All Forum Posts by: Bryan Scott

Someone will have to assist my understanding of the 50% rule? I've been a fix-n-flip investor and a long-term, buy-n-hold landlord, but must admit, have never hear of the 50% rule? Not including the rehab assumptions and expenses for long-term holds, I can verify, first-hand, the typical HUD assumptions for maintenance and vacancy expenses as being 16% - 17% per year (based on annual rents received). And, I understand that I must remodel kitchens and bathrooms every 10 - 15 years, plus, I must replace the roof every 20-30 years and repaint exterior every 4-5 years and repaint interior every tenant turnover, or maybe (on average) every 2-3 years. Carpet every 3-5 years (kids, pets, etc.). Pls help me understand how the 50% rule applies to the above knowns. I would be interested in using this "short-cut" in my pro-formas. Thx in advance.

Denver/Colorado Springs Metro areas still have a lot of good deals via HUD, Fannie, Freddie and all large commercial banks in terms of REOs. There are no bidding wars going on in this market as has been described by some in the NE.

Leslie, Short answer (from the perspective of a Colorado Realtor/Investor) is: Case #1: The Plaintiff now has a lien equal to the deficiency balance of $85,453 + the $2,500 bid price against the defaulting borrower. Case #2: The current beneficiary lienholder was outbid by a third party. This is to their advantage, because they are made whole by virtue of the fact that a third party outbid them. The third party will then obtain a Public Trustee's deed once all other interests have been distiguished, or have otherwise expired.

Long answer: The mere mention of Plaintiff smells of lawsuit. This, together with an auction do not make sense in the State of Colorado. Here, there is a rule 120 hearing, which basically amounts to a lawsuit between the mortgage bank entity and the defaulting borrower. Basically, it is a hearing to determine validity of the mortgagee's claim on non-payment by the borrower, which if favors the mortgagee, turns out to be a judgment against the borrower, which results in foreclosure officially beginning. This typically occurs after filing of the NOD, which starts the whole process. After NOD plus approximately 125 days, the property is sold at a Public Trustee auction, which occurs in live bidding inside the PT's offices amonst those who are interested. The mortgagee puts up the amount required to purchase the property, which is a dollar figure based on all amounts in arrears plus all expenses incurred by the foreclosing entity. All bidders are required to bid at least $50 over that amount. If no bids are received, the property goes back to the foreclosing entity, with the original Note and Deed of Trust being extinguished. There is an additional time period that lapses after the sale date, which provides time to clear redemption periods of all junior lienholders, then a Public Trustee's Deed is issued to the prevailing party. In any event, the aftermath of all this could and does create a "deficiency balance" which could turn out to be another lawsuit filed against the original borrower. If not, and at bare minimum, there will be an official IRS 1099 filed and sent to the defaulting borrower, which serves to add to their taxable income for the period (year) during which the event occurs.

Not sure if this helped or created more questions. Were it me, I would contact the local, county public trustee to obtain more info on how these things are done in your state and/or county. Good luck to you!

George,

#1 - Have you seen the property?
#2 - If answer to #1 is no, make it yes, by going to property to verify all assumptions. If you cannot do this, have someone you trust do it for you.
#3 - Verify/confirm rehab estimates/costs and actually meet the GC who the buyer intends to do the work? Are they real, licensed, qualified, to do the rehab?
#4 - If an investor/buyer/borrower wants me to fund their project, they can expect me to be VERY involved in what they are doing with MY MONEY! Once I confirm the numbers and validate the deal, trust me, I will ONLY release rehab funds at certain, pre-defined stages, which normally track the permit process; carpentry/framing, concrete, electrical, plumbing, drywall, finish, final CO, etc.
#5 - Oh, let's not forget..., What experience level does the borrower have? Are they doing the GC work themselves, or are they going to hire a real GC, and, have you met the GC as well?

In summary, there are lots of snakes and alligators ready, willing and able to deprive you of your hard-earned private or hard money capital. Deal with the above, make sure the contractor is licensed and insured, make sure you are named as additionally insured on the hazard insurance, which is most definitely reflective of the fact that the project is a construction work in progress, be a member of an LLC who owns the property with an operating agreement, etc.. By all means, use of an attorney who understands real estate and these types of deals is a minimum requirement. Best of luck to you and the project!

Greg,

An appraisal within 5% of listed price, even post all the meltdown which began in my market in late 2006, early 2007, would be acceptable to buyer's loan underwriter, but if the underwriter appraisal says you are $2K overpriced, you must be willing to decrease purchase price, or the buyer must be willing to increase their down-payment by same amount. This is especially true with FHA-insured financing. It sucks, but it is what it is. The inspection and/or appraisal cost is not normally a factor, because everyone expects these costs to appear on the HUD-1 on the buyer's side, so don't give in to those expenses unless you believe it to be necessary to keep the deal from falling apart. Same comments about supplying a washer/dryer. Not necessary unless your buyer makes this a condition of the original offer, or an amend/extend. Good luck!!

Hi Danny, Am headed to the blog right after posting this. I too am looking for insight on how to develop the "machine" you've obviously turned your rehab/flip business into. I would love to have the problem of 6 rehabs simultaneously!! Can't wait as a matter of fact.

Tom, I have same question for myself, or anyone else with a similar "401-K" retirement strategy. First question: What is your revenue - expense goal? If you need $10K/month (net b4 taxes) to retire on, then the combination of SFR single or multi, based on fair market rents will help you sort that out. If your goal is cash-on-cash return, then you might run the math a little differently, but as they say, a dollar is a dollar. For my part, notwithstanding return, if I need a net of $10K/mo, then I am going to include Rev - Exp = Cashflow - 17% reserves, which will pay for most maintenance and vacancy events, but not likely for capital upgrades/remodels (remodel the kitchen and baths every 10 years and replace the roof and HVAC every 15, etc). Best advice for your unique situation might be to consult a bona-fide CPA/Retirement Planner, who is very well versed in real estate. Then, please DO NOT forget about asset protection in terms of how you structure legal entities to own and mangage your assets. You need to appear to the public to be poor and, if a potential litigant gets past that stage, appear to be judgment-proof!! Good luck to you!

ARV - Rehab - Carry Costs - Every other cost = Offer Price. If ARV you mentioned is real, go for it!! If in question, physically go out and investigate ALL the comps and be OK with the valuation of ARV. All else will fall in place. Exit strategy should be a great property for a great price in the neighborhood in order to sell more quickly than typical DOM. Just my Colorado strategy.