$6,000 out of pocket with Norada

[Aaron Henes]

Hi All,

I was looking at the $6,000 out of pocket deals that I discovered though NORADA real estate investors. Has anyone worked through this program and found success?

Thanks!

[Chris Depalma]

@Marco Santarelli How can it appraise at a value 25% more than I pay?  Why would n't you sell it for that price?

[Mark Vejnar]

Chris Depalma

It can appraise at a higher price because an appraiser will not view your purchase as a typical arms-length transaction because it is never exposed to the market. The appraisal will be based on market sales, market rents, and market cost to replace (simply put). Turn keys are not listed on the MLS so are not considered to have exposure to the market. Evidently current market sales, rents, and costs of properties comparable to the subject support a value 25% higher than the selling price of the subject.

It's important to note that the subject's low selling price has no adverse impact on values in the neighborhood. The subject is not considered an arms-length transaction and is therefore given no consideration when analyzing market trends. Simplified explanation but that's the reason it can appraise higher.

The key word is Market. Turnkey is off-market.

[Marco Santarelli]

@Chris Depalma-- that's a good and common question.

To rephrase your question, it might be better to ask, "How can I buy at 25% less than appraised value?"

The key to making this "low down" program work is for you to be able to purchase then refinance the property at a price that is about 25% below the appraised value.  That way you can use the equity in the property as the "down-payment" (the equity required to refinance the property without additional cash out-of-pocket).

The cash required to close (usually $5k to $7k) is the total of the closing costs and fees required for the program's financing.

Hope that helps.  If not let me know.

Continued success!

[Philip Sriployrung]

@Marco Santarelli 

This thread is a few months old, but are these deals still available? Please let me know.

[Marco Santarelli]

Hi @Philip Sriployrung,

Yes, these deals are still available.  In fact they've actually improved a little in terms of their location (neighborhoods). 

Coincidentally, we just released a podcast episode on this exact topic on Thursday.  You can listen to it here if you like:  

$6,000 Total Out-of-Pocket Turnkey Properties in Memphis

Feel free to contact one of our Investment Counselors anytime for more detailed information and available/upcoming inventory.

You can also visit our website for some of the available inventory.

Continued success!

[Philip Sriployrung]

Thanks @Marco Santarelli, I just completed the contact form on your site and will be listening to that podcast!

[William Hochstedler]

@Jay Hinrichs, @Marco Santarelli, @Michael Mcghee, et al

Is this discussion happening anywhere else on BP?

There's a lot of macro economic conversations about "bubbles" but I think it's really interesting to compare what's happening now with 2008. In Utah, we are definitely seeing a buyer panic and some irrational purchases for fear of missing opportunities. Unlike Marco's 75% LTV, we are seeing wholesalers in Salt Lake selling at 85% ARV (less repairs).

But hopefully I can add some value here with personal experience.  Other than institutional lenders turning off the spigots in May of 2007, our single biggest exposure and source of most of our problems was the quality of the property management.  At that time, we were doing it in house and didn't have the systems to manage our (small) portfolio.  We really didn't know what we were doing and 10-15% vacancy killed us.  So I can't stress enough vetting the property management companies on these types of investments.

What's different? In our market anyway, appraisers are very gun shy. We're not getting our appraisals to come in on these products. They will justify prices for VA and FHA loans, but not no-seasoning refi's. Just a few weeks ago, I challenged an appraiser to purchase a property at the price we were asking for if I gave him a briefcase full of cash. He admitted that he wouldn't be able to, but still had to stick with his backward looking guidelines that only justified the lower price. With all the new regulations and liability, I'm not seeing the same kind of reckless appraising that drove the lead up to the bust.

Jay mentioned having cash reserves to weather problems.  Banks require a minimum 6 months reserves for these products and it's a good guideline.  Don't cheat it.  I should also add that these loans are all full doc unlike the past.

Basically, if we're able to find properties that satisfy this strategy, we can sell them as-is for about the same margins as if we did the work. If we fix them up, they're pretty liquid at FMV. So it's difficult to conceive of selling them at these kinds of discounts.

So my question for Marco is, are you operating in markets where this strategy is not possible because of a lack of deals?  And, if so, how are you counseling clients given the choice?

Jay, you mentioned that you are starting to see softening in certain areas.  Where are you seeing this?

Thanks for the good discussion.  

[Jay Hinrichs]

@William Hochstedler  were I saw this model fail miserably for LA based investors was even though they are full doc.. the cash reserves that are there at the beginning.. investors get this irrational sense of security that their rents are going to come in like clock work that the homes are going to stay rented that their home will be taken care of like they would.. and the reserves end up getting spent on other things in their lives.. thereby wildling down their reserves.

YOu have a bad run... you need 5k to fix up and re rent... house is vacant for 3 month during the process... and if you don't have the funds your PM is noting going to front it for you.. and down the tube you go.

that's what I witnessed.. these were not speculators  these were people that thought their 100 to 200 a month positive were a given and could never change.. and they were woefully under capitalized. 

So my thoughts with this is use with extreme caution. .but I fear your going to have a bunch of WEst coast folks jump into this and if they have a bad run on tenant they will wish they never bought these .  remember payments may only be 400 a month at best.. 6 months reserves is a whopping 2400 dollars.. so someone theoretically with less than 10k in cash could get into these properties.. this William I personally think is highly dangerous for lender and for buyer... its not losing the 10k that's nothing its getting your personal credit trashed when you can't make the payments because you lost all your cash.

IMHO if you want to be in the rental game you need 20 to 30k liquid at anyone time that you don't have to borrower etc.. this will insulate you from taking a loss. as you build units of course its not exponential but you need a base.

And since this is not TRUE cash equity only paper equity there is no hope of selling them for a profit or what you have in them..  if you have a vacant home that needs to be liquidated.

[Marco Santarelli]

@William Hochstedler - good question.

Memphis is the only market where we are able to offer this type of "low down" investment.

The appraisals come in almost always at fair market value because there are comps.   Although appraisers around the country tend to cover their butt and be conservative, we find little issue with these Memphis appraisals.

However, @Jay Hinrichs makes a very good point. You may be able to liquidate the property at or near FMV, but keep in mind that a good portion of these $50,000-$70,000 properties are purchased by investors as rentals. Therefore, you may have to wait a little longer to sell to a retail buyer if you need to resell the property.

As far as maintenance reserves, I recommend having 2 to 4 months worth of gross rent in reserve.  With larger portfolios that could be reduced per property.  But reserves are very important either way. 

Finally, this is not for every investor.  The investor's investment goals and investment criteria will determine what we recommend and where they ultimately choose to invest.

These are better suited for investors who have some investment experience or "thicker skin".

Continued success!

[Jay Hinrichs]

@Marco Santarelli  and they need as we both agree significant reserves. and actually anyone buying rentals needs this.  and I think the lending industry has firmed that up a bunch.

It was a train wreck in the last decade of under capitalized investors buying out of state rentals.

No way anyone is going to be made whole buying any kind of mid west property and having to sell it within a few years.. I don't care if its rental a nice 300k home etc... market does not move in value and sales costs are 8% the very best you would do is lose 8% that's the very best.

now there could be pockets of re gentrification areas of these cities were some profits are taken.. but the only real profits I personally see is with significant value add or the folks selling these homes. as we know they don't do it for free.

[Marco Santarelli]

@Jay Hinrichs -- Agreed, these are not flips or short-term holds.  Investors needs a medium to long-term time horizon for it to make sense.

[William Hochstedler]

@Jay Hinrichs

Do you see a fundamental difference with this strategy and paying FMV with 25% down? Arguably the same loan amount and equity.

Also, what markets are you seeing slow downs in?

Thanks both (@Marco Santarelli) for your responses. 

[Jay Hinrichs]

@William Hochstedler  its vastly different in IMHO  the 25% down plus closing cost plus reserves is more than 6k down plus small reserve.. so investor usually has more wherewithal out the gate. Will protect the higher cash equity as its money out of pocket.. and the equity is more real or tangible its not phantom.  Just a stronger borrower bottom line....

[Edgar Estrada]

Originally posted by @Marco Santarelli:

Hi @Aaron Henes,

We can put you in touch with a number of our investors who have purchased these "low down" properties.  They are all stabilized investments with paying tenants.

Marco, living in Southern California I am highly leaning towards investing via turnkey. I know your company Norada Real Estate is a hybrid promoter/turnkey company. I would love to hear more from your past investors as you've mentioned above. 

[Marco Santarelli]

@Edgar Estrada

I understand... Living in Southern California makes it rather easy to lean towards investing in affordable turn-key properties that actually cash-flow with acceptable rates of return.

We would be happy to connect you with some of our clients Edgar.  Feel free to contact our office anytime (email or phone).  One of our Investment Counselors can answer your questions and provide you whatever you need.

Continued success!

[Geoff Eckert]

@Jay Hinrichs

I have been reading your post's and wanted to ask a question.  Say an investor has $30-45K+ reserves and is  seeking a long-term  buy and hold for cash flow would you say it would be OK to buy these types of properties?  It seems you are just assuming that people buying these types of properties are low on cash reserves or income to buy anything better.      Just curious, as although I own 2 homes now, I am a newbie and want to start building a portfolio of cash flowing properties.  

This seems like an attractive way to get off the side lines and get in the game on a property with some equity and low buy-in to keep cash reserves.     I understand these neighborhoods may not be A types and you must prepare for higher tenant turnover and reserves to cover vacancies and repairs.  I would hope Norada has identified some decent PM firms, as their reputation also depends on it.   

Any insight would be appreciated because I am currently researching and identifying my strategy.   I am a busy Professional, and although I am passionate about real estate,  I see Turnkey as my best choice due to my current 50/hrs work week.   My goal is to buy 10 properties in next 10 years and 2-3 by end of next year.

Thanks

Geoff

@Marco Santarelli

[Curt Davis]

great thread

[Marco Santarelli]

Hi @Geoff Eckert,

You have some good questions and concerns.  I'm sure Jay will have some feedback for you, but here is some food for thought, as well as some comments:

• We hope investors are not purchasing these "low down" properties only because they are low on their cash reserves.  That's not who they are for. 
• Any investment decision should be based around your personal investment goals and your Investment criteria.  Choosing a property first is the tail wagging the dog.
• These properties are typically in B- neighborhoods. They are certainly not A grade neighborhoods. In fact some are in C+ neighborhoods. Speak to one of our investment counselors to hand pick whatever makes the most sense for you.
• We have very good property management in place with these properties.  We almost always put you in touch with our property managers as part of your initial due diligence.  I don't consider that optional.
• Although we don't recommend these $6000 out-of-pocket properties for most investors, particularly newbie investors, they do make a good investment for most provided you have realistic expectations from the beginning.  For some people that might mean "thicker skin".
• Although inventory will come and go, you can see examples on our website under the Memphis page.  Keep in mind that no photo, or one single photo, typically means the property is being renovated at that moment.

Once again, start your search with your investment goals and criteria in mind.  You will stay the course and avoid getting derailed.

Please let me know if you have any questions.

Continued success!

[Curt Davis]

Circa 2007-2009 our turnkey business model was " buy this home with zero down and we will put $10k cash back in your pocket " then it turned into $5,000 out of pocket to buy.  At the time it seemed that most of the people buying these types of homes were about 50% of people who were a hot water tank away from giving them back to the back.   Of the 20 rental homes I personally own, I did purchase them all using a hard money little to no money out of pocket method.  I like to think that most of my portfolio is a good mix of A-C homes.  

Regardless of purchase method, if the homes are in less desirable areas it doesnt matter how good a property management company is, they will have a hard time managing due to the low quality tenants that come with these areas.  This is where management companies get a bad reputation when a home is in a lower quality area, the problem is not management but the area and tenant. 

@William Hochstedler

Its not the same thing regarding the down payment/loan amount.  This type of strategy can pull higher comps but the home would most likely not sell for the appraised amount if that makes sense. When you buy with the little down method, where you end up with your refinanced loan amount would really be what the advertised price would be of you purchased the home already fixed up and renovated, then you would put down 20%-25%.

[Alex Craig]

This model works if the houses are getting rehabbed correctly.  

[James Martin]

The homes we manage in C+ areas that's been completely renovated has done quite well. The main differences we've seen from B class to C+  is longer days on the market, more phone calls answering the same questions that already posted in the advertisment, more teenage youth in the area and so on. The real issues I do see is when it time to re-rent the unit a few of our clients are not prepared to get the home in the same condition it was in when we first rented it. The better tenants are not settling for less anymore from what I'm seeing. For the owners who were prepared to get the home in tip top shape have little disturbance in cash flow. 

[Jay Hinrichs]

@Geoff Eckert  there can be a very wide gap between C and B  forget the minus and the plus.

so it could be luck of the draw it could street to street your C could be C today and meltdown to D rarely do these neighborhoods come up  they for the most part go down.

were as solid A and B can maintain as you have a nice sprinkling of owner occ and sales to owners.

Were as anything under that is pretty much only being sold to investors.  So no real exit there is you needed to..

@Curt Davis yes that is how it was done CASH at close rate and term refi.. Use me ( HML ) to put you in title Curt rehabs your house LA investor refits pays me off and pulls cash out.. seemed like a good Idea at the time but the banks soon learned that was not a really good thing to do.

Geoff investing in rentals is just common sense in the most part  they don't always go perfect.. so you need adequate reserves for that ut oh moment..

I would also encourage those that are thinking on lower than B or even B to only view the properties on a Sat.. this will give you a full flavor of the neighborhood..

Mid day mid week and any neighborhood has little going on...

to buy a home in these areas with 6k down and not having at least 20 to 30k in reserves would be very unwise.

[Alex Tank]

DANGER DANGER DANGER!!!

Ponzi Scheme!

Please join me to suit Marcos and his companies! Let's put him in the jail same way Bernie Madoff did!!!

I lost money, hope you don't!

They already sent Default Letter!