2 Part Question

[Jennifer Wood]

My husband and I have an opportunity to purchase a single-family rental portfolio in our out-of-state investing market that is owner-financed. While the units look to cash flow, for the next 5 years we plan on using that cash flow for any extra expenses over and above what we would forecast for the maintenance, repairs, and capex items for the properties since we already have W2 jobs we plan on keeping for at least the next 5 years. This is in the early stages so I don't have a lot of info to go on right now.  We have a solid team that can support us in this endeavor but I would welcome any guidance those of you who have done this may have:

1 - What are the major pitfalls that we need to be aware of with doing something like this? We plan on having an attorney look everything over, doing this under our LLC, etc. What are the major and minor things those of you who have done this either looked for, or wish you looked for?

2 - Would you recommend purchasing a home warranty package (like American Home Shield) for something like this?  Is this even possible?  We are talking 15+ properties.  The only experience I have with home warranty packages is using AHS for my primary residence and it has been worth it for us.

Thanks for your time!

[Greg Scott]

I would say #1 and #2 are not your first and second priorities.

The first priority must be answering "Is this a good deal?".  The fact that this is owner financed might be a good thing but sends up a lot of warning flags. 

I sometimes see properties being owner financed because a bank won't finance them.  If you get a mortgage, the lender will want to check surveys, appraisals, and title issues, things that don't always happen when buying owner financed.  Most experienced investors aren't looking to the protection of a home warranty, which gives me another level of caution.  With that in mind, here would be my priority order based on what you have written:

1) Have all the houses inspected so you know about major deferred maintenance. 

2) Pay for an appraisal on all homes so you know if you are getting a good deal.  (Note:  You are under no obligation to share your appraisal with the seller.)

3) Get the seller to provide surveys of all properties and have an experienced attorney look them over.  If they are older, it is probably worth paying for an updated survey.

4) Ensure the closing is done through a title company and insist on title insurance.  Sometimes properties with clouded title are sold using owner finance.

5) Talk to a property manager to ensure these are good rental areas and
the rental income is not artificially inflated by an unethical seller.

6) Do the math on the repairs, monthly income, monthly expenses all make sense. If they don't, do not close.

7) Have a lawyer look over all closing documents. If it is seller financed, you have no real estate agent fiduciary protection, so it is up to you to protect yourself.

After all that, then, yes, work with an attorney on how you hope to close, LLC, trust, or in your name. If I have all of the above, I'd skip the warranty.