a max of $45K and rent for $900 per month, I want to break this down from a wholesale perspective.

Home would need to be purchased from the bank for about $20k, average repairs of about $12,000, $1,000 closing cost from purchase, holding cost as well, looking to be all in around $35K, sale price of $45,000. This is very difficult to do, at least in the Memphis market. Rents are considerably high in Memphis as compared to the rest of the country. As investors we can look at a deal and say, no way will I want a deal with only 13% ROI, but the investor who is only making a 3% ROI is some money market account would think this is excellent. Also, as many of us are wholesale investors, we can find our own properties, manage our own work and rent and manage our own homes thus giving us a larger ROI%. BLAM!!!!! I am done.
Curt Davis - KAIZEN Realty538 Reviews
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Alex CraigBusiness Member
OP
Real Estate Professional · Memphis, TN · Member since 2009 · 1k+ posts · 1k+ votes
16y
Curt, very well said.
901-848-9028
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Curt DavisBusiness Member
Flipper/Rehabber · Memphis, TN · Member since 2008 · 5k+ posts · 2k+ votes
16y
Thx Alex, I just feel people have this semi unrealistic idea of what to expect. I could almost bet that many of them re not selling homes under the 50% rule? I talked to a guy in California the other day who told me that they were looking for a property with the same similar formula. I called him and told him I have a duplex, 2/1 each side and will rent for $525 per side or $1,050 and I am selling it for $52k all in with repairs. The cash flow was excellent but he told me the unit did not have enough equity, its last normal sale was 2yrs ago for $75k. I thought, if your paying cash and your looking for long term buy and hold, what does it matter what the equity is? I just dont understand people sometimes.
Curt Davis - KAIZEN Realty538 Reviews
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Jon Holdman
Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes
16y

I would not claim a property that rents for $1000 must be purchased below $50K to make it a good deal. I would say a property that rents for $500 would need to be purchased around $25K, but as the rent increases, the rent/price ratio can go down.

Even after appling the 50% rule (which is NOT the same as the 2% rule), and assuming 30% down payment, a property like this would return $215 a month in true cash flow for a 17% ROI.

The duplex for $52K with $1050 in rent is a good deal, too.

Equity matters because you need to be able to take a down turn and cover your sales costs. If there are numerous similar duplexes selling for $50-55K, I'd have to think twice, even though the cash flow is good. If you had to sell shortly after you bought it (hey, life happens), you'd take a 10% hit between the buying and selling costs. If there's any more decline in prices (entirely possible, IMHO, as the government starts backing away from supporting home prices), then you take a bigger hit. Having some equity cushion gives you some protection.

IMHO, you need three factors for a rental property to be a good deal:
1) cash flow, per the evaluation we all discuss and debate
2) equity, at least enough to cover your costs and to protect against some downward movement.
3) demand, if you can't fill the units, its not a deal at any price.

Two out of three is not good enough.
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Dustin Phillips
Real Estate Investor · Indianapolis, IN · Member since 2009 · 161 posts · 46 votes
16y
I think Jon just made some great points.

As investors (Wholesalers) I think we sometimes get short sighted and only focus on one of the three key points he outlined.

However, those three things Jon showed are a good reminder and a great way to market our properties. So thanks Jon, I will be sure to that I'm covering all three in the future when looking at a deal and when marketing the deal to others...

Cash flow is important but the others hold an equal piece of the puzzle and I dont always do a good job of highlighting them to buyers...
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Mike McKinzie
Investor · Westminster, CO · Member since 2009 · 1k+ posts · 1k+ votes
16y
Originally posted by Curt Davis:
This is very difficult to do, at least in the Memphis market.

This is the exact point of the equation. Everyone is bringing up excellent points, so no need to reiterate them.
Last year, I bought a house in Arlington, Texas for $142,000 and it rents for $1,250. Most investors on BP would laugh at me for doing this. But, that $142,000 was bringing me $400 a month before that. So I did move up. Why did I make that investment? First, it was already rented and managed. Next, it was less than 10 years old. The rent is deposited directly into my bank each month, so the total amount of work I do each year is to write one check for the property tax and one check for the insurance, maybe 10 minutes a year (I paid all cash). For me, this is more like a CD that is paying 6% than a house. Is it a great investment? No. Is it nice to have $1,150 deposited into my account every 15th? Yes.

What are my plans? I will sell it in 2-5 years and carry the first mortgage.

I am still considering Alex and Benolyn's property. It may fit my short term and long term goals. But the competition is NOT Memphis, the competition is the United States.
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