Difficulty selling rental properties at loan amount

299 Replies

@Naveen Desai

By the way, let me clarify.... Don't think I am getting a 30% discount from market price... instead, I think the current owner (from LA) overpaid when he bought, and now he is trying to get out....What I offered is simply market price....

Hello everyone again,

I have numerous updates:

1) Lazzini property - sold in June 2016 at breakeven to loan amount

2) Chelsea property - got vandalized again (3 times in 3 years) because boarding up apparently wasn't good enough and having this so-called "honest and reliable" management company that promised to drive by 1x/month and charged me for gardening 2x/month did NOT DO ANYTHING!  I had a potential buyer who wanted to see the property and he was the one telling me that the property had been vandalized.  I then contact my insurance company and they told me my insurance policy was cancelled about 6 months prior BECAUSE the property was vandalized.  So basically, the management company did nothing and just ripped me off and the insurance agent forgot to inform me because she was busy planning a wedding.  The claim has still not been resolved after 3 1/2 months because the management company dragged their feet in providing a police report filing (they said they were stood up by police 3x but then I insisted on them just simply going to the police station - duh! - and it still took them 3 weeks to do so) and they had no record whatsoever of going to my property.  I found a great contractor now, who almost feels like a concierge service to me, who was referred by a great investor from Bigger Pockets.  The contractor has removed the code violations due to the property not being boarded up and trash sitting outside, including a chair from the inside of the property that I had paid for the management to clean out and remove the debris, which they obviously didn't.  

I still owe about $43,000 on this property and have now sold another out of state property that I owned outright (even though I lost another $20,000 due to that management company there letting the tenant move out during escrow and the first buyer pulled out), thus, I offered the property in as is condition at $29,500 but no matter what, every time I lowered the price, I got offered another $10,000 less.  

Several investors in Memphis finally confirmed that there is a different market for out of state investors than local investors.  We are being taken for a ride and pay about 30-50% more on every single transaction: purchase, rehab, repairs, etc.  and we are being lied to that work had been done when it wasn't done.  Most crooks in Memphis get away with it, even if you have a legal title against them.

Contractor is now helping me fix up the property for $10,000 in total while someone trusted will be living there for free and house sitting and reporting back to us so the property won't get vandalized again until we have found a rent to own tenant. Plan is to get $7,000 minimum down and then covering my PITI plus additional cushion, which will be around market rent in that area. There are 3 other properties nearby that are boarded up, too, but they will be fixed up within a year providing each other higher market value.

3) Kings Arms property - the tenants had paid rent before timely, even though they didn't seem the best candidate.  They offered $100/month more but since they paid, I was okay with it, even though it was still below market and what this large property would go for.  However, I asked the management company to do a full checkup of the property and provide pictures, which they didn't and I kept pulling teeth asking about the status.  Supposedly, a person left and they fell behind on following up. Two months after lease expiration, they just sent me the lease renewal without pictures or information who actually lives at my property.  Two months after that, the tenants fell behind on rent.  I kept pulling more teeth to find out whether they had paid or not.  Then tenants filed Chapter 13 (I am still waiting for any funds to come from the bankruptcy trustee) owing me 2 months rent but were given an automatic stay by the court as long as they paid timely starting the October 2016 rent again.  Sure enough, the tenants ended up falling behind again (management company still didn't inform me and I only saw it a month later when I got their reports).  Bankruptcy court issued another automatic stay extension due to a reorganization because tenant was supposedly very ill.  One month got paid, then they fell behind again, which I found out again a month later from my rent reports instead of management informing me by the 5th of the month.  Then I asked the same contractor I am now using to drive by.  He found out that there are hood rats living at my property of at least 10 people.  Again, when I confronted management, they didn't tell me that they had knowledge of the tenants living with many others and the tenants violate several codes.  I was told by management that they "NEVER drive by a property once it is rented!" and "we have over 1,600 properties to manage so we don't have time to drive by each one of them!"  What?  Hello?  I was shocked to hear this.  So basically the plan now is to evict the tenants ASAP,  if no other criminal/domestic issues happen to get them out immediately (they have stolen tools and almost a cell phone from the management company's plumber, which they also didn't tell me about when it happened).  Management company personnel is lame - they don't want to do any work but if there are high repairs, they will do it without your permission and then just send you the bill a week or two later costing you several thousands.  Management made over $13,000 on me last year and they made me feel like I had to beg them to do something that is standard!

Plan with this property is to get tenants out, fix up a bit to make it sell better.  Hopefully, there is a bit of equity left to do so but again, there are two different markets and it all depends who might be making an offer.

It's all about not getting screwed over by your management company or contractors or even lawyers!  Official market is online, which lenders use, but reality in Memphis is that one gets taken for a ride as soon as you know you are out of state!  Please be careful!

@Sabrina Brown

Good God, who needs all these stress??

I am so sorry to hear your story... I hope you can get out of the remaining 2 properties asap, and put your life back on track again.... It will happen soon......

@Sabrina Brown Something does not sound right but if you list a house for a year and it does not sell then you generally are not listing it below market. If your property cashflows well then you should have no problem selling. Why are you selling if it cashflows so well?

This post has been removed.

@Sabrina Brown there was a post on BP from an out-of-state investor last week who just purchased a duplex in Memphis and was having trouble renting it. I looked at it on Zillow and saw that someone was trying to rent the property for six months before he purchased it. He paid $20K less than what it sold for in 2013, which was $20K less than it was purchased for in 2001. He was insistent that he got a great deal and his rent level was fair, even though someone else couldn't rent it for months and dumped it for a big loss. Hopefully it works out for him, but your story should be a warning for others.

Part of the advantage that local investors have is knowing the good streets, schools and neighborhoods. They can meet a contractor face-to-face and they can drive by the property. 

Sorry you are going through this. 

Absolutely sorry you are dealing with this. It may give you a bad taste for Memphis and out of state investing, but as a whole there are a lot of great people to work with here. May not be the least expensive on the front end, but in the long run would be well worth it.  All the best! As @James Wachob said, let any of us know if we can help.

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

Can you PM me some details?

Originally posted by @Dean Letfus :

@Mark S. if you buy turnkey you absolutely would sell at a loss in the first ten years. Not necessarily lower than loan value but quite likely if you get 80% lending.

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

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

@Dean Letfus

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

Originally posted by @Curt Davis :

@Dean Letfus

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

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

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

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

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

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

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

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

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

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

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

@Dean Letfus

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

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

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

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

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

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

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

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

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

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