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J Scott - Author of Flipping/Estimating Book - Ask Me Anything!
Hey everyone!
First, thank you so much for all the support after my recent Podcast episode and the recent BiggerPockets release of the 2nd Editions of The Book on Flipping Houses and The Book on Estimating Rehab Costs. I've gotten a tremendous amount of email and private messages with the kindest of words, and I sincerely appreciate it.
Unfortunately, there's been so many emails and messages that I haven't had the ability to respond to everyone, despite my best attempts. Many of them contained questions -- and I hate not being able to respond to all the questions I get! So, I wanted to start a thread to give everyone an opportunity to ask questions -- and since I get many of the same questions over and over, I thought this might be a good resource for future questions I may get.
Anyway, if you have any questions about the Flipping/Estimating books, about any aspects of real estate strategies, about investing in general, about running a real estate business (or any business), etc., I'm happy to do my best to answer.
There are a lot of tremendously knowledgeable people on this forum, so don't post here if you have a question best answered by the whole community.
But, if you want to address something specifically towards me, this is the place! Feel free to post in this thread and I'll do my best to respond to everyone!
Also note that I created this thread a few years back -- might be worth checking first to see if I've answered it there:
Scott: My sister's boyfriend is remodeling my kitchen right now. My plan is, after a family reunion in early August, I will rent my entire house out and find another, smaller property to live in. This is the first and only one property that I have for now.
I did not have this guy pull any permit. This guy has been a sub to his GC for the last 14 years doing everything you could imagine: roofing, electrical, plumbing, HVAC, exterior waterproofing and he also takes on jobs on referrals. I expect the remodeling to be done in 3 weeks max. He has an electrical license but not one for plumbing, but he did a beautiful plumbing job in my kitchen.
My question is: Could there be any problem down the road when I need to apply for a rental permit with the city, due to the fact that no permit has been pulled/granted? My house is located in the city of Rockville, MD.
Originally posted by @Huong T Nguyen:
Scott: My sister's boyfriend is remodeling my kitchen right now. My plan is, after a family reunion in early August, I will rent my entire house out and find another, smaller property to live in. This is the first and only one property that I have for now.
I did not have this guy pull any permit. This guy has been a sub to his GC for the last 14 years doing everything you could imagine: roofing, electrical, plumbing, HVAC, exterior waterproofing and he also takes on jobs on referrals. I expect the remodeling to be done in 3 weeks max. He has an electrical license but not one for plumbing, but he did a beautiful plumbing job in my kitchen.
My question is: Could there be any problem down the road when I need to apply for a rental permit with the city, due to the fact that no permit has been pulled/granted? My house is located in the city of Rockville, MD.
I don't know what's required to be disclosed for a rental license in Rockville (@Russell Brazil, any idea?), but this could certainly be an issue when you eventually go to sell...
The Maryland Property Disclosure Statement has the following question:
Unless you plan to lie, you're going to have to disclose that the kitchen remodel was done without permits. That poses two risks:
1. The buyer won't move forward or will require you to retroactively pull permits for the work; and/or
2. The lender/appraiser will flag this and not move forward with the loan unless/until you retroactively pull permits.
Personally, I'd do it now, while it's still relatively easy. But, if you don't, you should at least have a plan in place for when you go to sell...
Originally posted by @J Scott:
Originally posted by @Huong T Nguyen:
Scott: My sister's boyfriend is remodeling my kitchen right now. My plan is, after a family reunion in early August, I will rent my entire house out and find another, smaller property to live in. This is the first and only one property that I have for now.
I did not have this guy pull any permit. This guy has been a sub to his GC for the last 14 years doing everything you could imagine: roofing, electrical, plumbing, HVAC, exterior waterproofing and he also takes on jobs on referrals. I expect the remodeling to be done in 3 weeks max. He has an electrical license but not one for plumbing, but he did a beautiful plumbing job in my kitchen.
My question is: Could there be any problem down the road when I need to apply for a rental permit with the city, due to the fact that no permit has been pulled/granted? My house is located in the city of Rockville, MD.
I don't know what's required to be disclosed for a rental license in Rockville (@Russell Brazil, any idea?), but this could certainly be an issue when you eventually go to sell...
The Maryland Property Disclosure Statement has the following question:
Unless you plan to lie, you're going to have to disclose that the kitchen remodel was done without permits. That poses two risks:
1. The buyer won't move forward or will require you to retroactively pull permits for the work; and/or
2. The lender/appraiser will flag this and not move forward with the loan unless/until you retroactively pull permits.
Personally, I'd do it now, while it's still relatively easy. But, if you don't, you should at least have a plan in place for when you go to sell...
You just disclose that the job was done w/o permits. The demand in Rockville is high enough, and so much work has been done w/o permits that buyers by and large dont care. Addition of a bathroom w/o permit is slightly bigger deal in that then there is a discrepancy from actual to the tax records, that a lender might look into...but thats rare.
The only real concern is a fine from the city/county if they find you mid construction doing the worl w/o permits. Remember the county govt and all its inspectors are located in Rockville, so they will often see a work truck and pop into what they suspect is a job happening w/o permits.
I bet 75% of properties I sell in the area have at least some work done that the proper permits were not pulled. DC it is a much larger concern.
and rental wise...nothing comes up. Rental, you just pay your yearly rental license fee and thats it.
Originally posted by @Russell Brazil:
Originally posted by @J Scott:
Originally posted by @Huong T Nguyen:
Scott: My sister's boyfriend is remodeling my kitchen right now. My plan is, after a family reunion in early August, I will rent my entire house out and find another, smaller property to live in. This is the first and only one property that I have for now.
I did not have this guy pull any permit. This guy has been a sub to his GC for the last 14 years doing everything you could imagine: roofing, electrical, plumbing, HVAC, exterior waterproofing and he also takes on jobs on referrals. I expect the remodeling to be done in 3 weeks max. He has an electrical license but not one for plumbing, but he did a beautiful plumbing job in my kitchen.
My question is: Could there be any problem down the road when I need to apply for a rental permit with the city, due to the fact that no permit has been pulled/granted? My house is located in the city of Rockville, MD.
I don't know what's required to be disclosed for a rental license in Rockville (@Russell Brazil, any idea?), but this could certainly be an issue when you eventually go to sell...
The Maryland Property Disclosure Statement has the following question:
Unless you plan to lie, you're going to have to disclose that the kitchen remodel was done without permits. That poses two risks:
1. The buyer won't move forward or will require you to retroactively pull permits for the work; and/or
2. The lender/appraiser will flag this and not move forward with the loan unless/until you retroactively pull permits.
Personally, I'd do it now, while it's still relatively easy. But, if you don't, you should at least have a plan in place for when you go to sell...
You just disclose that the job was done w/o permits. The demand in Rockville is high enough, and so much work has been done w/o permits that buyers by and large dont care. Addition of a bathroom w/o permit is slightly bigger deal in that then there is a discrepancy from actual to the tax records, that a lender might look into...but thats rare.
The only real concern is a fine from the city/county if they find you mid construction doing the worl w/o permits. Remember the county govt and all its inspectors are located in Rockville, so they will often see a work truck and pop into what they suspect is a job happening w/o permits.
I bet 75% of properties I sell in the area have at least some work done that the proper permits were not pulled. DC it is a much larger concern.
Great info...thanks Russell!
This is a good reminder that real estate has a lot of VERY LOCAL components to it. I live 30 minutes north of there, and in my county, if you disclose that work was done without permits, buyers will walk unless that information is factored into the price. I've seen differing results in other states/counties as well (and have seen loans not go through because of it), but I'm probably more conservative about that kind of stuff than most people...
@J Scott
Do you have any recommendations for me on how to do put a professional cash offer proposal letter together and send to a bank for an REO listing? (What kinda of formate? Template?
They are starting to crack down on this.
From Forbes "Abuse of the tax benefits of conservation easements has reached a fever pitch as easement donations are now syndicated at multiples of nine to one and above. Put $100,000 into the syndication black box and take out a charitable contribution of $900,000 a year or two later. And wrap yourself in a green flag to defend the travesty."
Originally posted by @Michael Burch:
I have looked at some houses that I am interested in flipping. The big reason that I am hesitant is because I look at the comps which seem good but I don't feel as though I know what type of rehab I should do to the houses to make them worth what the comps are. Any help for a new guy would be awesome!
It can be very helpful to pay for an interior designer's consultation on a project.
The Ask Me Anything question I am curious about is what is your mix of income in recent years re: flipping vs book sales?
Originally posted by @Jeremy Roach:
@J Scott
Do you have any recommendations for me on how to do put a professional cash offer proposal letter together and send to a bank for an REO listing? (What kinda of formate? Template?
I assume this is a small bank or a bank you have a relationship with. Otherwise, you'll want to go through the listing agent instead.
Ultimately, the bank is going to want a state-approved contract, along with their addenda. My recommendation would be to use a state-approved contract to submit your offer.
Thanks so much for your quick reply and insightful advice. I have just found out that in Rockville MD, homeowner can apply for a permit and then do the work him/herself, so I will let you know if I would be able to pull the permit myself.
Now that you live in Maryland, could you please give me an idea how much labor costs for a gut reno of a 9'x12' kitchen in the DC Metro area, and the cost of roof architectural shingle replacement (both materials and labor) for a 12 -square roof?
I bought your 2 books in 2015 under a different moniker. Extremely helpful and I think I will buy the new books soon.
Originally posted by @Eric M.:
They are starting to crack down on this.
From Forbes "Abuse of the tax benefits of conservation easements has reached a fever pitch as easement donations are now syndicated at multiples of nine to one and above. Put $100,000 into the syndication black box and take out a charitable contribution of $900,000 a year or two later. And wrap yourself in a green flag to defend the travesty."
Absolutely... If you're not dealing with a reputable syndicator or if you're doing syndications where the appraised values don't support the deductions being offered by the investment, you're going to risk taking a big hit in the audit. This is why I don't recommend conservation easements to most people, and the ones that I do recommend them to both:
- Understand the risks associated with these types of investments; and
- Have the ability to scrutinize the Prospectus and the investment deal being offered to be comfortable that it's not over-promising on what it's delivering.
If you're not in the position to do both of the above, my recommendation is DO NOT investment in conservation easements or other real estate tax shelters.
Btw, I'm starting to see these 7:1, 8:1 and even 9:1 deals. Crazy. I've not invested in anything greater than 4.5:1 and most of mine are 4:1.
Also note that these investment vehicles are only available to accredited investors, so that should cut down a bit on people doing bad investments. Finally, note that apparently there are a lot of people in Congress who use conservation easements as their preferred tax shelter, so it's probably less likely that they'll ever be outlawed... :-)
All that said, I'm not a tax or legal professional, so don't take my word for any of this!
Russeel Brazil: Thanks so much! Great info!
As long as the work is done inside my home, without any change to the footprint of my house, which is not known as vacant property to the city, and no sign of my roof getting raised, I guess there is no reason for the city inspector to pop his head in and ask me what is going on.
Thanks! I did use a template off of a website service called Lawdepot.com. I am learning as I go.
Could an attorney handle things like submitting documents and offers? Also one more question from your experience, so it is a small bank and they are not using a listing agent. I am working with a real estate agent for my other research and shared the location of this off-market REO. Is she allowed to share that information with other investors? and steal the deal? or are Real Estate agents sworn to some clients privacy information?
Originally posted by @Eric M.:
The Ask Me Anything question I am curious about is what is your mix of income in recent years re: flipping vs book sales?
I feel like people ask me this question a lot just to see if I'll answer it... :-)
As my accountant can attest, it changes by a LOT every year -- I get bored easily and change up what I focus on pretty often (shiny object syndrome, but in a good way, I believe). So there's no "average" of how my income breaks down each year, but happy to provide as best an answer as I can...
In terms of books... Book income has been pretty steady the past 5 years, even as I write more books. That's because the new books provide a "pop" in income, while the older books are generally selling less year over year. Book income is certainly a passive income vehicle that I hope to use long-term (along with buy-and-hold real estate). I didn't write anything between 2013 and 2017 because I was burned out from writing, but I really felt like writing last year, so I did a bunch of it.
In terms of flipping... Our flipping income increased from 2008 through 2015, and has been dropping since then, simply because I haven't had the desire to work harder to keep up the income (deals are obviously tougher these days). Most of our flipping income these days comes through partnerships with other investors who are doing the bulk of the work. Our other real estate income has increased from 2015 through now -- this include rental/multi-family income, lending/note income, partnership income, etc.
In general... For the past several years, up until last year, books made up about 30% of our total income. The other 70% was real estate (see above), other investments (business investments, racehorses, etc.) and other business income (non real estate businesses we run).
Last year, I really felt like writing, so I took most of the year off from doing active real estate to focus on writing (update the flipping/estimating books, update my negotiating book and write a book on economic cycles) and some other business stuff. So, last year, income percentage from the books was much higher (over 50%).
This year, I'm hoping to finish up writing in the next 2 months (I'm tired of writing again, but have one more commitment to complete) and then not write anything new for at least another year or two. In the near-term, we're focused on building a note portfolio and are hoping to pick up a bunch more rentals or multi-family deals this year. I don't expect we'll be doing much flipping. And my wife and I are excited about a new business we'll be launching in a few months (a passion project that's real estate related). The last passion project business I started (outside of real estate) lost a lot of money; hopefully this one will go better... :)
Originally posted by @Huong T Nguyen:
Russeel Brazil: Thanks so much! Great info!
As long as the work is done inside my home, without any change to the footprint of my house, which is not known as vacant property to the city, and no sign of my roof getting raised, I guess there is no reason for the city inspector to pop his head in and ask me what is going on.
Again, can't speak for Russell's area, but in my county (and in one or two other places I've invested), it's not crazy for inspectors to see a 30 yard dumpster and knock on the door to see what's going on or to put up a stop work order if there are no permits. Certainly not common (never happened to me), but it happened to another BP member I know here (I won't mention his name here)...
Originally posted by @Jeremy Roach:
Thanks! I did use a template off of a website service called Lawdepot.com. I am learning as I go.
Could an attorney handle things like submitting documents and offers? Also one more question from your experience, so it is a small bank and they are not using a listing agent. I am working with a real estate agent for my other research and shared the location of this off-market REO. Is she allowed to share that information with other investors? and steal the deal? or are Real Estate agents sworn to some clients privacy information?
Note that I've purchased a few REOs directly from small banks, but I certainly haven't done enough to call myself an expert on this. Perhaps other banks work differently than the couple that I've worked with...
That said, typically, if you're working with a small bank on REO deals that aren't being publicly listed, you're going to be working directly with their VP of Commercial Real Estate (or someone who works for that person). You should be able to talk to this person directly and handle negotiations in an informal manner. When you come to an agreement, they'll have a contract/addenda for you to sign.
Not sure why you'd be submitting offers through an attorney for something like this, unless we're talking about a bulk package or a really large deal that would start with an LOI and some more formal negotiations.
Can you provide more info on the situation?
Originally posted by @J Scott:
Originally posted by @Huong T Nguyen:
Russeel Brazil: Thanks so much! Great info!
As long as the work is done inside my home, without any change to the footprint of my house, which is not known as vacant property to the city, and no sign of my roof getting raised, I guess there is no reason for the city inspector to pop his head in and ask me what is going on.
Again, can't speak for Russell's area, but in my county (and in one or two other places I've invested), it's not crazy for inspectors to see a 30 yard dumpster and knock on the door to see what's going on or to put up a stop work order if there are no permits. Certainly not common (never happened to me), but it happened to another BP member I know here (I won't mention his name here)...
Thanks. I don't have a dumpster in my driveway. I can call the city trash collector to come and collect bulk trash 6 times a year for free, each time no more than 500 lbs in theory. i know that quota is not a lot but my kitchen is small so that is what I am doing now. I know the city might give me a warning if my neighbor complains about construction debris lying in my backyard as part of it is still visible from the street.
As a government contractor being affected by the shutdown for almost the entire month of January, I am not taking in any income at the time when I need to spend a lot of money on my kitchen, I am counting every penny I have in my pocket right now.
Originally posted by @J Scott:
Originally posted by @Huong T Nguyen:
Russeel Brazil: Thanks so much! Great info!
As long as the work is done inside my home, without any change to the footprint of my house, which is not known as vacant property to the city, and no sign of my roof getting raised, I guess there is no reason for the city inspector to pop his head in and ask me what is going on.
Again, can't speak for Russell's area, but in my county (and in one or two other places I've invested), it's not crazy for inspectors to see a 30 yard dumpster and knock on the door to see what's going on or to put up a stop work order if there are no permits. Certainly not common (never happened to me), but it happened to another BP member I know here (I won't mention his name here)...
It can take just a work van outside of the house and the contractor carrying something into the house in Rockville to get an inspectors attention. It becomes less a problem, as you move to locations in the county further away from Rockville (further from where the inspectors are very day) or where houses get further apart, so they arnt right next door and wondering whats that work van doing next door.
Now you go to DC, just a few miles south....and there the inspectors are actively out looking for people to fine. They literally will go to some neighborhoods where a lot of renovations are taking place like Petworth/Brightwood and drive up and down every street looking for work being done, and fine you. One day a few months ago, I think they gave out $250k in fines in 1 day in DC. DC at times may make you tear things out that were not permitted either. MoCo that doesnt happen. I have a screened in porch addition on one of my rental properties that is unpermitted and no one cares at all.
MoCo though, you have some hard *** inspectors and some who dont care at all. Ive literally had properties pass a final permitting inspection where there were things that didnt meet code, and the inspector was like fix those things, I say ok, he finals me and I never fix those items. DC is harder, PG County is harder. Frederick is easier than any of the aforementioned. Ive never owned, or renovated in HoCo where J is the next county over, so I dont know how strict they are.
Originally posted by @Russell Brazil:
Howard County has some of the nicest inspectors I've ever worked with (with the exception of the electrical inspectors, who are the bane of my existence)...
More details: Met with a banker about getting a loan for a different property. I then have asked, " hey do you have any REO's" He showed his list and I told the banker that I would take one of the listed properties for cash. He then went on to tell me that all I have to do is put in an offer via email. That they have a comity meeting once a week and that is when they will review my offer to either accept it or counter offer it. I have submitted it and now I'm just waiting to hear back. But my question is also if I shared the address to this property that is off the market with my realtor, is she legally allowed to give that address info to a friend or colleague investor? Or are they bound to keep our conversations confidential?
Originally posted by @Jeremy Roach:
More details: Met with a banker about getting a loan for a different property. I then have asked, " hey do you have any REO's" He showed his list and I told the banker that I would take one of the listed properties for cash. He then went on to tell me that all I have to do is put in an offer via email. That they have a comity meeting once a week and that is when they will review my offer to either accept it or counter offer it. I have submitted it and now I'm just waiting to hear back. But my question is also if I shared the address to this property that is off the market with my realtor, is she legally allowed to give that address info to a friend or colleague investor? Or are they bound to keep our conversations confidential?
Got it. Sounds like they don't need anything formal -- at very most, a state contract.
As for whether your agent can steal the deal, I don't know the legal answer to that question. Certainly, I don't believe she is legally bound to keep this information confidential. But, if you have a Buyer Brokerage Agreement signed with her, she does have a fiduciary responsibility to you. And I would *guess* that this responsibility would extend to not taking a deal you're pursuing (that you found) and disclosing it to another investor without your permission.
Again, I don't know from a legal perspective (perhaps read your agreement and see what it says), but I can't imagine a good agent would do this.
THIS MAY BE A QUESTION WORTH POSING IN THE BROADER FORUMS...
Thanks, J Scott, you have been extremely helpful. What is this "state contract" that you are referring to?
Originally posted by @Jeremy Roach:
Thanks, J Scott, you have been extremely helpful. What is this "state contract" that you are referring to?
Every state has a formal contract that Realtors use (some states have multiple contracts or different versions for different Realtor associations). Real estate agents and banks who sell REOs are accustomed to these contracts, because they use them every day. I imagine most/all local banks that sell REOs will eventually expect the deal to be written up on a state-approved contract, so if you start with this, the agent/bank won't have to rewrite anything on a different contract or ask you to supply a different contract.
Technically, only agents should have access to these contracts, but they are generally floating around out there and I bet if you ask another investor or an agent, they can provide you a blank one that you can use to submit your offers.
@J Scott, you really came through for me! I thank you very much, and I will post on the forums if & when I pull off this deal! I'm really hoping that this one will help get me some start-up capital to pursue my path to purchasing multifamily homes.