All Forum Posts by: Denise Evans

I am the buyer's real estate broker on a deal that needs a hard money lender.

Alabama short term rental property was just converted from offices. Turn key. 1.3 miles from stadium, 3 blocks from food and entertainment district, 3 blocks from football game day trolley. Football season short term rentals for home games, the rest of the time mid term rentals for traveling nurses and University of Alabama vendors and visiting professors, Mercedes Benz plant visiting personnel.

Comparable rents and values support purchase price and debt service. $1,150,000 purchase price, buyer has 20% down payment via 2nd mortgage loan from one of the sellers.

Please contact me if you can possibly meet this need.

I am the buyer's real estate broker on a deal that needs a hard money lender. 

Alabama short term rental property was just converted from offices. Turn key. 1.3 miles from stadium, 3 blocks from food and entertainment district, 3 blocks from football game day trolley. Football season short term rentals for home games, the rest of the time mid term rentals for traveling nurses and University of Alabama vendors and visiting professors, Mercedes Benz plant visiting personnel. 

Comparable rents and values support purchase price and debt service.  $1,150,000 purchase price, buyer has 20% down payment via 2nd mortgage loan from one of the sellers.

Please contact me if you can possibly meet this need.

I'm glad! There are great deals out there, and great deals overlooked by other people, that work if you run the numbers properly. Good luck, and let us know how you are doing!

You are taking subject-to on a 3% mortgage when current interest rates are closer to 7% for rental properties?  

You are at great risk of the lender exercising the due on sale clause if it ever finds out. Not such a big risk in a time of stable interest rates, or rates falling below the current note interest rate. That is because lenders just choose not to notice. Now, however, it is a realistic risk and must be accounted for in your planning. A lender who can get a 3% loan paid off and put that money back to work at 7% or more will take that opportunity. That was the whole reason due on sale clauses came into being in the 1980s.

If you reduce maintenance to $1,000 expenses that is more realistic unless stuff is just falling apart. But, if it is falling apart, it needs to be replaced, which is a capital expense, not an operating expense.

From an accounting standpoint, you can still put another $1,000 in reserves, but that is not an operating expense, so it doesn't affect NOI.

With maintenance expense of only $1,000 that gives you an NOI of $4,415. Student housing in Tuscaloosa caps around 6%, but let's say you are in a market of 7% or more. At a 7-cap and an NOI of $4,415, the property value is slightly over $63,000. Will 80% of that number be enough to pay off the current mortgage, if you had to do that? What if that particular property (location, condition, size, etc) caps at 9 percent? That gives you a value of only $49,000. Do you know where cap rates are for similar properties?

If you need to refinance on a value of $63,000 with an 80% LTV, assuming 7% interest and a 30-year amortization, your annual mortgage payments will be $4,023.75. Your NOI is only $4,415. That gives you a debt coverage ratio of 1.09. Conventional loans (with lower than 20% down payment and low interest rates) typically require a minimum of 1.2, so that means your rents will need to increase in order to gain approval for a new mortgage of 80% of $63,000. For a DCR of 1.2 and mortgage payments of $4,023.75, your NOI will need to be at least $4,828.50. Since your expenses seem close to the bone, that means increasing rent by $67 per month. Will the market support that? Would it support that if you spent a small amount of money for upgrades?

DCR loans will sometimes go as low as gross rents (with no deductions for operating expenses) just barely enough to cover the mortgage payments. But, that is down payments of 20% or more and higher interest rates. Have you taken all of this into consideration for this particular deal?

Again, the biggest risk for which you need to prepare is the possibility the lender will find out, call the note, and demand payment in full.

How do they find out? It usually starts when the current owner cancels its insurance and you put new insurance on the property, but with a different name than their borrower. Sometimes a seller gets mad at you, thinking they sold too cheaply (not your fault, but that's human nature) and rats you out. There are sometimes rewards for doing things like that.

You can't just leave the current insurance in place and pay the premiums because (1) that is insurance fraud and you risk the insurance being cancelled if the company finds out and (2) guess who gets the insurance check if the place burns to the ground? Not you.

Also, mortgage interest statements from the lender will be sent to their original borrower, and reported on income taxes for his/her/its SSN or EIN. When you declare interest deductions for that property, but have nothing from the lender to the IRS to back that up, you will have audit flags. Are you prepared for that? 

Will you get the username and password for the mortgage loan so you can sign on to the account to get any info you need, without having to rely on the borrower to forward things to you? If so, you'll be also be able to change the settings to put your own email address and physical address for notices and things, so be sure to do that.

There are safer ways to do this, but they require all the right paperwork and steps. Each deal is different, so I can't give you general advice about how to go.

Or, you might want to go ahead, as is, with this deal. Just do it with your eyes open to the potential risks, and take steps to minimize their impact on you.

The attorney's advice in the letter you reprinted is completely wrong.  Sorry. I'll need more info before I set the record straight for your particular circumstance. Buzelli was not good law when the decision came out, and was flawed regarding its reliance on void tax sale cases rather than judicial redemption cases. Then the statute was amended in 2009, making Buzelli irrelevant.

A critical first question is--did the taxpayer die before or after the tax auction? If before, then you have a void tax sale situation. Different rules than if he died afterwards, which is a judicial redemption rights question.

Asia, are you asking ME if I know attorneys? You've dealt with a lot of them yourself. Do you not recommend any of them?

I posted a video that explains about Alabama redemption time periods. Not as clear cut as 3 years after tax deed. Watch the video.  I would not loan hard money against a tax deed, much less borrow money for an expensive rehab. There are about a dozen different ways things can go bad. The investor can probably control most of them, but the lender has no such close-quarters notice and ability to respond.

Get quitclaim deeds from the owner, or as many of the heirs as you can if there are heirs. That is the best way to protect yourself. Even if you don't get from all of the heirs, that at least makes you a co-owner and bootstraps into a lot of other rights and protections.

@Tyson Begly, To quote my own book on tax sales:

Rule Two assumes that if it looks like garbage, it is abandoned garbage. Put more eloquently, the Alabama Supreme Court said, “Though ordinarily there exists a presumption that one does not intend to abandon his property, this presumption is not attendant where the article claimed to have been abandoned is generally considered valueless.”[1] Photographic evidence that the contents of a tax sale property were all damaged, heavily soiled, or not worth the cost to haul to the dump, would seem to indicate “valueless” abandoned property. In that case, the investor would be protected if it helped the personal property on its trip to the landfill.

[1] Milford v. Tennessee River Pulp & Paper Co., 355 So.2d 687, 689 (Ala. 1978)

Nobody has to take any action. Under the law, title to real estate MUST be in someone at all times. We might not know what that someone is, but title rests there. It does not matter if probate was opened or any notices sent out or anything similar.

I understand your reasoning, but it is a constitutional due process issue that you cannot take someone's property away from them without due process of law, which includes notice. Also, the person must have an opportunity to appear in court and dispute the taking. While we basically think of those certified mail notices as just something to prove the taxpayer got the delinquent notice, it is more than that. It is a notice to appear in court and show cause why the property should not be auctioned. It is probate court, but it's still a court.  The certified letter is a summons, just like in a regular lawsuit. If it was sent to the wrong person, then that person lost their rights without the opportunity to argue.

Yes, you would think it is the county's responsibility to keep up with stuff, but it is not practical. So, it rests on the investors. Sorry.

@Tyson Begly  Tricky question. If you have a quiet title order AND properly served everybody you could find AND the guardian ad litem did their job properly, then you are probably safe. On the other hand, a "served by publication" heir could argue the guardian ad litem did not do their job well, the heir should not be foreclosed from claiming the tax sale was void, and they ALWAYS have 3 years after the tax deed date to assert their rights and cannot lose them simply because of a GAL who did not assert the correct defenses on behalf of the unknown or unfound heirs.