The STR permit doesn't transfer, though the seller says everyone reapplies

Question

$465k, 3/2, walkable to the main street of a small tourist city. The city licenses short-term rentals annually and caps non owner occupied licenses at 4% of the housing stock. They're at the cap right now with a waitlist, and the ordinance says a license terminates on transfer of title. Seller's line is that the waitlist moves and everyone reapplies and gets it back.

Seller pro forma is $82k gross, and at 22% management plus the usual operating load I get to somewhere around $47k net before debt. Long-term rent comps for the same house are $2,350. PITI is about $3,100.

So the STR case is strong and the fallback case is negative $750 a month. How do people actually underwrite this? Is there a contract structure that puts the permit risk on the seller, or is the answer just don't?

Rena Expert · Accepted Answer

You've already written the answer: the deal is a $750 a month hole with a lottery ticket attached. Underwrite it as a long-term rental that you can't afford, and everything above that is upside you may not get.

On structure, the mechanism people use is a closing condition tied to issuance of a license in the buyer's name, sometimes with an extended feasibility period, sometimes with a portion of the price in escrow released when the license issues. Sellers in a hot market rarely accept a 90 day permit contingency, and your lender's rate lock and appraisal validity fight the timeline. Whether any of that is enforceable the way you want depends on your state's contract and escrow practice, so have a local real estate attorney draft it rather than adapting a form addendum.

The part that decides this isn't in the seller's story. Read the ordinance itself for the mechanics of the cap: does a terminated license free a slot immediately, does it go to the top of the waitlist rather than to the buyer of the property, and is the waitlist ordered or a lottery? Those three details differ from city to city and they determine whether the seller's claim is roughly true or completely false. Ask the licensing office in writing and keep the reply.

Two things you haven't raised. A license that issues once isn't a license that renews; several cap cities have added owner-occupancy or primary-residence conditions at renewal, and existing holders got a two year sunset. And your lender will likely qualify the property on long-term market rent regardless of the STR pro forma, so if you're using a DSCR product, the $2,350 is the number the loan sees, and $3,100 of debt against it won't clear a 1.0 coverage test.

tylerbrooks9 · Answer

If the fallback rent doesn't cover the debt, it isn't a fallback. It's just a slower version of the same problem.

renee_dubois · Answer

The thing I keep coming back to with units like this is what the building or house is worth to someone who isn't you. A 3/2 in a tourist city with the STR license gone is priced off local wages, and local wages set $2,350. If the cap tightens further, every non owner occupied house on the market is competing to sell to the same long-term buyer pool at the same time. That's the exit risk, not just the cash flow risk.

karen_whitfield · Answer

Waitlists at a cap are a queue for a thing the city already decided it doesn't want more of. I'd rather buy in the next town over and wait five years than pay a premium for a license the council can vote away in one evening. Slow is fine. Slow and permitted is better.

brandonlee36 · Answer

One operational detail from annual licensing: renewals in these cities tend to all fall in the same month, and the renewal packet usually wants proof of current insurance, a life safety inspection and paid lodging tax. Miss one line item on the form and you're out of the queue for the year with bookings already on the calendar. Whatever you model, model the refund and rebooking cost of a license lapse, because it's not zero.

laurenkim53 · Answer

Opposite problem out where I look. County has no ordinance at all, nobody's proposing one, and a 3/2 is $140k. Also nobody's visiting. Regulatory safety is cheap in places with no demand, which is the trade nobody puts in the pro forma.

diane_kowalski · Answer

@pike, does the 4% cap count licenses issued or properties eligible? Some ordinances count active licenses, so a terminated one frees a slot the same day. Others count a fixed number of parcels per census block and the slot stays attached to the address, which would actually be good news for you. Worth getting that in writing from the licensing office because the seller's version only works under the second reading.

paulgrant17 · Answer

@arbor's question is the whole thread honestly. If the slot follows the address, pike is buying a permitted property. If it follows the person, he's buying a house at a tourist price with a waitlist number.

Separate thing: if you do land on the long-term fallback, a furnished house in a tourist town screens differently than an unfurnished one. Shorter tenancies, more turnover, and your furniture is now the tenant's furniture.

ehernandez74 · Answer

What would a 90 day feasibility period cost you in this market? If the seller wants $465k firm and would take $450k with no contingency, then the contingency is worth $15k and you can decide whether the permit risk is worth more or less than that. Pricing the option makes the choice less abstract. I'd also ask the licensing office how many license terminations happened last year and how far the waitlist moved. If the answer is four and two, you know.

kevin_lombard · Answer

I'm stuck on what "at the cap" means in practice. If a city is at cap, is anyone new getting in at all, or does the queue actually turn over? Reading this thread I went from thinking it was a permit question to thinking it's a question about how one city council behaves, and I don't know how anyone forecasts that.

The STR permit doesn't transfer, though the seller says everyone reapplies

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