All Forum Posts by: Andrew Johnson

@Chuck Kramer To draw a small parallel of the extinction of dinosaurs, look at the recruiting industry.  When Monster.com came out (and tons of other online job boards) it was going to "kill recruiting agencies" and "kill recruiters".  Who would need them?  Candidates will just beat a path to their door.  Years later it was LinkedIn.  Monster.com didn't work but now everyone would be on LinkedIn and, again, recruiters would be devalued and go the way of the dodo.  Sure there are shifts in markets (recruiting and real estate) but the large recruitment agencies still exist and do well, they still get 25%-33% fees, and really the "model" hasn't changed a lot.  Now the talk is about is about AI or machine learning algorithms to predict everything from "fit" to when a candidate will be open to leaving their current company.  What has changed?  Well, it's really easy to spam job applications now.  

How does all of this create a parallel to real estate?  Well, it's super easy to spam out low-ball offers.  If these new wholesale-ish products from Zillow (and others) take off then it will be even easier.  Right now it's easy for anyone to find out contact information, find a listing realtor, make all of those inquiries through Zillow, and toss out a verbal offer.  You can do the same through fsbo sites that have been around for years and years as well.  But the net result is that while "leads are increased" the "quality of leads" likely hasn't moved.  So an owner selling ends up with a bunch of white-noise.  Post something on Craigslist and see the quality of interested buyers that come in.  

What is going to happen is a good amount of confusion for anyone going through the buying and selling process.  Do they want to get an instant offer on Zillow?  Do they want to sell it themselves?  Do they want to use a realtor?  Do they want to sell fractional ownership (start-ups are entering into that space now)?  And all of these questions will come up during the 5-6 times they buy/sell a home during their life.  

So they'll likely (in almost all cases) seek out the "dinosaurs" that do this stuff all day...everyday...and look for guidance...guidance that will cost them 6% on the sell-side.

That said...I really want to call @Russell Brazil a "dinosaur"...just once...just for fun...

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Not for nothing, but Russell is right about the desire for standardization. Let's say that I am an owner (which I am) and I wanted to sell. The last thing I want (no offense to your practice) is someone writing out LOI terms of a paper towel, signing it, handing it to me and expecting me to equate it to a generally accepted contract that's legally enforceable. Okay, that's a little hyperbolic as I know it's not your "standard procedure".

But the last thing I want my realtor to tell me is:  "I received an offer but it's not the standard contract language that we use in our state, let me read over this and get back to you."  That just makes me think: a.) what's in the contract that the buyer might be hiding, b.) I should probably read this contract myself, c.) I should probably pay a lawyer $500 to read this contract for me, and then d.) start asking myself why a buyer who was serious didn't use whatever is "standard" for the region/state.        

@Tyler Weinrich This is just more of an abstract thought process because I don't really know any specifics:

1.) At a macro level the owner is trading a higher price ($130K over appraisal) for favorable terms to you, the buyer (5% down and not having to quality through a bank).  The $130K sounds like a lot but for all I know it's a $3MM property.  If it's a $300K property then it's a different ball of wax.  Odds are it's somewhere in the middle and you're trading terms for purchase price.

2.) Terms for owner financing can/will make all of the difference in the world. If he's using a 15 year amortization schedule with 10% interest rate it's materially different (economically) than a commercial lender using a 25 year amortization tables and a 5% interest rate.  So...well...terms matter.  As will the (likely) impending balloon payment...

3.) The elephant in the room is the length of the loan.  If the owner is looking for a 5 year balloon payment and you can't get it turned around, can't secure bank financing, etc. then what do you do?  It sounds like you'd break-even-ish in the beginning so it's not like you're amassing money for the 25% down the bank will want.  So how will you come up with that cash when the balloon is due?

@Ryan Fitzhugh "the current tenants are repainting and putting in a better kitchen"?  The current tenants?  Like the renters themselves are coming out-of-pocket to put in a better kitchen?  Tenants wanting to wait a room a different color isn't unheard of but I've yet to meet a tenant that's aching to spend their own money on a kitchen rehab.  

You're a real estate agent and you're saying that it's renting for $1,750 per month and *should* sell for (or be valued at) under $75K as it's not rehabbed at the moment. So it's call it $70K for a FMV for the "as is" property at the moment. This isn't just a "1% rule" property or a "2% rule" property it's a 2.5% property.

Usually if you're looking at a 2.5% property in 2018 you're looking at pretty dicey or extremely rural area. 

On top of that, you're saying that this 2.5% property have tenants are footing the bill themselves for a kitchen upgrade...

This is either the deal of the year or something...is...well...weird...

So...ummm...let's play "simple math"...

$450K purchase price, 25% down...

30 year fixed rate mortgage at 5% on $337,500 is $1,812 per month...

So if you have zero vacancy you'll break-even on the mortgage...

And then burn money on maintenance, cap-ex (likely very limited), any vacancy, property taxes, insurance, etc.

Consequently, you really, really, REALLY need that home price to go up.  You'll be bleeding money every month and year until you see it at that future profit.  And you'll have to factor in costs to sell (like realtor fees) when you do go to sell.  So that spread (i.e. "profit")  will have to pay you back for all of those monthly/annual losses...and then some...then you get taxed on what's left...and unless you 1031 there's depreciation recapture...

@Michelle Ayala Really dumb question here, why it is "as is", cash-only, etc. if it's just some cosmetic sprucing up?  From what you're saying it's not like the property wouldn't qualify for conventional financing.  I would imagine that I'm missing some piece of the deal here.

Taking that aside, you didn't say if you want to flip it or rent it out.  If you rent it out, well, you didn't put the rent in there.  If you want to flip it then it's $250K - 10%ish (closing costs, realtor fees, etc.) so that's $225K and then you subtract out all of the updates and holding costs.  It doesn't sound like you'd have to hold the property for a long time and if you're doing a cash-deal there's no mortgage to pay but it still doesn't sound like there's a ton of spread here.

And you can take on that a few round-trip plane tickets, hotel stays, etc. for you since you're doing this deal and living in Wisconsin!

If you don't want to do the flip and just have it managed for your in Phoenix, well, we're back to need to know the rent level, expenses, blah blah blah.

@Eric Sung I have a bunch of that Allure-ish fake-hand-scraped wood-look plank flooring.  It takes scuffs pretty well, you can "patch" it with a pen, it looks great in photos, and it's waterproof.  Since it's waterproof you can pretty much put it anywhere you'd like to and you'll be okay.  My units are smaller so they run the same flooring throughout the entire unit.  And, for what it's worth, the same flooring means that I can use the same paint color and don't have to worry about picking different cabinet finishes or anything else because it might have to look good with dark brown in one room and tan tile in another.  Others may have different opinions but continuity just sometimes makes life easier.

@Joe Splitrock Well that's one heck of a list but I have to admit, I'm with @Kelly Byrd in that I'd never have expected Fremont to top the list.  I mean...well...it's Fremont.  And how Oakland rolls up there I can't quite figure out.  Not to mention good ol' San Diego just doesn't cut the mustard.  We are down at 32 but I'm guessing it's because we're just too lazy to actually respond to surveys.  We're also too lazy to try and keep the Chargers but that's another story.  

@Ron Read There's really no other option other than to drive out there.  If I went by an apartment complex during the middle of the day and there were zero cars in the parking area...well...I might be super duper happy.  I have a bunch of people that work...and they work normal hours...and they use that income to pay rent :-)  That said, if these are 3 bedroom/2 bath units you'd probably expect to see something.  If they are 1 bedroom/1 bath units it's a little easier to think "hey, everyone is probably working and tenants that ___ rent level likely don't have an extra car".  But I think overall people are right thinking that you'd expect to see one car there.  

That said, it's better than seeing listing pictures with 10 cars in the parking area.  At that point people might not be working, have a bunch of folks crammed into units, etc.  So "zero cars" is likely the lesser of two evils.  But nothing can really beat driving by the place at 2:00 p.m., 6:00 p.m., 9:00 p.m., and 2:00 a.m.

Let's push all of that to the side for the moment.  I would argue that you're probably investing the time to drive out there no matter what.  Sure, it's a 3 hour round trip but odds are you'll know if you like the neighborhood/area within 10 minutes of driving around.  I could do hours of "research" on the ol' interwebs, build pro-formas, but still end up thinking "yikes" driving through the neighborhood before I even reach the property.

Just search for the best BBQ joint in the town and make a weekend trip out there to eat and drive by the place.

Jerry Rien You could say the same for maybe 90%+ of the forum posts :)

Ashley Zhang I’ll approach the question from a slightly different perspective. What’s your acquisition strategy? There are weekly posts by new investors frustrated that they can’t get realtors to make “make 100 offers to get 1 property”. Well, okay, maybe it’s 20 offers but you get my point. If your strategy is “make ___ lowball offers until you hit on an acceptance” that’s tough to get a seasoned realtor to embrace. If you’re the realtor and writing the 20 or 100 offers yourself, pulling your own comps, doing all of the legwork, etc. then you remove that variable/obstacle. But, overall, I’d second what most people are saying. If it’s for one deal...don’t bother. If it’s going to be for 6 deals a year then it’s an “easy yes”.