All Forum Posts by: Andrew West

@Alexander Schloe first of all, I am so sorry you're in this situation. What a bummer!

Sure, there's no denying that this will be a good learning experience for you (you'll scrutinize EVERY detail from now on!), but the comments above re: being "head of your team" and "this is on you" are unhelpful and just add insult to injury. Show me a real estate investor who hasn't trusted a professional to competently do their job. That's the game.

That being said, here are my two cents (having gone through something similar). Get a consultation with a lawyer to go through the details and get their thoughts on the issues. Depending on that outcome, it might be worth reaching out to whoever (if anyone) you conclude is at fault to explain the situation and give them the opportunity to make it right. If your lawyer can do this, all the better. If they refuse to cooperate, I would think long and hard about how far you want to take it. As most other commenters have said, lawsuits are arduous and your time & money is probably better spent elsewhere.

Best of luck!

@Corie Carpentier if I may be so bold, I'm going to say this deal will NOT cash flow for you. Looks like you haven't budgeted for any expenses beyond your mortgage payment in your analysis. Namely, you'll want to plan for maintenance, capex, and vacancy (echoing the wise words from @Pete Harper and @Jaron Walling!). With self-managing and a newer home, you can ideally keep these low, but it's still important to estimate them in your analysis. 

I made this mistake when I became an "accidental landlord" several years ago before finding BP. The rent was $650 more than my mortgage which I thought was a home run. However, after expenses, we were barely breaking even and decided to sell after a few years. 

Better deals are out there! Good luck!

Thanks for the input so far everyone! It seems like we're generally thinking along the correct lines in exploring this.

@Bill B. My team and I had most of the same questions as you. I even offered to switch our RC policy to ACV so that replacement wouldn't be factor in the event of total loss (bank gets paid and we sell/demo the land). We had also wondered how the previous owner had mortgaged it given these conditions, but it appears to be owned outright.

@Drew Sygit and @Bernardino Graziano I think you both are right in that it's a dead-end with this particular bank. My impression is that their mind is made up. I had my agent ask the city official about the variance, and the info she received was that we can't do this ahead of time; we would have to wait until the total loss occurs and we're in the rebuilding situation. Does that sound right?

Drew, we haven't talked w/ Lori yet. We've mainly been interacting with Peggy who I guess is the city attorney. I might PM you separately since it sounds like you're super familiar with the area. Thanks for your input.

BP friends & family! I would love some advice on a situation we've run into with a triplex I'm trying to purchase just outside Detroit (River Rouge, MI). I'm still learning the technicalities of this, so forgive any errors in my summary.

Essentially, everything has gone smoothly in our due diligence thus far and I'm told that our mortgage (conventional investment loan) is fully approved. We're a week before closing and some verbiage has been flagged in our appraisal by the bank that's underwriting the loan. It states as follows:

"Subject's use is legal non-conforming which means that if the subject is ever destroyed by a fire, it cannot be rebuilt as such."

As I understand it, this property was originally built as a single family before being sectioned off into the triplex it is today. At the time,  that was legal, but since the division, the zoning laws have changed to require only single-family in this area. The property has essentially been "grandfathered in" (hence the LEGAL, non-conforming), but if it ever needed to be rebuilt (in the event of a fire/total loss), it could only be rebuilt as a single-family. 

It's been a bit of a game of telephone as you might imagine from the underwriter, to the servicer, to me, but essentially I'm being told that this is a non-starter and they cannot close the loan. Specifically, they are honing in on the fact that it was appraised based off of being a triplex (and this is the value they are lending on), and that value cannot be guaranteed in the event of a total loss/rebuild, since it would need to be rebuilt as a SFR. I am told that this is a hard & fast fannie mae requirement.

I'd love to know from the community and any experts out there:

1) Is this right? any lenders familiar with this or have other investors experienced this?

2) Any creative solutions you can suggest? (we are starting to explore alternative financing with out team, and I'm trying to dig into the rules & regulations but I'm not a pro by any means)

The numbers on the deal are STELLAR and we'd hate for it to slip away if we can work or overcome this snag!

(final aside: I'm also being mindful that we may not want to end up with this property in our portfolio, and thus be stuck in the same situation down the road when trying to sell it)

THANKS IN ADVANCE!

@Clark Henderson we just went through an appraisal gap situation like this on a pair of duplexes in Detroit area, so i feel your pain! It's tough to get a low appraisal when you know the numbers work well even on the higher purchase price. Like @Rylan Kean mentioned, step 1 is to try to use the low appraisal as leverage to get the seller to drop the price. Unless they had other competing cash offers, they should be motivated to work with you, knowing that if the deal falls through, the next buyer will likely be in the same exact situation with a low appraisal. 

If you're willing to spare the additional $15k to make up the difference, you'll essentially have a higher down payment on the loan which means a lower mortgage and better cash flow. This is just a factor of your personal goals. 

Ultimately, we decided to walk from our deal because the gap was just too high and the seller wasn't willing to budge. We had the extra money to put in, but because we're just getting started, we didn't want to tie up too much cash in a single deal and thus prevent ourselves from looking for the next one and scaling quicker. 

Good luck!

@Crystal A. that is such a beatiful & historic house! I don't have much to offer to the "deal" conversation as I'm not familiar with the market, but I'd encourage you to explore short-term rental/Airbnb options for the house-hack. In the right markets this can often be much more profitable than long-term rentals! Especially in a cool house like that. I'd imagine the DC/Baltimore market is pretty strong for tourism & other short-term needs. Best of luck!

@Levertis Brock looks like plenty of people are weighing in on the main tenant/eviction question, but I wanted to jump in and caution you to double check your numbers. You didn't mention how you're funding the deal, but I'd question the legitimacy of a 38% COC return on a 1% property. Are you doing a low down payment? Have you accurately estimated all other monthly costs beyond your mortgage payment (taxes, insurance, vacancy, repairs, capex, etc.)? I might be missing something, but just a gentle "nudge" to go double check your deal analysis on this. That may even help your decision with whether this one's worth fighting for. Best of luck!

@Jose Centeno I'm not familiar with the Allentown market, but this smells fishy. Especially because of the "things are done differently here" response you received. In 7 years of buying real estate, I've never heard of commissions being split by buyer & seller. I have always known this to be around 6% and paid directly from the seller's proceeds. In any situation like this, your only leverage comes when you can prove otherwise and give yourself more desirable alternatives. That means finding as many other agents in the area as possible who can confirm or deny that arrangement. If they all tell you it's legit, sounds like you're stuck. If not, you either have leverage to push back on your agent, or abandon them altogether. Good luck, and I'm excited to see others with more experience weigh in on this!

@Joas Espinoza congrats on getting started! As others have said, you seem to be locked into the mindset of needing to be close to your first investment (i.e. investing in LA or moving if you invest elsewhere). This is where a lot of people start because it feels less risky. It's not. What's most risky is buying a bad investment just because it's close to you. Depending on your budget/funding strategy, I would start looking at out-of-state deals in profitable markets and commit to analyzing a few every day. Before long, you'll be familiar with where the numbers really work and what areas are in line with your price point. Then start networking & building a team there!

And please- for the love of all things- don't invest your entire savings into your first deal....or any deal for that matter. Your future self will thank you ;) Good luck!

Hello Friends-

We are under contract on two duplexes in Michigan, and shopping for insurance (everyone's FAVORITE topic). We are fairly new to this so, as we learn about all of the different aspects of a policy (ACV vs. replacement cost, deductibles, premiums, etc.), I'm wondering if anyone uses any "rules of thumb" when choosing your policy as an investor. Perhaps those in the insurance world specifically have tips on how to think about the various priorities? Please don't give me the classic "it depends on your goals and your risk tolerance" responses. I already know that, as a general rule, we "purchase" peace of mind with higher premiums so that if something does go wrong we have better coverage. I am genuinely looking to get educated as to when the numbers make sense for an ACV policy vs. replacement cost, and how I should be thinking about this. Thanks in advance!