Exposed: RoofStock’s TurnKey Real Estate Investing

What's up you guys, it's Graham here. Now, because I'm a real estate agent and real estate investor, I pretty much think it's like my job to understand all of the real estate investing platforms out there. Now, for those who haven't seen it, I previously spent four hours of my time reading through two hundred and ninety-six pages of Fundrise's fine print to come up with all of the pros and cons of that. But today, I have another one that's just as good, and this has been highly requested. And that is, let's do a drumroll... well, you guys already know what it is from the title: Roofstock!

Now, as usual, I always underestimate all the work and research that goes into making a video like this. I don't just go through their website for a few minutes and be like, “Okay you guys, seems like a pity, kid. Makes you like it. Subscribe!” That's my terrible Cartman impression. But for real, though, I spend hours of my time doing a lot of research on this, reading through every page, all the terms of condition, all the fine print, everything to make a video that you are watching right now.

All I ask from you guys in return, if you appreciate it, just a simple like. That does it! You hit the like button, good enough for me. Let's continue with the video.

Now, for those who aren't aware, Roofstock is actually a really cool concept. It's a website that analyzes single-family homes positioned as rentals. Imagine it almost like it's a Zillow of pre-screened homes that are all meant to be investments. The advantage to buyers is that they can access homes with renters already in them, allowing them to buy a property with immediate predictable cash flow. The advantage to the seller is that you get to sell your property with the tenant already living in the house, thereby not losing out on any rental income during the selling process.

So, as their website states, buyers access vetted homes with current cash flow, seller's market homes without lost income or disrupting tenants. There’s a really weird thing that I’m reading here. Am I reading this right? "Neighborhoods avoid signs, yards which could depress values." It's a win-win all around!

Okay, so apparently yard signs are depressing property values. Okay, let me put my imaginary conspiracy theory hat on for one sec. Guys, gotta come clean here, got to spread some truth on this channel here. Rising interest rates don’t affect real estate values. Lack of wage growth doesn’t affect real estate values. That has nothing to do with it. The bigger problem I see here? For sale signs in the front yard! I can't even say that with a straight face.

Okay, but all saving that point is so ridiculous I don't even know how to respond to something like that. I have never seen in my entire career, over ten years, a for sale sign negatively affecting the value of a neighborhood. But let's just continue.

Okay, so anyway, back on track here. It honestly seems like a pretty decent business model from the outside. Sellers don't really have to bother with listing and showing their home; they simply submit it to Roofstock. They analyze it, they price it, and then they really only have to deal with it or show it once they get an accepted offer. Meanwhile, they get to keep the tenant in there. The tenant goes undisturbed, and it can continue collecting their rent every month.

The overall process seems pretty seamless for the seller. You submit the property to Roofstock, they'll conduct their own due diligence, and they'll analyze it and give it a valuation they recommend to sell to an investor. They handle all the offers, and then they'll coordinate the sale.

But now, you might be asking yourself, wait a second, if Roofstock is a business, how do they make money from this? And that's a great question. Roofstock charges the seller two and a half percent of the sales price as a fee for their service and everything they offer. For the buyer, they charge the buyer a half a percent of any property the buyer gets. So, the total amount that Roofstock gets for a hundred thousand dollar home would be three thousand dollars in commission.

Now, from my perspective as a real estate agent, the two and a half percent fee that Roofstock charges seems somewhat reasonable for basically just analyzing your property, doing their due diligence on it, putting it up on the website, fielding the offers, going through paperwork, all that sort of stuff. Even though there are no showings involved, and as a real estate agent myself, most of my fee is really for the showings that I do and for all the time I spend on that. I mean, it seems pretty reasonable for what Roofstock is charging.

And while this seems okay for the most part, there are some very significant downsides that I see for the seller, which I'll be discussing shortly. But then I took a look at the buyer perspective, and the buyer side of things, and I got a complaint. I'll be honest with you guys; I actually really, really liked the layouts a lot. The ability to go online and play with the numbers and instantly see how they affect your cash flow is amazing! I could sit around all day just playing with this thing. Okay, not really, but everything seems fairly accurate from what I can tell.

They've got reasonable expected expenses, reasonable property taxes, reasonable loan payments—all of the estimates seem to be pretty average. So, even though I want to find a fault in their calculations, because that would make this video so much more interesting, I can't. Part of the reason these calculations are reasonable is because Roofstock does a tremendous amount of due diligence prior to even listing a home. In order for a property to be listed on Roofstock, they first must certify it.

This means a property walkthrough inspection, an estimate of all the costs and major and minor repairs, a title report with no uninsurable encumbrances or liens, evaluation analysis of the property and market conditions, a 3D virtual tour, a property floor plan, photos of the property, a summary of the lease terms, and a review of the tenant selection process. Doing all of this allows Roofstock to give the buyer a thirty-day money-back guarantee, which honestly, I’ve never seen this before, and this seems too good to be true.

But I looked into it, and this is what I found. So, get this: if you buy a property with Roofstock and within thirty days you are unhappy with it, you have the ability to go to Roofstock, express your dissatisfaction, and they will go and list your property for ninety days to try to resell it. If that home ends up selling lower than what you paid for it, Roofstock will reimburse you whatever that difference is.

Now, if it doesn't sell at all within ninety days, Roofstock will reimburse you for the cost that you paid for that property. And if it sells above what you paid for it, well, tough, because Roofstock will just keep the profit. But honestly, like, if you're dissatisfied with something and you're giving it back, it's more important to get your money back. They try to make money on the market going up and selling it for a higher price, so I will side with Roofstock on that one.

But for real, though, this seems like a really, really great guarantee. From everything that I've looked into and everything I have read, it seems reasonable. I've never seen a company like this offer a thirty-day money-back guarantee on any sort of property purchase like this, which really makes me think that Roofstock truly stands behind what they have to offer.

So, all of this so far just seems to be too good to be true. And you know what they say: if it’s too good to be true… So, there are a few red flags that I found that I would like to bring to everyone's attention from my perspective.

So first, let's start with the buyer's side of things. Now, even though everything I see from the buyer's perspective seems extremely streamlined and pretty easy to navigate, the one thing that stands out to me is that it does not appear as though you, as the buyer, can do your own inspection on the property. From what I can tell, it's basically like you're trusting Roofstock to do all of your inspections on your behalf. They have their own certification process, and they will do their own inspections and due diligence for you to review at the time of the offer.

Now, even though these inspections and all the due diligence are from a third-party company, it still seems a bit like a conflict of interest, receiving these reports from the company which has a financial interest in you buying their properties. Now, my second concern with all of this is that as a buyer, you want to do all of your inspections after the offer has been accepted, not before.

From what I can gather, there’s really nothing stopping an inspection from being done today when the property is in perfect condition. But what if it sells three months later, and in that three months there’s been a roof leak, there’s been some water damage, maybe something happened to the property and now it needs additional repair? All of these things can happen in the timeframe from when you get the property inspected to when it actually sells.

This means that if you don't get an inspection done after your offer has been accepted, there could be some potential issues which you might not uncover until you've actually taken ownership of the property. Now, I can't imagine Roofstock to be so naive as not to predict this happening eventually at some point down the line. It's just very important to make sure you do whatever inspections you need to after you get your offer accepted but before you close.

The next concern I have is that it doesn't seem like many of the properties on their website really seem to be in prime locations. Now, I totally understand that prime location is totally subjective, and this is just my opinion on things. But from what I could tell, these seem to be more cash flowing properties than really appreciating assets. Don't misinterpret me here, because there is nothing wrong with going for cash flow over appreciation, and there are some great advantages of doing so.

But often, the reason why these properties are cash flowing so well is because the locations tend to be a little bit less desirable. Let’s take this listing for example: at 333 Cypress Hill, selling for one hundred and eight thousand nine hundred dollars today. Now, this seems to make some decent rental income, but then you see the property sold back in 1986 for fifty-four thousand five hundred dollars. Yes, that's right: fifty-four thousand five hundred dollars. You gotta remember that fifty-four thousand five hundred dollars in 1986, adjusted for inflation, is equivalent to one hundred and twenty-three thousand five hundred dollars in today's money.

So, over the last thirty years, that home has pretty much not appreciated in value at all; it simply just kept up with inflation. Now, I suppose you're still collecting rent during that time frame, so it's not like you're not making any money. But still, ideally in real estate, you want to be keeping up with inflation plus seeing some appreciation in addition to rent. Owning a property in a good location not only gives you more appreciation, but there's also more stability, more consistent rent, and also less vacancy in the time between tenants.

Now, the next downside I see with this from the buyer's perspective is that there's not really any room for improvement. Now, I get that this is not Roofstock's target audience, and they're really approaching a much more laid-back, casual, lazier investors who simply want to invest, collect rent, and not really do any work on it, and there's nothing wrong with that. But from a buyer's perspective, they can be making a lot more money if they're simply buying these properties, fixing them up, and then renting them out themselves.

So by not doing that, they're certainly paying a very large premium for having all of this work done for them. Finally, my last criticism with this—and I could be totally wrong with this one, so feel free to correct me on this one down in the comments if I am incorrect—but from everything I can tell, it doesn't appear as though you can tour the home in person before either writing an offer or closing on the property. If this is the case, and this is true, I think it’s so important that with any offer you write with Roofstock, it's very important to make that offer subject to interior inspection.

This means that you have the chance to see in person on the inside as a contingency of that sale, and if you don’t like it or don’t approve of that for whatever reason, you can back out of the deal. I've seen so many homes firsthand that just look amazing in the pictures. It's shot with the wide-angle lens, everything looks so bright, it looks perfect, but then you go and see the home in person and you realize, "Wow, this is a piece of..." It looks totally different than how it did online. They catfished me!

Good! The reality is that many pictures can often be altered, modified, open to interpretation, and photoshopped, and they can look entirely different from the reality of what the place is actually like. Now, besides those buyer concerns—which obviously could be eliminated with a little due diligence, seeing the property in person—I don't really see any downside from the buyer's perspective.

But now, let's talk about these seller's perspective. On the surface, again, I agree, it seems pretty good. You only pay two and a half percent commission to sell your property, you get to keep the tenant in there, which means that you get to collect rents the entire time that the property is on the market and also you don't have to bother with touring the home or like bothering the tenant for any of these inconveniences.

But some of this also comes at a cost. The first downside I see, and this might seem pretty simple, is just not having a sign out front of your house that advertises that your home is for sale. I'd really like to see some factual studies that ever suggest that a for sale sign has a negative impact on the home selling price because, for my entire experience over the last ten years as a real estate agent and investor, a for sale sign only helps get additional exposure to that property.

And with more exposure, it tends to sell for a higher price. Having a sign in front of a property makes people aware that there is even a home to be sold in the first place. Many people who want to buy real estate first start by driving around the area they want to live in, see the for sale sign, they look it up online, they figure out how much it is, and that's what gives additional exposure.

Even for people who are renting in the area who are thinking about buying—maybe they’re driving home from work one day and they realize, "Oh wait a second, a for sale sign just went up here! Let’s see how much this is," and it gets a little bit more interest. If they don’t have a sign out front of the property, they lose out on all that extra exposure they could have gotten had they just simply put a for sale sign in front of the property.

Not only that, but it’s also free advertising for Roofstock. This seems like an easy no-brainer for Roofstock! This is like free advertising; if Roofstock simply puts out their own sign in front of the property that says, “For Sale by Roofstock,” I guarantee all the neighbors in that area will all of a sudden be aware of Roofstock. If they're considering selling, too, they're more likely to look into Roofstock because their neighbor did and because they saw that sign.

Listen, long story short, is that to get fair market value for a property, it comes with exposure. And in order to get the most exposure possible, you need to advertise both online and in person. And in person, the easiest thing to do is that for sale sign. So, by cutting that out, you're getting less exposure and by doing so, you're less likely to get fair market value because of that.

Now, the second downside I see with this is that the property is not listed on the MLS. The reasoning for doing this is that if they listed it on the MLS, they would have to pay a buyer's agent two and a half percent to bring that buyer to the property. See, the way it typically works when you list a property on the MLS is that you pay five to six percent total commission. Half that goes towards the agent who represents the seller and half of that goes towards the agent who brings the buyer.

So, with that said, by listing it on the MLS, Roofstock wouldn’t have to pay that additional two and a half percent, which means they wouldn't make any money unless they charged five percent. And at that, it defeats the purpose of only charging two and a half percent to the seller. But again, going back to my first point—getting more exposure on the home means getting a higher price for that home, which means more money in the seller's pocket.

And by not listing the home on the MLS, they're again excluding a large portion of the buyers who may have been interested in that home that are simply just not seeing it. Now, even though it appears that Roofstock still syndicates their information to sites like Zillow, Trulia, and Redfin, the MLS is the number one place that agents go to send their own clients listings that automatically Roofstock is not targeting. So, right off the bat, as the seller, you're not going to get the full scope of exposure to really get the top market value for your property.

Okay, now the third downside I see when doing this is that because you're listing the home with a tenant already in place, your buyer pool for this is limited and is going to be very, very small compared to what it could be. You're immediately excluding all the owner-users who might want to buy that house just for themselves to live in. Now, obviously, one could argue that by selling a vacant property, you’re not getting any rental income from the time you’re selling the property, and maybe an investor actually wants the tenant to be in there, and that is a fair argument.

But I would list it with a tenant on a month-to-month lease, and then if the property goes in escrow from someone who wants that home for themselves, simply give the tenant notice to vacate. This, for the way I see it, is really the best of both worlds. You still collect rent; you still appeal to the investors. But at the same time, you also appeal to owner-users as well, which is arguably a much larger market, and by selling it on Roofstock to investors with a tenant in place, your buyer pool is going to be much, much smaller than it could be.

By doing so, you're really limiting the options to what you could get in terms of price. So given everything I've said, honestly, I really don't see it as a bad service or anything like that. Honestly, I'm pretty neutral about it. For a buyer, it would be nice to do your own inspections and due diligence and not entirely rely on Roofstock to do all of that for you.

And also, as a buyer, it would be nice not to buy something turnkey, to simply do all the work yourself and rent it out yourself, and just get a better bang for the buck. But I get it; not everyone is like that. And certainly, for many people, it's worth paying a little bit more just to have something that’s already done, ready to go turnkey.

I'm also not a big fan of the areas that they have listed on their website, which all just seem a little bit too remote for me, and that carries their own risk and desirability and the ability to rent it out. But like I said, this is all a very subjective opinion on something like this, and what I consider remote might be someone else’s perfect investment. It's just really, really important for any buyer to do their own research and investigation to determine how desirable the location is and how easy it will be to reread that property during a vacancy and also how much will that home grow in value, if at all.

Now for sellers, if you want a very simple, easy, streamlined process of selling your property, it honestly seems pretty reasonable to me. But I also believe that you’ll be leaving money on the table by not getting the MLS exposure, by not putting a for sale sign in front of the property, by selling it with the tenant already in place, and also not allowing any private showings. But like I said, overall, it seems decent.

I really don’t have that many critiques for them; I like their guarantee a lot. I like their layout and the way their numbers and calculations are driven a lot. Is it a scam? By no means whatsoever. Would I use it? I highly doubt it. But for some people who are looking for cash-flowing properties like this, who want something entirely turnkey, who don’t mind the areas to do their own due diligence and know what they’re getting into, honestly, it seems pretty decent to me.

I’d probably even be more likely to use Roofstock than I would Fundrise, which might say a lot or it might not mean anything to you guys; I don’t know. But anyway, that's my review on Roofstock. Overall, decent—you know, got some drawbacks to it, but it's also got some positives to it as well, depending on how you look at it. And that is my honest take on this.

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