Difficulty selling rental properties at loan amount
Real Estate Consultant · Memphis, TN · Member since 2015 · 70 posts · 82 votes
Difficulty selling rental properties at loan amount
Most Popular Reply
Chris ClothierBusiness Member
Rental Property Investor · memphis, TN · Member since 2009 · 2k+ posts · 3k+ votesI was not involved in the sale of these properties, but have sat back and watched this thread for the better part of a day and what fascinates me is how easy it is to get the result you want from other people. The thing that makes BP so great is that you can get unfiltered advice and usually from people that, besides a picture, are anonymous strangers. That is also the bad part. Due to no filter and anonymity, sometimes the comments are just thrown out there without any real thought about facts and details. It is unfortunate, that after @K. Marie Poe stopped asking questions, no one really picked up where she left off. It was obvious that things did not add up from the original post to where the thread took off.
This is not about should you buy Turnkey or not. This is about the basics. This is about buying smart and being honest here on BP with all of the details and sharing ALL of the pertinent data if you truly want the users to help you. @Jay Hinrichs, you're getting a couple of votes or that last post, but as much as I like you, I'm not one of them. You make a lot of assumptions in your response and you castigate @Curt Davis when he is the only poster on here actually trying to help Sabrina achieve her original question. He is the only one being honest about her options and solutions and the realities of her situation. Yet, you knock him for his honesty about what it would take to sell to a turnkey company and then you knock him for his honesty about the value of her properties and the fact that blaming will not get her closer to her goal.
I would think that many of the smart investors and commentators on here would really want all of the data and details before really coming to a conclusion. Big props to @Michael Lauther for his straight forward and pragmatic comments about buying midwest turnkey properties and the way you have to be brutally honest with yourself if you are going to be successful.
As for Turnkey, who cares about that debate? No one is going to change their minds on this and that is ok. As for your comment @Cal C., I own a turnkey company and I will gladly share this thread. For most of us running reputable companies, we love having these types of threads shared because they really help to define the good and the bad in both turnkey companies and investors.
Here are a few facts that were left out that are easy to know if you are familiar with Memphis. Why they were left out of the original post, I have no idea, but when put into context, a lot of commentators may feel differently.
1. There was an AFFILIATE company out of Los Angeles who worked very hard to get Memphis companies to sell properties to their clients. First red flag - They charged people money to be a part of their group and then those people would get access to their turnkey properties. Second red flag - They pushed the no-money out of pocket investing, positive cash flow, sit on the couch and collect mentality so any investor coming through them was set up for failure from the beginning. Jay, you have harped on this topic and here is a real life example of a buyer who bought through them and how their expectation was not met - but does that mean someone got screwed?
2. The company selling these properties is not a big company and they do virtually zero marketing. They rely solely on affiliate relationships for sales. The owner is a very good real estate investor and a fantastic business man with a great reputation. He does not sell on customer service, he does not sell on great management - hell, he doesn't even sell on doing extensive rehabs. He sells based on being a small company with low overhead a small management company and they do low-end rehabs to sell properties below market pricing to investors.
3. @Alex Craig is spot on with his analysis of the renovations done to these properties. They are not extensively renovated and still have deferred maintenance to this day. I am quite sure the same holds true with Lazini and the poster already said that the Chelsea Hill property had to be boarded up because it was being vandalized.
I was not there when these properties were sold. But, I am familiar with what was going on at the time and how companies were selling including the Affiliate company in LA. I am very confident that none of these were sold as short term investments. I am quite sure they were absolutely sold as long-term buy and holds beyond a 10-year hold.
Now lets look just real quickly at the houses themselves and the posters original post.
The outrage from BP posters came from this investor being taken advantage of by a Turnkey company who overpriced the properties, lied about value and did shoddy work. This company does not have a reputation for those things...
All three properties were purchased in early 2010 (this data comes from the assessors website so if it is wrong or Sabrina says she paid more....I'm just listing what is on the gov. site):
3381 Kings Arms purchased for $76k
3958 Chelsea Hill purchased for $35k.
9265 Lazzini Cv purchased for $70k.
Again, that is from the property assessors website so perhaps they are wrong, but this is exactly the way the sales were recorded. Perhaps the affiliate company and the turnkey company both mislead the buyer about the amount of work that was done or the amount of deferred maintenance needed, but I highly doubt these properties were sold at or above retail value. Maybe Chelsea Hill was sold as a great area of town, which again, would be wrong, but like I said, they don't look overpriced to me based on what I know about Memphis. And at $35,000 I have no idea how a buyer can think they are being over priced. @Ben Leybovich, there is your under $50,000 pig property that is almost impossible to have success with as an out of state investor.
Are the properties any good? Chelsea Hill is an area of town that we do not want to buy or manage. Kings Arms is a nice area and a good property. Lazzini is in a nice area and also a good property, but is an abnormal property at 2 bedrooms in a 3 bedroom area.
So I don't think any of these properties are sold too high. Not for the area of town and not for the work or lack thereof that was done. Only the OP knows what her expectations were for renovation.
What about the claim that they were listed at 25% below market value with no bites? I know other posters thought that was a little odd. Well, here is what the MLS shows:
3381 Kings Arms was listed at $109,900 that is 44% increase in 5 years!!! No way that property is listed at 25% below market value. IN fact, it was overpriced. It has been dropped to $99,900 and as was pointed out by Alex, it may still be slightly over-priced considering the lack of retail updates. But if it is sold at $89,000 based on lack of upgrades, that is still a capture of equity or appreciation, whatever you want to call it and would probably be slightly below retail value based on the lack of updates.
9265 Lazzini Cv. was listed on the MLS at $95,000. It is no longer listed, but again, at 95,000 that is not 25% below market value. That is at a whopping 34.7% mark-up and priced right at max value for that property in that area. It may be priced perfect or may need a little less to move to a retail buyer.
3958 Chelsea Hill does not show to have been listed on the MLS.
So were they ever listed at 25% below market value? Doesn't look like it, but that is the claim that sent BP into a frenzy. How can these properties not sell at 25% below retail value and not get a bite unless this buyer was screwed by a company? Or, they are not listed on the MLS.
OP claimed that selling all three as a package was preferable and that she just wanted to get out of them at break even or possibly a little profit. It sounds like Chelsea Hill will be the challenge for a package. Curt Davis has offered to help with that multiple times here on the thread and was even asked by Linda Pliagas to reach out and try to help you. He has done that. He has stated that he thinks he can help you break even at worst. At least give him some props for trying to help and offering to help if he can based on the original post.
I get how BP works. I have been posting and writing articles here for almost 6 years now and understand which comments to laugh at and which to really dig into. The best way to make BP work is to be willing to be honest and ask for analysis and advice based on all the facts. These properties were bought with no money down from an affiliate and from a vendor who is usually pretty up front that he does not believe in over renovating and likes to keep prices low.
To me, it sounds like a bad deal all the way around, but not the way the OP has described and certainly not the way the thread took off. It sounds like she wants to move on to other investments, but her long-term properties in Memphis are not going to let her realize a big profit. If she truly wants to sell, then with all the details on the table, there is bound to be a buyer on here and a solution that can help her get out of the properties at a break even if not a little profit.
299 Replies
- Investor · Indianapolis, IN · Member since 2015 · 143 posts · 82 votes11y
If I were you and was dead set on selling these here is what I would do.
1) list them on MLS for retail value
2) list them on FSBO, craiglist, the marketplace here and any other website where you can list them. Market them on these sites as turnkey and provide as much details as you can. If another investor will buy these, they want to see numbers.
You can do all these at the same times and see who bites first.
Good luck!
- Wholesaler · Memphis, TN · Member since 2015 · 49 posts · 28 votes11y
This post has become more and more about a bad deal instead of a solution. However until I know the specifics I will reserve judgment. As a previous mortgage broker I always got a higher value on refinances than purchases. When purchasing a property the marketability comes into play with what someone will offer. Since everyone's watching and reading why not post the addresses and lets see what we have here?
- 11yCurt DavisBusiness MemberFlipper/Rehabber · Memphis, TN · Member since 2008 · 5k+ posts · 2k+ votes
After doing a little recon of the homes you own I have noticed the following:
Lazzini - Very nice home in Cordova. You should have refinanced at around $79,000 in 2010. Low current market value of $98k-$106. If you were looking to break even to walk away this should not be hard to do here.
Chelsea Hill - you should have refinanced at around $49k in 2010. Home is nice looking but in a bad area. One just sold for $59,620 recently but that is the highest sale in the area. Depending on your current rent you should be able to sell this one also.
Kings Arms - Currently listed on the MLS for $99,900 for the last 162 days. You should have refinanced at or around $85k back in 2010. Excellent rental area in Fox Meadows. Current estimated market value of $90,000. List price is above current market value. Also the front pictures and other pics dont look great, they could have done a better job.
If your goal is to sell and walk away then this should be doable based on my assessments. If my assumptions are incorrect please help me (us) out with numbers corrections. To me it seems a lot of the recent issues are working with the wrong individuals or companies. I could take better pics and enhance them in 30 seconds which would make a world of difference.
The TK provider you purchased through has a decent reputation and has been in business for the better part of the last 11-12yrs of so. That doesnt mean they are perfect and not have issues at times, we all do.
If you wanted to chat sometime let me know and I would be happy to see if there was a way to maybe help move some of them.
Curt Davis - KAIZEN Realty538 Reviews - Investor · Hampton Bays, NY · Member since 2009 · 907 posts · 258 votes11y
@Sabrina Brown based on what I have read so far you purchased these properties for approximately $215,000 and have had repairs over the last five years of $20,000 but have had 9 months of vacancy (I gather vacancy was intentional while trying to sell.) you have invested little or none of your own money and have netted $1000 a month for 50 months .
$50K less $20k in repairs is still a decent return since you had not cash of your own invested. Am I missing something?
Yes you overpaid for the property but I am only guessing that if you have a 15 year 6% mortgage you will own the property outright in another 10 years while continuing to reap a positive cash flow.
Your solution is to find competent management because turnover, vacancy and repair will eat up that $1000 cash flow quickly.
There are many blogs about investment property and the 2% 50% rule and your property would fall short but depending on your goals it can still work to your advantage.
Selling and moving on of course is your other option and I don't know your market well enough to evaluate this but I do know you spent 9 months spinning your wheels trying to sell your property at 25% below what you perceive as its value. Apparently you have been mislead or your property would have been sold.
I am a buy and hold investor. I invest cash to generate income. The "market value" of a property is less important than its cash flow. I do not use leverage but in your case leverage is serving you well. If you stay the course and my assumptions are correct you will have built future income for yourself with little or no cash outlay .
This is how I view your situation. I would not sell but that's just me. If the post is to discusses the merits of Turn Key investments. I am happy to have that conversation.
I invest out of state and have put together my own portfolio. I did not go the turn key route . You could have done better but all things considered you could have done much worse.
4
- 11yCurt DavisBusiness MemberFlipper/Rehabber · Memphis, TN · Member since 2008 · 5k+ posts · 2k+ votes
The little to no money down buying model is extinct in the manor of how you purchased bc there is far more competition now for the same homes. Prices have naturally gone up. Its just the normal market conditions. It is possible to still do it but you only see it in lower income areas bc the higher priced you go the harder it is to make the numbers work. Example:
You find a home worth say $70,000 max value, you can only be in it max with refi LTV at $52,500. This is still possible but again in lower quality areas. You find a home that is appraised value ARV of $100,000 and the max with refi will be at $75,000. It is much harder the higher in price you go.
Hope that helps.
Curt Davis - KAIZEN Realty538 Reviews - Investor · San Diego, CA · Member since 2014 · 592 posts · 765 votes11y
Had a sidebar with the OP and feel more comfortable with posting on the thread after gathering some pertinent information.
It is my opinion that you should keep these houses and not sell them to purchase a CA MF.
Reasoning:
- CA Multi is very expensive at the moment (arguably overvalued - a common notion here on BP as well). We are several years into an expansion phase and many CA markets rise faster than the rest of the country. 3.5% CAP is becoming very normal where I live.
- From personal experience, the TK company you bought from does not have a strong management sister company. I wouldn't be surprised if many of the issues you have had with maintenance and vacancy were directly their fault.
- As mentioned by @Michael Lauther you are likely still netting positive cashflow (and loan repayment) after repairs for 0 actual cash invested.
Suggestions:
- Plot out your cashflow for these houses individually. If you only put down 20k repairs over the last 5 years, that's only $110 per roof per month and should be well within expectation / budgeted repair and capex. I haven't seen enough numbers to actually see whether or not this was actually a good deal. It's possible you just had sticker shock from a full rehab. Collecting rent every month and having large single cost events is the nature of buy and hold investments.
- Hire a better team. This holds true even if you do decide to sell. You need a better listing agent. The pictures / marketing are not impressive.
- Real Estate Consultant · Memphis, TN · Member since 2015 · 70 posts · 82 votes11y
@Derek : yes, that was the case. Nobody could have predicted that I would get into this situation. The market was strong holding up at 75% LTV. The market has slightly declined mostly caused by so many investors purchasing from foreclosures and short sales (caused by those investors that were sold on these properties at around the same time).
@Alexander: I did exactly that...numerous times over the years with different realtors. Of course, most didn't do anything hoping that in the end I would give up and just sell to any of their connections. Realtors' best advise is always to sell at a lower the price because they are still making their commissions. If I lived there, I would stage the property or at least use a "woman's eye and touch" to make them inviting. I have done this a few times with my personal properties and made huge profits that way. I take good care of all of my properties and belongings.
@Curt: You are very close in your assumptions as well as market values I have determined. If that is the case, why would I "walk" away from these properties and not get what I should be getting? Whether I bought them at zero down or whatever in 2010, I should still be able to get the market value but was willing to discount the sales prices. Yes, Chelsea has always been a challenge, except the area improved drastically since last year. There is a possible lease purchase tenant in the property right now, however, I would want to get the loan out of my name.
@Michael: I actually put a lot more repairs into these properties since I purchased them. The 20K was just this year to get them up to par. The MLS listings I had did not include some of these repairs and as @Curt noticed, the pictures don't do the properties any justice as they were taking during the rainy season. There was also another time where one of my properties was vacant and boarded up for almost 2 years because a management company told me to take it out of Section8 to get higher rents, although they should have known that this area did not call for higher rents. In the meanwhile, Memphis city no longer accepts new Section8 applications. Besides these issues, it is normal to have had times between a tenant moving out, making the property rent ready (spending usually 2K on average - and charged at markup by these management companies), and getting a new tenant in. Keep in mind that usually the first month rent is either 50% or less because management takes that as tenant placement fee. This sucks up a lot of cash. At one time it was great to have 3 properties to balance out another property cash losses but then it just started getting worse with all of them, mainly caused by management companies and lack of communication on their part and them making the wrong decisions that I was not informed about until it was too late.
- Real Estate Consultant · Memphis, TN · Member since 2015 · 70 posts · 82 votes11y
I forgot to mention: ALL of these 3 properties are cash flowing with about $200-$350/month each. They probably generate even more now because interest rates have dropped drastically since I purchased them. I cannot refinance because I am no longer a W-2 earner and/or don't want to lose my excellent credit rating hence the loans are all current.
- Real Estate Consultant · Memphis, TN · Member since 2015 · 70 posts · 82 votes11y
The cash flows that I mentioned are after PITI and management fees so if these other issues had not incurred, I should have had built up a lot of cash in theory. It was going well for about 1 1/2 years until tenants started moving out, the other property became vacant with the end result of being vandalized by punks a couple of times and boarded up, involving realtors, etc. yadda yadda yadda.
@Frank: I have a different MFH strategy with multiple commercial loan and non-recourse options in CA. That would be a different topic. I hope you saw my responses to others regarding the bad pictures/marketing, and not having had any luck in finding qualified management companies, even though they are well known in the Memphis area and consider themselves professional. That by itself is one of the biggest challenges.
- Investor · Hampton Bays, NY · Member since 2009 · 907 posts · 258 votes11y
@Sabrina Brown your story is not a new one. Many of us have gone through this and it is precisely at this point so many give up and sell at a loss. If you can get reasonably competent property management than I would keep the property.
I don't know your personal situation but I would take some time to visit the property and make some contacts in the area.
a good start may be to find reputable contacts here on BP. There are some on this post that I have been acquainted with for several years. That may be good place to start.
- Investor · El Dorado Hills, CA · Member since 2012 · 1k+ posts · 1k+ votes11yThere is a separate pricing and value system for turn keys... Because retail buyers don't want to buy homes in the areas where most of the TK operators are working. That leaves you with an exit strategy of selling to another investor who has you over a barrel while you are 1800 miles away and bleeding money every month. I bet there are local investors in Memphis that make a killing selling many of the same houses over and over like a buy here/pay here car lot.
- Investor · Hampton Bays, NY · Member since 2009 · 907 posts · 258 votes11y
@Sabrina Brown if you type the @ key and continue to type the name of the person\ou want to address you can click their name when it appears at the bottom of the post reply box.. If you do this the person will be alerted that you have responded
Best of luck to you.
- Sherman Oaks, CA · Member since 2013 · 3k+ posts · 2k+ votes11y
@Sabrina Brown Welcome to BP! Fortunately BPs Memphis presence is strong and one of those bp contacts will be able to help you exit soon.
The reputable TK guys will explain the exit realities upfront. One might figure most anything sub 100k in today's world might have some extra exit challenges. Your post is a valuable lesson for anyone looking to buy retail TK or regular. Thanks for having the cajones for sharing this.
@Tammy Wise I have found I can easily find and for significantly less like homes nearest many formal TK offers just by checking the MLS. Sometimes next door for 50k less and this is sub 100k so yeah...every buyer should be getting comps much less researching what's selling on the MLS. It appears these properties decreased in value in retail reality if one can't sell at 5 year old 75% values. Location equals true exit value...always has and always will.
- Greensboro, NC · Member since 2014 · 212 posts · 143 votes11y
Originally posted by @Joe Bertolino:
There is a separate pricing and value system for turn keys... Because retail buyers don't want to buy homes in the areas where most of the TK operators are working. That leaves you with an exit strategy of selling to another investor who has you over a barrel while you are 1800 miles away and bleeding money every month. I bet there are local investors in Memphis that make a killing selling many of the same houses over and over like a buy here/pay here car lot.I'd vote for this post twice if I could.
- 11yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
@Curt Davis I don't think we can blame Sabrina here.. she was just investing with what was the norm in the day... She is LA based like 50% of the turn key buyers are .. and its apparent that she did the 100% loan to get into title then a rate and term refi at 75% LTV to get the short term lender paid off.. I did over 2,000 of these loans in my day as the short term lender... And I understand that the market crashed and values eroded I lost millions personally in that event... But my deals were all pre 08 before the crash .. she bought after the crash. I think she raises very relevant issues with regard to the Memphis market.. and the Memphis operators like you .. of course the market in the whole mid west... the reality is if you buy sub 100k your probably never going to sell retail.. I had a post when I first got on BP that said the 2% rule kills values it went to almost 300 posts.. and this is the exact reason why... you have 2 values you have the blue sky lender value and you have reality of what a buyer will pay for an asset without the benefit of a high powered out of state marketing campaign. that's the truth of the industry. You guys can try to deflect all you want but the reality is there is no retail exit for sub 100k in your market or very little. So the reality is when you buy these if you buy them less than the 2% rule you have lost equity day one.. and you will need to hold them for the long term IE 10 to 20 years. there is no exit at year 2 , 3, 5 , 7. I know I am selling my Madison MS houses I bought in 07 to 08 for go zone and I am losing 20 to 40 k per house I sell.. which for me because I took go zone is about a break even for those that did not buy go zone they lose there Butts.
How you try to spin this is your business however Sabrina is living the reality. she can't sell for what she owes.. she got arms length appraisals from some lender in 2010 that said the properties were worth X and now she can't sell for what she owes and if she wanted to exit it sounds like she will take a huge loss. so what is reality is the ARV of these homes be it appraisal value or anything else is JUST fantasy..
And she is correct the renter demographic is a tough one in the mid west it just is.
What say you,,,, how do you help your investors get out of a property they paid full retail ( Above Market price) when they need to exit.. you already stated that a turn key company needs to make 15k per deal to make if worth their time to use one of their buyers to help a past client.
I think personally that you folks there in the mid west need to fess up and just state that when you buy these they are like 10 to 30 year annuities if you try to sell prior to year 10 your going to lose .. if you do that then you can hold your head up high.. to tell people they are buying properties with built in equity is as @Aaron Mazzrillo States worse than the worse TV guru.. your taking far more advantaged of these folks than any guru.
Here is a nice West coast Lady who thought she was getting a deal and now is just trying to keep her credit in tact and its costing her thousands.. she would have been SO much better off never to buy these in the first place..
- 11yCurt DavisBusiness MemberFlipper/Rehabber · Memphis, TN · Member since 2008 · 5k+ posts · 2k+ votes
jay, if you read one of my recent posts above I looked up the three properties she has and had basically determined she should be able to at least sell to break even on her loan amounts but you then read her reply and she is not interested in just breaking even.
People buy for cash flow so most investors go with a 30yr loan. Doing this will provide very little principal reduction as if someone did a 15yr loan from the start.
I completely agree that buy and hold buyers should plan to be in for the long haul. the difference between buying tk and doing it on your own is that when something goes wrong through the tk system the investor has someone to blame as opposed to dealing with the issues. I own 20 rentals of my own in my market and I have all managed and I do have problems just like everyone else but the difference is I don't have anyone to blame when things go wrong. When I have vacancy and repairs, late paying tenants, that's part of the game.
Maybe someone will put together a program for investors to buy out of state that's like turnkey but provides guarantees but not a turnkey company.
Curt Davis - KAIZEN Realty538 Reviews - Investor · Peachtree Corners, GA · Member since 2014 · 1k+ posts · 1k+ votes11y
Originally posted by @Jay Hinrichs:
@Curt Davis I don't think we can blame Sabrina here.. she was just investing with what was the norm in the day... She is LA based like 50% of the turn key buyers are .. and its apparent that she did the 100% loan to get into title then a rate and term refi at 75% LTV to get the short term lender paid off.. I did over 2,000 of these loans in my day as the short term lender... And I understand that the market crashed and values eroded I lost millions personally in that event... But my deals were all pre 08 before the crash .. she bought after the crash. I think she raises very relevant issues with regard to the Memphis market.. and the Memphis operators like you .. of course the market in the whole mid west... the reality is if you buy sub 100k your probably never going to sell retail.. I had a post when I first got on BP that said the 2% rule kills values it went to almost 300 posts.. and this is the exact reason why... you have 2 values you have the blue sky lender value and you have reality of what a buyer will pay for an asset without the benefit of a high powered out of state marketing campaign. that's the truth of the industry. You guys can try to deflect all you want but the reality is there is no retail exit for sub 100k in your market or very little. So the reality is when you buy these if you buy them less than the 2% rule you have lost equity day one.. and you will need to hold them for the long term IE 10 to 20 years. there is no exit at year 2 , 3, 5 , 7. I know I am selling my Madison MS houses I bought in 07 to 08 for go zone and I am losing 20 to 40 k per house I sell.. which for me because I took go zone is about a break even for those that did not buy go zone they lose there Butts.
How you try to spin this is your business however Sabrina is living the reality. she can't sell for what she owes.. she got arms length appraisals from some lender in 2010 that said the properties were worth X and now she can't sell for what she owes and if she wanted to exit it sounds like she will take a huge loss. so what is reality is the ARV of these homes be it appraisal value or anything else is JUST fantasy..
And she is correct the renter demographic is a tough one in the mid west it just is.
What say you,,,, how do you help your investors get out of a property they paid full retail ( Above Market price) when they need to exit.. you already stated that a turn key company needs to make 15k per deal to make if worth their time to use one of their buyers to help a past client.
I think personally that you folks there in the mid west need to fess up and just state that when you buy these they are like 10 to 30 year annuities if you try to sell prior to year 10 your going to lose .. if you do that then you can hold your head up high.. to tell people they are buying properties with built in equity is as @Aaron Mazzrillo States worse than the worse TV guru.. your taking far more advantaged of these folks than any guru.
Here is a nice West coast Lady who thought she was getting a deal and now is just trying to keep her credit in tact and its costing her thousands.. she would have been SO much better off never to buy these in the first place..
Great post! This thread keeps getting better and better! It's almost as if there are three prices-wholesale, retail and turnkey.
- 11yAlex CraigBusiness MemberReal Estate Professional · Memphis, TN · Member since 2009 · 1k+ posts · 1k+ votes
@Sabrina Brown It sounds like with better management your experience would be different. We get section 8 applicants all the time; while I am not a big fan of that program, that is your best shot in the Chelsea Hill area. For Turnkey to work, management must be excellent. Sabrina, I am going to break this down and I am not trying to make you feel worse on a situation that is already not great. It is more to educate individuals about Turnkey and to give further insight into the situation of why these homes were doomed to fail from day 1. Those getting into turnkey investing will appreciate my comments. Those that despise turnkey will fail to listen in the differences of a Turnkey company selling on #'s and Turnkey outfits that are well organized, in house crews that work for cheap instead of outsourcing to Contractors who will mark up jobs on average 40%, have excellent management and have a unique philosophy that does not include setting up properties for failure through sub part rehabs. Turnkey should be to provide a excellent property set up on the front end for success that will drastically reduce maintenance the first few years that allows the investor to build up cash flow reserves. Also, it should help reduce vacancy b/c tenants will want to live in awesome homes. Turnkey is also ongoing support. Not sell the property and hand off to Property Management to handle.
But lets look deeper into Sabrina's experience by property. With the right team, I think all the issues are avoided. I can tell by looking at her house on Kings Arm that the house was renovated with "lipstick on a pig approach." This is certainly standard for some Turnkey companies and typically those companies are the ones selling on #'s that will never be achieved b/c there is constant maintenance and tenants will leave b/c there are to many other nicer rental homes to choose from. The problem I run up against is that I will lose business to another turnkey company b/c investors are buying strictly by the #'s on a piece of paper and not looking at the product itself. Ask BP blogger Kevin Perk what adding upgrades does to his rental does for his properties. In my A class homes I have put in granite, backyard decks, stainless steel appliances, tile backsplashes, etc. B class properties get retail ready upgrades too for the area. But then again, I tell investors up front and I will put it in bold "if you are looking to sell in less then 7 years, I am not the person for you." Not to knock Sabrina, but this is a classic example of buying homes in the wrong areas and in the case of Kings Arms, doing the bare minimum. I will say this in bold too "that strategy does not work!!!" How do I know? From personal experience. When I bought my first rental homes in 2007; I subscribed into the same philosophy. Buy cheap, put lip stick on a pig, if it works, then leave it, no matter how dated it looks. Starting in 2011, when these homes when vacant, I started adding my standard upgrades that I put into all my rental homes and it cost be on average $6,000 per house.
Chelsea Hill --- C class area with only exit strategy is to sell to other investors. This should have been communicated to up front. Since only investors buy in C class, the property is worth what someone else will pay. If you can get $725 in rent, then getting $59,000 from a direct buyer should not be a problem. Reputable turnkey companies will not buy in that area unless they are a C class provider and disclose that up front. There are certainly investors who love C class. You need to find an agent who markets directly to investors to help find you these. This sounds like @Douglas Skipworth approach.
Lazzini Cv -- This is certainly a great area and there are numerous retail comps at $100k, but unless I missed this somewhere in Sabrina's post she did not mention that it is a 2 bedroom house. All the comps in the area are 3 bedrooms and had it been a 3 bedroom, Hedge Funds would have paid $100k +. Since most individual investors do not want 2 bedroom rental homes and all the comps are 3 bedrooms, it will be difficult to sell. I looked up comps over the past year and did not find any 2 bedroom comps that were not attached housing in the area. I think you should have been listed at $84,900 and not $95,900. Your agent should have picked up right away that there are not any 2 bedroom comps and you needed to priced well below what 3 bedrooms are selling for. BTW, as Curt mentioned, the pics are horrible. A good agent will advise you to spend $100 on high res, wide angle lenses on a clear day.
Kings Arms -- You have it listed at $99,900. There are 2 comps in the high 80's and by looking at those listings, this house does not offer any amenities that these houses do not offer and I would argue these actually look more up to date. There are no "wow" features to your Kings Arms house. You are priced to high and your agent should know this. Granted I am going by the listing pictures; if there are updated pictures that show further upgrades, then I would fire your Realtor today for not posting those. I would also request they take some pictures this weekend as it is supposed to be beautiful, but without any grass or landscaping, it may be a waste of time. That front of house picture in your listing is depressing. If those pictures accurately depict your home, then this is a prime example of the differences in Turnkey philosophy. Your seller did not address things that needed to be addressed to ensure long term success of your home. The roof looks tired; it is either on the back half or it needs a roof clean from a professional company specializing in that. There is no curb appeal. We would have cut back some of those trees and gotten some grass to grown and would have certainly landscaped the home. The parquet floor appears to only have received a coat of polyurethane right over the dark spots. The floor should have been sanded down, re-stained and then put 2 to 3 coats of polyurethane. The kitchen cabinets should have been painted with oil based paint and installed brush nickel hardware. For $25 extra, you could have had brush nickel or oil rubbed bronze ceiling fans that look great instead of all the all white retro looking fans. For $300 more, the vanities tops could have been updated instead of keeping the dated yellow look and they could have been painted. In the kitchen for $65 a brush nickel faucet could have been installed instead of the 1980's faucet with wooden handles. Each bathroom could have received updated brush nickel faucets for $40 a piece. In that bar area, there does not seem to be any flooring at all. Some vinyl plank flooring would have looked great. Back deck needs to be pressure washed. I noticed you have carpet in the high traffic areas; that should have been vinyl plank hardwood; it looks better and it will last 3x as long as carpet. But the Turnkey companies selling on price only will not add vinyl plank flooring b/c it adds around $1,500 to the final sales price. The bathrooms looks tired too.
I would say the listings of Sabrina's King's Arm depicts the difference of philosophy of Turnkey companies. It says "New upgrades! This property has been updated with new interior paint on the walls, trim, and ceilings, new carpet and pad. New blinds, door hardware, and new lighting fixtures"
These are not updates, this is the bare minimum; anyone selling a vacant home is going to paint it and if the blinds are in bad shape replace those and put in new carpet if the old is tired looking. After all, that is the first thing someone will see when they walk through the door. If anyone has seen the move Office Space, this house can be summed up by Jennifer Aniston's boss when he ask her to put on some more bling. She has the required amount, but no more and she thinks that is ok, however, the boss wants her to go above and beyond. This house is Jennifer Aniston.
Sorry Sabrina, again, my comments are not meant to be harsh, simply to point out differences in philosophy of TK providers and point out mistakes made so others do not make the same. I would reach out to Douglas Skipworth ASAP and see what he can do for you.
Best of Luck!!!
- Rental Property Investor · Phoenix/Lima, Arizona/OH · Member since 2012 · 4k+ posts · 4k+ votes11y
Originally posted by @Jay Hinrichs:
@Curt Davis I don't think we can blame Sabrina here.. she was just investing with what was the norm in the day... She is LA based like 50% of the turn key buyers are .. and its apparent that she did the 100% loan to get into title then a rate and term refi at 75% LTV to get the short term lender paid off.. I did over 2,000 of these loans in my day as the short term lender... And I understand that the market crashed and values eroded I lost millions personally in that event... But my deals were all pre 08 before the crash .. she bought after the crash. I think she raises very relevant issues with regard to the Memphis market.. and the Memphis operators like you .. of course the market in the whole mid west... the reality is if you buy sub 100k your probably never going to sell retail.. I had a post when I first got on BP that said the 2% rule kills values it went to almost 300 posts.. and this is the exact reason why... you have 2 values you have the blue sky lender value and you have reality of what a buyer will pay for an asset without the benefit of a high powered out of state marketing campaign. that's the truth of the industry. You guys can try to deflect all you want but the reality is there is no retail exit for sub 100k in your market or very little. So the reality is when you buy these if you buy them less than the 2% rule you have lost equity day one.. and you will need to hold them for the long term IE 10 to 20 years. there is no exit at year 2 , 3, 5 , 7. I know I am selling my Madison MS houses I bought in 07 to 08 for go zone and I am losing 20 to 40 k per house I sell.. which for me because I took go zone is about a break even for those that did not buy go zone they lose there Butts.
How you try to spin this is your business however Sabrina is living the reality. she can't sell for what she owes.. she got arms length appraisals from some lender in 2010 that said the properties were worth X and now she can't sell for what she owes and if she wanted to exit it sounds like she will take a huge loss. so what is reality is the ARV of these homes be it appraisal value or anything else is JUST fantasy..
And she is correct the renter demographic is a tough one in the mid west it just is.
What say you,,,, how do you help your investors get out of a property they paid full retail ( Above Market price) when they need to exit.. you already stated that a turn key company needs to make 15k per deal to make if worth their time to use one of their buyers to help a past client.
I think personally that you folks there in the mid west need to fess up and just state that when you buy these they are like 10 to 30 year annuities if you try to sell prior to year 10 your going to lose .. if you do that then you can hold your head up high.. to tell people they are buying properties with built in equity is as @Aaron Mazzrillo States worse than the worse TV guru.. your taking far more advantaged of these folks than any guru.
Here is a nice West coast Lady who thought she was getting a deal and now is just trying to keep her credit in tact and its costing her thousands.. she would have been SO much better off never to buy these in the first place..
Jay - yours is an excellent response that covers all of the basis:
1. CA money coming to Mid West...as if they know anything, but can they be blamed...?!
2. The issue with buying sub $100,000 TK
3. The economic realities of Mid West, including Memphis
The bottom line is that if OP underwrote to the IRR she wouldn't be in this predicament. 100% purchase with a 75% cash out is not the issue, if the numbers are right.
People - YOU HAVE TO UNDERWRITE THE EXIT BEFORE YOU GET IN!!!!!!!!!!!!!
What is the exit with TK PIGS - I've been preaching to anyone who'll listen, but everyone from CA seems to be too smart to listen...
- Residential Real Estate Broker · Austin, TX · Member since 2014 · 146 posts · 21 votes11y
Hello, It doesn't make sense that you were trying to sell them at 25% below market value. Based on that, they should have sold easily unless there were major expensive problems with the property. If it was me i would do any repairs needed and sell them for market value. I would get a good realtor that specializes in investment props and get his advice. I probably wouldn't try to sell them as a package as it limits the buying pool.
- 11yCurt DavisBusiness MemberFlipper/Rehabber · Memphis, TN · Member since 2008 · 5k+ posts · 2k+ votes
So its a catch 22 then. The CA investor doesnt invest in their own market bc the prices are far to high and if they invest in the midwest then the prices are too low. Most investors could not invest long distance without the support of either several individuals or a TK team.
What is the solution for investors then? Is there another program out there to help investors invest long distance?
Also what everyone seems to keep ignoring is that with the properties stated for this thread owners properties, there is enough equity in the 3 homes that they could be sold for more then she is in them for. How can someone be upset about not being able to sell the properties when they are being listed for sale for above market value? I am a Realtor and I have looked at the numbers, it can be done. She HAS owned them long enough to at least be able to sell and walk to break even.
Curt Davis - KAIZEN Realty538 Reviews - 11yAlex CraigBusiness MemberReal Estate Professional · Memphis, TN · Member since 2009 · 1k+ posts · 1k+ votes
@Ben Leybovich Once again, you are commenting on the bottom feeder Turnkey Providers. I will acknowledge that the exit strategy in the first few years is hard if you can acknowledge there is the possibility that someone can run a good business, rehab the homes right and set them up for long term cash flow and if they choose to sell in 7 to 10 years and beyond, they can make money. If not, then at least acknowledge that the rental homes you speak of do not look like this: A Class Home with Retail Ready Upgrades. If you planned on holding a home for 10 yrs, don't you think it is possible to make money on this home? What do you call money managers that consistently return 8%? Millionaires. So keep in mind, reputable TK companies are not promising 15% + returns; if they are, there are lying.
Exit is simple. If in the first 7 to 10 years, you can find an investor to buy your home too. Sabrina has excellent cash flow, why can't she put together Financials on the home, rent rolls, leases and maintenance records and present it to other individuals in her market? She can go to the local REIA and present the home. If it is an excellent area, then retail is your option, but don't expect to make any money on the sell b/c of agent commissions and shared closing cost. But it sounds like the financials on the home are not great. I would get all the homes back on track on 18 month minimum leases and after 4 months of on time payments from the tenant, show how the property did not perform and the actions she took to get the property back on track.
After year 10 on an $80,000 mortgage, the balance will be around $63,000. No reason you can't sell if your property to an owner occupant good area and make money, even paying commissions. If the area is not good, then there are going to be challenges for this option. That is why I love "A" class. It certainly provides better options. Actually we just sold a house in Midtown Memphis where the client had owned for about 5 years and sold at I what I think was a 15k or so profit. So yes, it can happen, but he was in an great area.
- 11yAlex CraigBusiness MemberReal Estate Professional · Memphis, TN · Member since 2009 · 1k+ posts · 1k+ votes
It is a catch-22. Here are the options if you want to be in real estate the #'s in your own market do not make sense and do not want to go TK.
1) Choose a market you love to visit so that you can go their once a year and write off those expenses. Then hire a Realtor who has no vested interest in the property and is paid on commission only. Then hire a contractor and understand they will mark it up at least 40% and roll the dice with that. There are far more sub par contractors then good one. But I have met people who have done this and I think it is great. If you can do it, then do it.
2) Invest in a REIT and be ok with the ups and downs. 2014 was good. The best REIT right now is returning 5% and several are losing. Also, do not get any tax benefits.
- 11yAlex CraigBusiness MemberReal Estate Professional · Memphis, TN · Member since 2009 · 1k+ posts · 1k+ votes
@Account Closed
The reason that does not work for Sabrina is that one of her properties in C class. They are worth what the next investor will pay. It will not work for her Cordova home b/c it is a 2 bedroom. Those are very hard to sell. The 3rd property has a chance, but the home offers nothing to get excited about and has no curb appeal, thus making selling retail virtually impossible, especially since she has listed 10k over comps in the area and those homes actually have grass in the front yard. She was not set up on the front end for long term success. But, and I was guilty with my own portfolio too back in 2007 and 2008, which was buy cheap, take out a loan to rehab the property, but that loan is not enough to cover what really needed to be done so that I could buy the house with $0 down, thus leaving thousands in deferred maintenance. Most appraisals I see will not look at the detail of the comps in the area on these mid range sub $100k homes. In other words, if the comps used for her appraisals were retail ready, then the appraiser is going to use those comps and develop the same value per sq ft even though the subject property looks like grandma was put in a retirement home and the family decided to make it a rental.
- Investor · Detroit, MI · Member since 2014 · 755 posts · 462 votes11y
Originally posted by @Curt Davis:
...Maybe someone will put together a program for investors to buy out of state that's like turnkey but provides guarantees but not a turnkey company.
Maybe partnering up with local people that have a continuing interest in seeing the property succeed...
And hoping to sell another TK to the same
suckerperson DOES NOT count as a "continuing interest in seeing the property succeed..."I have repeated said with regards to the my market if you purchased from a TK provider you probably gave away 80%-90% of the deal without even knowing it!
Join the conversationCreate a free account to reply, vote on answers and follow this thread.