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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:
Do you cover dealing with asbestos and lead, including finding a good environmental consultant and good remediation contractors? Some flippers just were hit with almost $800,000 in fines for improper removal of asbestos cement siding on one house:
https://ohsonline.com/articles/2019/01/25/asbestos-violations.aspx?admgarea=news&m=1
Originally posted by @Stephen Masek:
Do you cover dealing with asbestos and lead, including finding a good environmental consultant and good remediation contractors? Some flippers just were hit with almost $800,000 in fines for improper removal of asbestos cement siding on one house:
I do not go into detail on asbestos, lead or other hazardous materials, simply because federal laws are constantly changing and some states actually have more restrictive laws than the federal laws.
I do recommend (always!) that any hazardous materials be dealt with legally and in compliance with all state and federal regulations. We will always bring in licensed companies when dealing with asbestos and lead paint -- both of which are a big issue in some areas where I rehab (Baltimore, for example).
In terms of cost, I recommend getting several bids -- some companies will certainly try to take advantage if they believe you don't understand the regulations and costs of remediation.
I am wanting to generate leads for houses for me to buy as flips. I'd like to develop marketing that would get people to call me when they need to sell their homes quickly. I'd sure appreciate any ideas you may have for that!Thanks
Originally posted by @Jill Thomas:I am wanting to generate leads for houses for me to buy as flips. I'd like to develop marketing that would get people to call me when they need to sell their homes quickly. I'd sure appreciate any ideas you may have for that!Thanks
Have you read The Book on Flipping Houses?
In addition, there is a ton of great information in the forums (I know I've responded to this question at least a dozen times)...do a search and you'll find a lot of great info!
Thanks. Will do!
Ask you anything eh? Ok awesome! And thank you in advance. I seem to remember you saying that you did some new builds so here's is the situation....
I am doing a ground up build of 2 townhouses. We dug the foundation, the pad was all set to go, the exact correct elevation etc... and then it rained like crazy for the better part of a month and now the whole site has turned into a rutty claylike mess with a ton of water in it. You sink in about 2 inches when standing in it. I pumped out as much water as I could but it's very hard to maneuver out there and impossible to get it all out.
My foundation guy says he can't do the forms for the footings until the site drys out and it gets back to normal but now there's more rain in the forecast!
I've heard and read that the following is possible solution.... I dig the whole site out with a backhoe, (clay, water and all) export all that out of there, bring the whole thing down another six inches, then have the foundation guy do his form work and then fill the whole foundation hole with six inches of self compacting 3/4 inch stone.
Have you ever encountered this?
Do you think this is the right move?
thank you again
Originally posted by @Nicholas Lohr:Ask you anything eh? Ok awesome! And thank you in advance. I seem to remember you saying that you did some new builds so here's is the situation....
I am doing a ground up build of 2 townhouses. We dug the foundation, the pad was all set to go, the exact correct elevation etc... and then it rained like crazy for the better part of a month and now the whole site has turned into a rutty claylike mess with a ton of water in it. You sink in about 2 inches when standing in it. I pumped out as much water as I could but it's very hard to maneuver out there and impossible to get it all out.
My foundation guy says he can't do the forms for the footings until the site drys out and it gets back to normal but now there's more rain in the forecast!
I've heard and read that the following is possible solution.... I dig the whole site out with a backhoe, (clay, water and all) export all that out of there, bring the whole thing down another six inches, then have the foundation guy do his form work and then fill the whole foundation hole with six inches of self compacting 3/4 inch stone.
Have you ever encountered this?
Do you think this is the right move?
thank you again
Unfortunately (or fortunately), this isn't my area of expertise. And this is important enough that even if I had an idea of the right answer, I wouldn't want you to listen to me over your foundation guy (or anyone else on your crew).
What does your foundation guy say?
Would you fill the stone before your footing inspection? If so, what does the inspector say?
Do you have a GC on the job? What does he say?
Sorry I can't give more advice, but I'd rather say nothing than say something wrong!
Ok thanks anyway J, I appreciate the honesty, I saw this thread and just thought I'd throw it out there to you. I'm the "GC" actually. I'll get it sorted. Thanks for the book btw! I read it a couple years back.
Perhaps BP need a New Construction forum category?
Originally posted by @Nicholas Lohr:
Ok thanks anyway J, I appreciate the honesty, I saw this thread and just thought I'd throw it out there to you. I'm the "GC" actually. I'll get it sorted. Thanks for the book btw! I read it a couple years back.
Perhaps BP need a New Construction forum category?
There is a development in new home construction forum BiggerPockets. I would suggest posting there!
Out of every 100 houses that you look at, how many do you close on and how many do you put offers on?
Hi Jay,
I'm looking for my first multi family buy and hold property and I'm wondering if I should use a traditional loan for the financing and start slow or should I make a more powerful move and use 200,000 in home equity for joint ventures to build more capital and buying power?
Originally posted by @Wesley Davis:
Out of every 100 houses that you look at, how many do you close on and how many do you put offers on?
Just to give you an idea of how the market changes, back in 2008-2010, I was probably offering on 40-50 out of 100 (that we physically looked at) and closed on 15-20 out of a 100.
These days, I don't look at a lot of properties (most of my deals are partnerships and my partners are doing the acquisition stuff), but I'd probably say we're putting offers on about 15-20 out of 100 (that are physically looked at) and closing on less than 5 out of 100.
The other big difference is that 10 years ago, we probably looked at about 25% of all deals that came across my desk. These days, I probably discard about 95-98% of them without even considering going to look.
Again, those are rough numbers (for today) since we're not buying a lot of deals ourselves. But, talking to our partners and going through the deals that we are doing due diligence ourselves, that's about where we are. It's a tough market to be buying these days...
Now, if you asked me about the resale side -- the numbers are probably reversed. Used to take 5 offers before we found a buyer who was qualified to actually buy! :)
Originally posted by @Brandon Thomas:
Hi Jay,
I'm looking for my first multi family buy and hold property and I'm wondering if I should use a traditional loan for the financing and start slow or should I make a more powerful move and use 200,000 in home equity for joint ventures to build more capital and buying power?
What does how you finance the first house have to do with how quickly or aggressively you scale?
You can buy the first with a traditional loan and then the second with the HELOC. Or vice-versa.
You can scale quickly or slowly.
Unless there is something specific with your financing plan or situation, the two are likely independent decisions that won't bear on each other. (And if there's something here I'm missing, let me know!)
My suggestion is two-fold:
1. Figure out your goals. From there, figure out a step-by-step plan. Does that plan have you buying one property this year or 10? Does it have you buying duplexes or apartments? Does it require partners or can you do it on your own?
2. Once you have a plan, start looking for properties. Once you have a deal (or multiple deals) that meet your goals/plan, then make a decision on financing based on the specific property(s) and situation.
Long story short, it sounds like you're in a good position -- you have two viable financing options, so I don't see any rush to make the financing decision before you know what you want to buy and what your plan is...
Just my $.02!
If I create and fund an LLC to lend 100% to me to buy real estate and light renovate and rent it out. If I come to the bank for refinance to buy other property in less than 6 months will the bank appraise base on appraisal value or the cost to buy and renovate?
Originally posted by @John Lee:
If I create and fund an LLC to lend 100% to me to buy real estate and light renovate and rent it out. If I come to the bank for refinance to buy other property in less than 6 months will the bank appraise base on appraisal value or the cost to buy and renovate?
Hey John,
A couple things here:
- Why are you creating an LLC to lend to you personally? I'm not a tax or legal professional, but I don't know of any tax or liability advantages to going this route. Either you should fund the LLC and then purchase the property in that LLC (if you want the LLC to own it). Or just fund the deal personally and buy it in your name (if you want to own it in your personal name). In terms of which way to go, I would talk to a good tax professional and a good attorney, and also refer to my next point...
- Some banks will only lend to LLCs (these are the small banks, often referred to as portfolio lenders). Some banks will only lend to you personally (specifically if you're trying to get a conforming/conventional loan). You should figure out which type of bank/loan you'll likely be dealing with, and then hold title to the property in the entity that you will likely be trying to get funding with. If you'll be working with a bank the lends to LLCs, hold the property in an LLC. If you'll be working with a lender who will only lend in your own personal name, then you probably want to buy in your name.
- In terms of how much the bank will lend, again it will depend on the type of bank and type of loan. But, GENERALLY, you'll find that a lot of banks will require 6 months of seasoning (meaning you'll have to have owned the property for 6 months) before they will lend based on a new appraisal. Before 6 months, they will lend based off the purchase and renovation costs (or maybe just the purchase costs). That's a general statement -- you may be able to find banks that have different rules.
Originally posted by @J Scott:
Originally posted by @John Lee:If I create and fund an LLC to lend 100% to me to buy real estate and light renovate and rent it out. If I come to the bank for refinance to buy other property in less than 6 months will the bank appraise base on appraisal value or the cost to buy and renovate?
Hey John,
A couple things here:
- Why are you creating an LLC to lend to you personally? I'm not a tax or legal professional, but I don't know of any tax or liability advantages to going this route. Either you should fund the LLC and then purchase the property in that LLC (if you want the LLC to own it). Or just fund the deal personally and buy it in your name (if you want to own it in your personal name). In terms of which way to go, I would talk to a good tax professional and a good attorney, and also refer to my next point...
- Some banks will only lend to LLCs (these are the small banks, often referred to as portfolio lenders). Some banks will only lend to you personally (specifically if you're trying to get a conforming/conventional loan). You should figure out which type of bank/loan you'll likely be dealing with, and then hold title to the property in the entity that you will likely be trying to get funding with. If you'll be working with a bank the lends to LLCs, hold the property in an LLC. If you'll be working with a lender who will only lend in your own personal name, then you probably want to buy in your name.- In terms of how much the bank will lend, again it will depend on the type of bank and type of loan. But, GENERALLY, you'll find that a lot of banks will require 6 months of seasoning (meaning you'll have to have owned the property for 6 months) before they will lend based on a new appraisal. Before 6 months, they will lend based off the purchase and renovation costs (or maybe just the purchase costs). That's a general statement -- you may be able to find banks that have different rules.
Planning to use the LLC as my private lender/bank, so the LLC would give me the mortgage with renovation cost. When I come to the bank to refinance, they will refinance an existing mortgage rather than just give me refinance to cash out a cash purchase
Originally posted by @John Lee:
Planning to use the LLC as my private lender/bank, so the LLC would give me the mortgage with renovation cost. When I come to the bank to refinance, they will refinance an existing mortgage rather than just give me refinance to cash out a cash purchase
Why do you think a bank would rather refinance money come from a business entity versus refinancing money that came out of your own pocket? In my experience, this is all the same to the bank doing the refinance.
The bigger question is whether they want to lend to a business entity or to your personally.
This is base on someone post in the forum
"3. HOW TO PROPERLY STRUCTURE BUYING A HOME WITH CASH
With these rules, you can see how it can be confusing to get conventional lending when buying a home with cash but there is absolutely a proper method to structuring your deals when buying cash. Here’s the secret:
Create an LLC and have the LLC lend you a mortgage on the property you are receiving.
The reason why this works is because instead of you needing cash or receiving a cash out loan, we are now refinancing a loan – your loan. There no reason to wait any time or have any “whichever is lower” rule come into play. We are just refinancing a loan.
Here’s how it works:
You create an LLC
You buy a home
Your LLC gives you a loan for the home
You file the deed for that loan at the county courthouse
You use the money from the LLC to buy and fix up the property
Once the property is completed, your conventional lender comes to refinance the loan
Your conventional lender runs title and sees there is a loan.
Your conventional lender refinances you into a new loan, and cuts a check to your LLC in the amount of 75% of the value.
Please don't confuse this 75% with a "cash out" amount. The non-cash out LTV on a refinance is also 75%. We are refinancing a mortgage. Your LLC's mortgage. Essentially your LLC has become the bank/hard money lender/etc. However you want to think about it. You get to set the interest rate (it can be 0%) and you get your investment amount back sooner.
Some things to think of:
To file a deed at the county courthouse is $100-$150 in cost (depending on which county)
And you want that note to be pretty close to 70% of the ARV for the property if you don't want to bring any money to closing. 70% will allow you to roll in your closing costs. If you want it to be at 75% just keep in mind you would need to bring your closing costs out of your pocket to complete the refinance."
Originally posted by @John Lee:
This is base on someone post in the forum
"3. HOW TO PROPERLY STRUCTURE BUYING A HOME WITH CASH
With these rules, you can see how it can be confusing to get conventional lending when buying a home with cash but there is absolutely a proper method to structuring your deals when buying cash. Here’s the secret:
Create an LLC and have the LLC lend you a mortgage on the property you are receiving.
The reason why this works is because instead of you needing cash or receiving a cash out loan, we are now refinancing a loan – your loan. There no reason to wait any time or have any “whichever is lower” rule come into play. We are just refinancing a loan.
Here’s how it works:
You create an LLC
You buy a home
Your LLC gives you a loan for the home
You file the deed for that loan at the county courthouse
You use the money from the LLC to buy and fix up the property
Once the property is completed, your conventional lender comes to refinance the loan
Your conventional lender runs title and sees there is a loan.
Your conventional lender refinances you into a new loan, and cuts a check to your LLC in the amount of 75% of the value.
Please don't confuse this 75% with a "cash out" amount. The non-cash out LTV on a refinance is also 75%. We are refinancing a mortgage. Your LLC's mortgage. Essentially your LLC has become the bank/hard money lender/etc. However you want to think about it. You get to set the interest rate (it can be 0%) and you get your investment amount back sooner.
Some things to think of:
To file a deed at the county courthouse is $100-$150 in cost (depending on which county)
And you want that note to be pretty close to 70% of the ARV for the property if you don't want to bring any money to closing. 70% will allow you to roll in your closing costs. If you want it to be at 75% just keep in mind you would need to bring your closing costs out of your pocket to complete the refinance."
Is he saying that by doing it this way, you can get around the 6 month seasoning rule for cash-out with a new appraisal? In my experience, this seasoning rule is in place regardless of whether you've used your own cash or taken out a mortgage. In fact, I do a good bit of lending, and I don't believe any of my borrowers have gotten around this 6 month seasoning simply based on the fact that they have a mortgage with me.
I don't know who wrote this, or if he's trying to solve a different problem.
He mentions at the beginning, "...you can see how it can be confusing to get conventional lending when buying a home with cash..."
Is he recommending this method because it's LESS confusing? Personally, I think this way is more confusing for the average investor.
Or is he recommending this way for a different reason? Perhaps you can ask him what his intent with post was...that might clarify things.
@J Scott
I own and have found both of your books extremely helpful!
My apologies if this topic is covered elsewhere. If so, feel free to point me to it.
We are about to acquire a 21 unit multi-family residential building in Chicago built c. 1970, and are exploring options for updating the HVAC.
There is currently a hot water boiler (three actually, and the original ones) for baseboard heat common to the whole building. Also, there are common domestic hot water tanks (gas paid by the owner), and a single gas meter so all tenants' cooking gas is paid by the owner as well.
We are exploring options for reducing the high gas-utility expense. Ideally, all of the tenants would pay for their own gas use (they are currently metered individually for electricity). The cost of doing so is the main question we are exploring.
The main unknown: the logistics/cost of running individual gas lines to each unit and giving each a separate gas meter.
Here are some of the options we are considering:
1) Keep the system basically as is, but update it for greater energy efficiency.
- Install two new high efficiency condensing boilers, and update windows and insulation for better heat loss performance.
PROS - a) minimally invasive; b) can provide 15-30% reduction in heating costs (we are told).
CONS - a)total gas expense is still paid by the landlord; b) individual units won't have individual control (except for a thermostat controlled shutoff valve for heat/water in each unit); c) AC would be available on with in wall/window units.
2) Try to individually meter each units' gas and provide each with a traditional forced air heating/cooling system.
PROS: a)gas expense could be completely removed for landlord (huge)- even tankless hot water could be installed in each unit; b) each unit would have their own climate control.
CONS: a) constructions costs of running new gas lines and soffiting sheet metal duct work. b) highly invasive with collateral construction costs; c) future costs of maintenance on multiple systems vs a single building-wide system.
3) An electric based heating system
- This is tricky in my mind because of the high cost of electric heat. We live in Chicago with harsh winters and expensive electric supply costs. I can't imagine shouldering that expense as a tenant, although I've been told that there are a number of nice buildings that utilize primarily electric heat.
- Also, we would have to run 220 lines to each unit.
4) Mini-split system.
PROS: a) minimally invasive; b) individual unit and in-unit-zone control; c) high efficiency
CONS: a) given Chicago's extreme cold snaps in winter, they cannot be (according to code) used as a "primary" heat source.
- One possible solution would be to keep the existing boiler/baseboard system for backup and/or use in extreme cold (possibly triggered by an outside temperature sensor). Then, of course, we haven't eliminated the heating gas expense, only reduced it. To what extent, is the question.
- Another solution would be to supply supplemental heat via electric baseboard heaters.
There a few moving parts to figure out here.
I'm sure that many people have experience with this very issue, and I'd love to hear about it!~
Thanks!
Originally posted by @Andrew Syrios:
Originally posted by @J Scott:Originally posted by @Andrew Syrios:
If you get scarred half to death and then get scarred half to death again, do you die?
Did I miss something???
An extremely stupid joke perhaps.
And not knowing how to spell the word scared killed the joke too
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!
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!
If you're looking at good comps, those should tell you what type of rehab you should be doing to attain that value. Remember, comps are houses that are similar, in similar condition and located in the vicinity of yours. If another house is like yours and in the area, in order for you to achieve the same resale value, you need to have similar condition. If your comps have hardwood and granite, you'll need something like hardwood and granite to achieve the same value. If they have updated mechanicals, you'll need updated mechanicals. If they have finished basements, you should consider a finished basement. If they have a pool, you'll need a pool (or something of similar value). Etc.
Of course, your doesn't need to be exactly like those. But, if they have something that is worth resale value, you need either the same thing or something equivalent to achieve the same value (assuming the other aspects of the comp -- similar size, type, location, age, etc. -- are the same).
Comps don't mean, "This is what your house is worth..."
Comps mean, "If your house is like this one, then this is what your house is worth..."
Does that make sense?
Originally posted by @Vijay T.:
@J Scott
I own and have found both of your books extremely helpful!
My apologies if this topic is covered elsewhere. If so, feel free to point me to it.
We are about to acquire a 21 unit multi-family residential building in Chicago built c. 1970, and are exploring options for updating the HVAC.
There is currently a hot water boiler (three actually, and the original ones) for baseboard heat common to the whole building. Also, there are common domestic hot water tanks (gas paid by the owner), and a single gas meter so all tenants' cooking gas is paid by the owner as well.
We are exploring options for reducing the high gas-utility expense. Ideally, all of the tenants would pay for their own gas use (they are currently metered individually for electricity). The cost of doing so is the main question we are exploring.
The main unknown: the logistics/cost of running individual gas lines to each unit and giving each a separate gas meter.
Here are some of the options we are considering:
1) Keep the system basically as is, but update it for greater energy efficiency.
- Install two new high efficiency condensing boilers, and update windows and insulation for better heat loss performance.
PROS - a) minimally invasive; b) can provide 15-30% reduction in heating costs (we are told).
CONS - a)total gas expense is still paid by the landlord; b) individual units won't have individual control (except for a thermostat controlled shutoff valve for heat/water in each unit); c) AC would be available on with in wall/window units.
2) Try to individually meter each units' gas and provide each with a traditional forced air heating/cooling system.
PROS: a)gas expense could be completely removed for landlord (huge)- even tankless hot water could be installed in each unit; b) each unit would have their own climate control.
CONS: a) constructions costs of running new gas lines and soffiting sheet metal duct work. b) highly invasive with collateral construction costs; c) future costs of maintenance on multiple systems vs a single building-wide system.
3) An electric based heating system
- This is tricky in my mind because of the high cost of electric heat. We live in Chicago with harsh winters and expensive electric supply costs. I can't imagine shouldering that expense as a tenant, although I've been told that there are a number of nice buildings that utilize primarily electric heat.
- Also, we would have to run 220 lines to each unit.
4) Mini-split system.
PROS: a) minimally invasive; b) individual unit and in-unit-zone control; c) high efficiency
CONS: a) given Chicago's extreme cold snaps in winter, they cannot be (according to code) used as a "primary" heat source.
- One possible solution would be to keep the existing boiler/baseboard system for backup and/or use in extreme cold (possibly triggered by an outside temperature sensor). Then, of course, we haven't eliminated the heating gas expense, only reduced it. To what extent, is the question.
- Another solution would be to supply supplemental heat via electric baseboard heaters.
There a few moving parts to figure out here.
I'm sure that many people have experience with this very issue, and I'd love to hear about it!~
Thanks!
Hey Vijay,
Unfortunately, whether a whole lot more information, I wouldn't be able to tell you what the right solution is for this specific property.
My recommendation would be to sit down with a reputable HVAC contractor and explore your options.
Here are the things I'd want to know if I were you:
- What are the cost of each solution?
- What is the increased value to the NOI (or even the cap rate!)?
- What is the impact on the tenants?
- What are the risks?
Once you have all of this information, I imagine you'll be able to easily narrow the decision to one or two of those options, and hopefully one will stand out.