Inspection Contingeny Window

[Josh Corby]

Do you guys actually pay for a home inspection and get contractor bids during your inspection contingency window? Or do you just look for a buyer and let them do all the due diligence? 

[Brenden Mitchum]

Hey @Josh Corby

I'm assuming you're asking as a wholesaler? If so, it depends. The bigger wholesalers don't do any of the DD for the buyer. In fact, typically they don't even allow their buyers an inspection window once they assign the contract so the buyer is responsible for doing their due diligence prior to putting the property under contract. That being said, I have worked with newer wholesalers who will go above and beyond by bringing out a contractor or even inspector and provide the results of that to potential buyers.

The issue with this is that they might then hold you responsible if the contractor or inspector missed something. It's better and cleaner to just let them do their own due diligence. 

Hope this helps a bit. Please, feel free to reach out anytime if you have other questions or just want to chat!

[Yoann Dorat]

@Josh Corby, keep in mind that the "inspection contingency" is more of an exit door for most wholesalers if they can't find an end buyer. You shouldn't front the cost of an inspection or get contractor estimates as any "sophisticated" end buyers would hire their own vendors. 

Watch out for your expenses as a wholesaler, don't spend where it's not necessary. 

[Josh Corby]

@Brenden Mitchum Thank you, this was definitely helpful. One quick question on another topic. Do you have any experience with creative finance, such as sub to and seller finance? Or do you just buy rentals the conventional way? 

[Brenden Mitchum]

@Josh Corby you're very welcome.

I, personally, have never purchased sub2 or seller financing but they're both fairly straight forward in terms of the mechanics of the deal. For seller financing, you want to find out how much equity they have. To do straight seller financing, they need to own their home out right. Remember, if they still have a loan on the property, they won't really be able to seller finance unless you work out sub2 with a seller carry back on some of the equity. The exception is if you can work together to pay off the loan, then they carry back the equity. It's really all about finding out what their situation is and how you can best help them solve their problem.

Are you currently working on a deal of this sort or just looking for more info on the subject?

[Josh Corby]

@Brenden Mitchum

I'm not currently doing a creative deal but i have a question that has been driving me crazy. How would you actually go about paying the seller's mortgage in a sub2 deal? Would you use ACH payments? If so, how does that work? 

Also, i have a question on investing in rentals. Are you taxed on the monthly cash flow you receive? If so, should I be setting aside a part of that cash flow per unit to pay those taxes at the end of the tax year?

Once again, thank you so much!

[Brenden Mitchum]

@Josh Corby

That's a fantastic question. I would guess it depends on the situation. The lender likely won't care as long as they're receiving payment so if the seller has a strong relationship with the lender they may be able to arrange for you to pay them directly. However, if it's a larger bank/institution, you'd likely just have an agreement to pay the mortgage to the seller and they would need to turn around and pay the bank. Obviously, the risk here is that they don't pay and you get foreclosed on. Honestly, not sure how to mitigate this risk. @Mitch Messer any thoughts on this?

I am not a CPA but yes, you're taxed on any income you receive. That being said, often you will have expenses and depreciation to offset that tax burden. And rental income is taxed at a much lower rate than W2 and capital gains. @Channing Brand am I sort of in line here? 

[Channing Brand]

@Josh Corby

Yes, @Brenden Mitchum is correct that rental income is treated as ordinary income. Capital gains are taxed at much lower rates, but ordinary income (such as W2 and rental income) are taxed at higher rates based on your marginal tax bracket.

The good news is that business expenses, depreciation, and QBI and lower the tax burden! Have a good idea of what your net cash flow is every month, and talk with your CPA about making estimated tax payments every quarter to potentially avoid penalties.

[Mitch Messer]

Originally posted by @Brenden Mitchum:

@Josh Corby

That's a fantastic question. I would guess it depends on the situation. The lender likely won't care as long as they're receiving payment so if the seller has a strong relationship with the lender they may be able to arrange for you to pay them directly. However, if it's a larger bank/institution, you'd likely just have an agreement to pay the mortgage to the seller and they would need to turn around and pay the bank. Obviously, the risk here is that they don't pay and you get foreclosed on. Honestly, not sure how to mitigate this risk. @Mitch Messer any thoughts on this?

All of the major lenders have online portals where the borrower can make payments. Obtain the login/password and you should be able to handle the monthly payments yourself. Pro Tip: Change the contact phone and email to ones you control, and be sure to add yourself as "in care of" to the mailing address of record so all mailed notices now come to you directly. (For example, "My Company Name, c/o Sam Seller, My Company Mailing Address.")  

Smaller lenders will at least have pay-by-phone setup, so you can make monthly payments directly. 

[Don Konipol]

@Josh Corby

1. On line direct payment with evidence of payment confirmation sent to the seller every month. Lenders don’t care what account the payment comes out of only that the funds are good.

2. Any real estate property that’s at least 50% leveraged will not show a profit after depreciation. These will be some “recapture” upon resale but rate still lower than ordinary income.