Opportunity or Shiny Object Syndrome?

Question

Hello Washington State BP Nation! It has been awhile since I have asked for your advice/help on something. I have been extremely busy on my 1st Flip project which is not the reason I am here today. We just found out that our really small community that I live in is going to get a GR8 big boost as there is going to be a new business venture coming to town and will bring in approximately 100 jobs directly related to the new business. Now with growth comes more indirect jobs in services within the community that will require a need for quality housing both rental and purchase as well.

So my question to you BP is I am a self proclaimed Flipper (which I do enjoy) however, with the possibility of this huge (at least for this town) potential need for quality housing should I start to try to look at the buy and hold as well? Now I must say that my long term game plan was to eventually get into the passive RE game (rental/buy & hold) but certainly not this soon. However, it also begs the question of how to become liquid fast enough to take advantage of this foreseeable opportunity! The new business venture will not be completed until the end of 2018 which gives me time to build up my ability to acquire more homes before the immediate need arrives.

So once again, is this an opportunity or a distraction? Thanks as always for your insight BP Nation, I always sincerely appreciate your help. Here is to wishing everyone a successful 2017 in your REI ventures!

Kevin Romines · Answer

Hey @Tony WooldridgeJust so you know, you can get what is known as delayed financing on your property once you have completed the rehab. The delayed financing allows you to get cash out up to the original purchase price of the home, plus closing costs. You can do this from the day after you pay cash for a place up to 6 months. After 6 months you can get a standard cash out refinance up to 75% LTV of the new appraised value. Thereby allowing you to get all or most of your cash back out of the deal all at Fannie Mae rates. Rinse and repeat and do it again. I will PM you the hard money lender recommendation.

Tony Wooldridge · Answer

@Jerry W., thanks for the quick down and dirty on how the options strategy works! Once again, I appreciate you sharing your knowledge base with me! Have a GR8 weekend.

Kevin Romines · Answer

If your going to get into the the buy and hold game and your currently flipping, then your in a perfect position. My suggestion would be to purchase using fix & flip money from a competitive hard money lender. I have a few that I know will go 10% down, they will fund 90% of the purchase and 100% of the rehab. Once you have it rehabbed and have owned it for 6 month or more, then you can get a cash out refinance up to 75% LTV of the new appraised value, to get all your cash back out of the deal using a Fannie or Freddie loan. Now your in a position to rinse and repeat your way to 10 financed properties with Fannie Mae. Once you get to 10 financed properties, open a Sub S corp (it must be a Sub S, it cant be an LLC) and take a couple of the properties and go get a commercial or portfolio loan refinance on them in the corps. name. Even if you have to guarantee the loan, so long as the loan is in the corps name, you then do not have to count those properties in the 10 financed property rule with Fannie Mae. Because of this, you now have 2 open slots with Fannie Mae and can now buy additional properties and refinance them with a Fannie Mae loan. You can keep aging the oldest loans out and move them to commercial to open up slots with Fannie Mae for additional refinances at the best possible terms. You can literally buy as many properties as you could ever want, doing it this way. Best of all, the properties should cash flow very well because you bought them at a discount due to the rehab that was needed and now have created value and get top market rents. Do you want to increase that even more? If so, do a 2 or 3 year lease option instead of renting the property. You get an option fee up front and a premium on the rents even more so then top of market rents. Yes you have to replace the home every 2 or 3 years in some or most cases, but you can 1031 exchange the property, paying no taxes on the deal because all the money goes forward into the next deal or multiple deals. You will really build a cash flow machine by doing that.Best of all, what did it cost you out of pocket to unleash this great machine you created? It cost you 10% down on only the 1st deal, plus closing costs. Each time you refinance to get your money and maybe more back out of the deal, rinse and repeat your way to retirement. Hard money purchase and rehab / refinance to a Fannie Mae cash out / refinance when at 10 properties to a commercial or portfolio lender in your corps. name / rinse and repeat to as many properties as you could ever want.

Jerry W. · Answer

Very briefly you look at a few houses owned by the same person and say you cannot afford both now, and buy one but get an option to purchase the other for X$ for 1 year. Give them some money for it even if it is only a few hundred. They like the idea of selling several houses. If the market goes up it only cost a few hundred to lock them in, if the market goes down you let them keep the option money and say you won't be able to do the deal. That is a very simple explanation but will give you the general idea.

Jerry W. · Answer

@Tony Wooldridge, I agree with Steve. You might also throw in a few option to purchase contracts good for a few years if you can swing them. Sometimes folks with more than 1 house will sell you one and give you say a one or two year option on another property as part of the sale.

Steve Vaughan · Answer

Well hello again @Tony Wooldridge!Good on you knowing something good (or bad, sometimes) is coming to your market!It might be a good time to brush up on our lease option and sub2 skills. If I knew things like housing availability were about to get tighter, but I was limited on acquisition funds, I would try and control as many nice, low equity homes as I could.I may also look into plexes and medium-sized multi's to maybe partner with somebody on. Good luck!

Kevin Romines · Answer

@Tony Wooldridge I am a conventional lender that specializes in working with a lot of investors. We don't do the hard money loans currently, so I refer the loans out to the hard money lenders directly, however we are going to be set up to write some of the hard money loans soon, so will update everyone when that happens. For now, I'm happy to refer the borrowers to the right lenders. The reason that it needs to be an Sub S corp is that Fannie Mae feels that with an LLC being a pass through type of entity, its virtually the same as you or a sole proprietor. Now, the rest of the world knows there is a difference from you the private person and the LLC entity, however Fannie Mae has rules that just don't work with the LLC in the same way it does the Sub S corp. See Fannie Mae Guidelines below:See below from the reference guide for FNMA multiple financed properties. If they own 25% or more of the LLC or partnership then it would count.Type of Property Ownership to include in Financed Property Count: Joint ownership of residential real estate. (This is considered to be the same as total ownership of an individual property).Note: Other properties owned or financed jointly by the borrower and co-borrower are only counted once. Joint or total ownership of a property that is held in the name of a corporation or S-corporation, even if the borrower is the ownerof the corporation; however, the financing is in the name of the borrower. Obligation on a mortgage debt for a residential property (regardless of whether or not the borrower is an owner of the property). Ownership of property that is held in the name of a limited liability company (LLC) or partnership where the borrower(s) havean individual or combined ownership in the LLC or partnership of 25% or more, regardless of the entity (or borrower) that is theobligor on the mortgage. Ownership of a property that is held in the name of an LLC or partnership where the borrower(s) have an individual or combinedownership in the LLC or partnership of less than 25% and the financing is in the name of the borrower. Ownership of a manufactured home and the land on which it is situated that is titled as real propertyType of Property Ownership NOT to include in Financed Property Count: Ownership of commercial real estate. Ownership of a multifamily property consisting of more than four dwelling units. Joint or total ownership of a property that is held in the name of a corporation or S-corporation, even if the borrower is the ownerof the corporation and the financing is in the name of the corporation or S-corporation. Ownership in a timeshare. Ownership of a vacant (residential) lot. Ownership of a property that is held in the name of an LLC or partnership where the borrower(s) have an individual or combinedownership in the LLC or partnership of less than 25% and the financing is in the name of the LLC or partnership. Ownership of a manufactured home on a leasehold estate not titled as real property (chattel lien on the home).

Tony Wooldridge · Answer

@Steve Vaughan, thanks again for stopping by to share and I will most certainly as I stated earlier have to start taking a good hard look at the options side of the house. As always Steve I appreciate your stopping in to share your knowledge with me. Have a wonderful weekend! P.S. the flip is coming along slowly but good! A lot better than a month ago or so!

Steve Vaughan · Answer

This is a great quick and dirty summary of how options are done. And yes, make sure consideration is exchanged. It is called option consideration in the case of an Option to buy. It will be forfeited if you don't later buy or go against the purchase price (strike) if you do. There is no such thing as nothing down real estate. Without consideration, a transaction isn't even legal! As far as nuance laws in WA, you might be referring to distressed seller equity skimming laws. I'd stay away from pre-foreclosures here in WA. Those don't work for LOs or sub2 anyway. Your target is a pretty house with low equity where the owner is facing a sudden job transfer or divorce, illness other non-foreclosure motivation.I would look up some recorded docs on your county website. See how they are written in your area. Start with Option and Memorandum of Option. Give you an idea of how the attorney's have been drafting them. Mine are either titled Standard Option to Purchase or Exclusive Option, but the county will just say Option. They are a common tool of developers to lock up land parcels until they do further DD and line up their financing, but some may be for improved property / houses.

Tony Wooldridge · Answer

@Kevin R. thanks again Kevin you have been a wealth of knowledge not only for me but hopefully for others that visit this in the future! Much appreciated.