All Forum Posts by: Denise Evans

Hi Milan, Even when self-managing, enter a management fee comparable to what 3rd parties choose. If you enter only 5% because that's all you charge yourself, then any lender or future buyer will enter a different number to reflect actual market conditions.  I like to avoid any opportunity for people to even THINK about tinkering with my numbers. Once they get started "recasting the financials," then goodness knows where they will stop. The more they increase those expenses, the lower the price goes, as you know.

The estoppel letter is for tenants to say they have not prepaid any rent, the security deposits are as represented by the current owner, there are no side agreements either oral or written, there are no unresolved repair requests and the tenants have no claims or disputes with the current owner. The last thing you want is to buy a property and then half of the tenants say, "I TOLD the prior owner there is mold in the spare bedroom closet and he said he'd fix it but he never did, and now I want YOU to fix it or else" or "I had an agreement with the prior owner that I could pay a $50 fee and cancel my lease early." You might win in court on either one of these, but you would be out a lot of legal fees and aggravation. The estoppel letter avoids many problems.

9-cap is great for such apartments!

I like to include a "Rules, Regulations and Fee Schedule" as an addendum to my lease. This is the place where you spell out the rules, and attach a price tag to breaking the rules.  For example, "No pets allowed. If we discover credible evidence you have been keeping an animal, you will be notified of the default and informed of the steps you must take. There will be a fee of $____ for the notice, and a fee of $____ per site visit to follow up regarding this issue. Site inspections might increase to as many as one per week for up to three months after the default notice, to make sure the problem has not recurred. These fees are for the increased work involved with having an illegal pet. You may also be liable for damage to the premises, and any problems you cause with other tenants because of the illegal pet."

Be sure to post and tell us when closing has taken place. We all like to hear the happy ending to the stories.

Are your tax and insurance numbers real, or just an estimate? Property management expense should be increased to 10% unless 5% is routinely available in your marketplace. This will affect your NOI, and your valuation. Is a 10-cap average for this type of apartments in your market place? I seem to recall modest apartments with large percentage of Section 8 selling on an 11- or 12-cap. Although, with some paint-up/fix-up and a security system, you should be able to shave at least a point off the cap rate.

Depending on the age of the apartments and the appliances, you might need to increase repairs and maintenance, or set up a reserve for capital improvements. The deal still cash flows like crazy, though.

I really like Appfolio, because it is more robust. The $160 per month price difference will seem insignificant when you think about how much you will have to do manually if you don't use Appfolio. I also like their commitment to their clients with continuing education, blog advice, and other assistance.  The property inspection module alone is well worth the price, with the ability to do inspections, take photos, assign property conditions to each room and take notes, all on your smart phone which then synchs to the desktop.  No scanning reports or photos. No filing. No putting together before-and-after photos or timeline comparison reports. It all happens in the software. So easy, a temp or intern can do your inspections for you. We all know, the easier it is to do inspections, the more likely you are to do them, and the more problems you will avoid or catch in the early stages.

I like to get everybody on my own lease form.  It cleans up a lot of poor drafting problems that can create headaches. If you decide to do this, offer a $25 incentive for people to cancel their old leases and sign new ones at the same rental rate and other important terms.

If you did not get this during your due diligence, immediately obtain estoppel letters from all of your tenants.

Think about cost segregation depreciation to increase early-year deductions and shelter more income.  If you are not greedy with your allocation of components, you usually do not need to hire expensive professionals for such a small project.

Finally, are you 1031-ing into this project?  Look before you leap. Are you confident that long term capital gains tax rates will remain low for many years into the future?  Many experts think those days are very limited. Depending on your own crystal ball and tax bracket, it might make more sense to take the hit this year and pay the long term capital gains taxes, rather than defer to a later year when the rates might be higher.

Good luck, and congratulations!

Hi Erica, what types of investments interest you or strategies interest you? How can I help?  Denise

In Alabama, the Probate Judge of the county runs the tax auction. They are not out-sourced.

If the tax sale was before the foreclosure, then the bank must redeem from the tax sale before they can sell the property with good title. They must pay the same as any other redeeming party--12% interest per year on the taxes due plus 12% on the overbid, up to 15% of the overbid (example below). If the property contains a residential structure, they must also pay the increased value created by the investor's preservation improvements (repairs, basically) plus 12% interest, and reimburse the investor for casualty insurance premiums, plus 12% interest.

The investor must send the bank certified mail notice of the tax sale. There is no time limit for sending the  notice, but whenever it is sent, the bank has one year from that date to redeem, or the original 3-years set by statute for everybody, whichever is longer.

If the tax sale was after the foreclosure, then the bank is treated like any other owner who didn't pay their taxes.

Example of overbid and interest cap:  Taxes due are $750.  Property has a tax appraisal of $100,000.  At the auction, there is spirited bidding, and the winning bid is $20,750.  If the owner redeems, he will pay 12% interest on the original $750 tax liability. He will also pay 12% interest on $15,000 of the overbid (15% of the tax appraisal) and no interest on the remaining $4,000.

There are some post-tax sale possession issues that everybody should know.

Good luck!

Thanks, Arlo

If the lease is not an automatically renewing lease, you are not required to give notice of non-renewal. BUT, it is a good idea to give 30-days notice, in order to avoid misunderstandings and problems. In my experience, most tenants believe they can simply go month-to-month at their discretion, and the landlord just has to live with it. If your tenant believes that and stays in possession, you will either have to wait 30 days for them to move out, or file an eviction lawsuit and possibly wait longer than 30 days if everything does not happen as quickly as it possibly can.

All states have laws that prohibit you from paying anything of value for real estate leads or referrals unless that person has a real estate license.  In most states, it is a misdemeanor.  Beware of unhappy real estate agents who feel you are eating into their income, and report you to the local real estate licensing commission or board.

There is often an exception for small referral fees or rent concessions paid to current tenants for referring new tenants, but that is not available in all states.

Flipping is not illegal. Many investor require short sale participants (buyer, seller, real estate agents and title companies) to sign a conflict of interest affidavit saying some combination of (1)they are not related to each other (2) the price is a fair market price and (3) the property will not be resold within some time period, usually 90 days.  If you sign the no-quick-flip affidavit, and then flip, that is fraud only if you knew you were going to sell it that quickly when you signed the affidavit. Otherwise, it's just breach of contract.

The only possible bank fraud is in the statement about the market value. But, the exact same properly has a different value as a short sale than it does as a straight up deal. Homeowners will usually pay the highest price for a property, but they will not wait the time it takes to get a short sale approved.  Most investors in same boat.  I wouldn't worry about this issue on a flip.   The servicing company gets an appraisal.  The servicing company decides what price is acceptable for a release of the lien. Unless there is collusion between the appraiser and the buyer, there is no possibility of fraud. 

At least in Alabama, the discount rate for defaulted loans I much higher than the earning potential of the  money.  Other states might be different. Appraisers might know, because the banks often quote a discount rate for the analysis. For example, I once negotiated a deal on a subdivision in which the bank anticipated 7-year sell out of all lots if they foreclosed, and a discount rate of 22%. That was pretty horrific.