All Forum Posts by: Denise Evans

The lease should cover just the things related to possession, term, money, and default. Very clean.  By law, rules have to be in a separate document, but can be changed from time to time without the tenant's consent. I have a Rules, Regulations and Fee Schedule I would be happy to share with you. Contact me off forum, via email on my website, and I'll send it to you.

In Alabama:

The Agreement for Entry for Routine Maintenance and Inspection must be separate from the lease to be enforceable.

The Agreement to Show During Last Four Months, without the need for notice or consent, must be separate to be enforceable.

Other addenda must be separate, some I advise be separate, because they don't apply to all tenants. Things like an Animal Addendum apply to only some tenants.

As far as multi-defaulting tenants, the Alabama law changed in 2014 and now allows you to kick out a multi-defaulting tenant. If a tenant defaults four times in a 12 month period, you do not have to allow them to cure the fifth time.  Sounds like you just need to sit out this problem tenant until the end of July, and then know better next time.

As other people have recommended, you should send the notice of default every single time you are able, as soon as you are able.

Good luck!

The discount rate is market driven, @Wayne Brooks. I'm in Alabama, which used to have a 1-year post-foreclosure right of redemption, until the last legislative session. It depressed REO prices significantly, which probably fed into the high discount rate. In your market, the discount rate might be smaller, but the analysis is the same. Plus, you have to control the appraisal process. About two years ago I discovered banks starting to use an appraisal AND their own AI internal valuation, and the AI always trumped the appraisal. In that case, you have to appeal, protest, and produce your own comparable competing properties listed for sale, and comparable recent sales. If it goes that far, I usually get the valuation I want, and all else flows from that.

@Wayne Brooks, it's not a theory, it's how the computer models are created. It is purely an NPV--net present value comparing two alternatives-- analysis.  An NPV that is positive, 0, or only slightly negative will be approved. An NPV of 0 means the offer exactly meets investor requirements. A positive number is better than investor requirements, and a negative number does not meet investor requirements. There is usually a range of negative NPV values that will still result in short sale approval.

I typically price my offers 15% to 20% below market, and almost always get approved. I was simply explaining WHY that works.

I'm a former banking lawyer, and former lawyer for the FDIC closed-bank division. I can tell you, from the inside, how banks evaluate short sale offers. Since then, I've successfully negotiated many short sales to buy properties at huge discounts.

Understanding the process starts with simple math.

What is the present value of a foreclosure, which is the only real alternative to approving a short sale. The present value of a foreclosure is the amount they will take home at the closing table after an REO sale, minus foreclosure expenses, holding costs (taxes, insurance, HOA dues, property manager, maintenance, etc.), and then discounted to present value using a VERY hefty discount rate.

If a property is worth $125,000 today, then the bank will assume it will be worth the same amount in one year after a foreclosure. Let's suppose that all the expenses will cost the bank $25,000, so they will net $100,000 in one year, upon a sale.

The question then becomes, what amount of money today, invested at 12% interest (the discount rate) compounded monthly would yield $100,000 in 12 months? The answer is $88,744.92. The discount rate is how the bank takes into account market changes, stigma discounts for foreclosure properties, uncertainty regarding valuation and expenses,, and the loss of use of their money. For foreclosures of entire subdivisions, I've seen discount rates as steep as 22%, calculated over a 7-year sell out of the lots!

For our example property, the bank will approve any short sale offer that will net them $88,744.92 at closing.

In reality, because neither the $125,000 appraisal, nor the $25,000 in expenses are firm numbers, but simply estimates, the bank will accept slightly less than $88,744.92. Money at the closing table after a short sale is "for sure." Money after a foreclosure and REO sale is speculative.

So, in this example, the bank might approve a short sale offer that netted them $84,000 at closing. Which means, in most markets, you can buy a $125,000 property for around $91,300 if the real estate commission is 6%.  If you have a real estate license and are willing to waive a commission, and if the listing agent is willing to accept only a 3% commission, then you can buy that same property for around $88,400.

In my opinion, that makes short sales the best foreclosure investing strategy.

@Antonio Lopez excellent response!  I've been doing short sales since late 2007, specializing in high end vacation properties on the Alabama Gulf Coast.  The only things I can add to your post are:

In my experience banks will typically take 15% to 20% less than the current market value for a property, because of the uncertainty of what a foreclosure will bring for them. In Florida, of course, you have that extremely lengthy judicial foreclosure procedure that can be tied up by a borrower for a couple of years. Banks HATE that.

It is critical that you control the appraisal or BPO process. Take the lock box off the property, and force the appraiser to make an appointment to see the property. At that time, present the appraiser with your market research. For a condo, as an example, my research consists of a census of every single condo on that complex that's sold within the prior 3 years. I don't typically give ALL of that to the appraiser, but if the prices are right, I do. For the ones with high prices, I have comments that show the reason--custom finishes, fully furnished, unusual buyer, etc.  I want the appraiser to have complete and accurate information to see that the market is lower than he/she might assume with a cursory market review.

I once had a short sale denied on the basis of price.  I contested it, and the bank wanted non-foreclosure and non-short sale comparables within the prior two years.  I presented evidence that 38 of the 60 condo units had been sold in the prior two years, and every single one of the "sales" had been a foreclosure or a short sale. They approved my price!

The process is lengthy and somewhat labor intensive, but the rewards are huge.

Most short sales fail because the listing agent puts an unreasonably high price on the property, and nobody makes an offer. In my market, a short sale offer that is 15% to 20% below prevailing market prices will be approved by the lender. That's because the bank analysis is always "Will this short sale generate more money than a foreclosure alternative." What they really mean is, "Will this short sale generate a sum of money that is not substantially less than an REO sale, minus costs for holding, repairs, sale and closing, discounted to present value?"

A short sale closing is cash quickly, for sure. A foreclosure is cash in the future, MAYBE in the amount of the appraisal, maybe  not. It is a gamble.

Once you understand that, you can make offers on a large number of properties that are overlooked by other investors.

I've discovered a wonderful product that eliminates pet urine odor, even in concrete. It's called "Urine Gone!" and comes in 24-ounce spray bottles. I bought mine at Bed Bath & Beyond, for $9.99. It is an enzyme-action product that breaks down the urine into components that do not have an odor. You have to completely soak the area so the product penetrates into all areas where the urine has penetrated, and then let it air dry.

I bought my first bottle when my male cat decided the fireplace was reasonably similar to his litter box, and could be used when he was too lazy to go to the other room. The Urine Gone! seemed to do the trick, but I wasn't sure until I went on a one-week trip in late spring. I left the house closed up, with the thermostat set on 80 degrees to save electricity. If any urine odor remained, I would have smelled it the minute I entered the house. What a surprise--no odor at all!

If you are interested, HERE is an article that explains why these types of products work, and why simple cleaning with detergents, vinegar, hydrogen peroxide, bleach, etc., will not do the job.

This also works on mattresses, carpeting, and fecal stains. It's a LOT cheaper than replacing the carpeting and sealing the concrete in a rental property.

Hi Josiah, First, what a great market you are in! I just heard the news about future NASA plans in Huntsville. Congrats!

Regarding evictions, you should issue a Notice of Default and 7-Day Opportunity to Cure notice on the first day the tenant is in default. Depending on the wording of your lease, that is usually the first day on which a late charge is due. The exact wording of your lease on this point could be very important.

In Alabama, you cannot file an eviction lawsuit until you have issued the 7-day letter and the tenant does not cure in time. The longer you wait to send the letter, the longer you are delaying your ability to file an eviction. You don't have to file, but at least you can, if you decide to evict.

In a typical lease, the rent is due on the 1st and late on the 6th. Your notice letter would go out on the 6th. That is counted as Day "0".  The 7th of the month would be Day "1."  The tenant can get current, plus late charges, all the way until Day 7, which would be 13th of the month in my example.  You can file your eviction lawsuit on the 14th, unless the 13th is a weekend or holiday. In that case, the first business day afterwards is counted as Day 7.

Just because you are allowed to file an eviction lawsuit that quickly, doesn't mean you need to do it on Day 8 after the notice letter.  I like to send out a Notice of Termination letter on Day 8. It tells the tenant I am serious. It is usually a "Call to Action" and causes the tenant to call me. Ideally, that is what I want.

You can continue to talk to them during that time period, and discuss payment arrangements, but make it clear the clock is ticking down. If you agree to give them extra time--say, until the 18th--then you and the tenant should sign a Forbearance Agreement. It can be as simple as a letter both of you sign. It would say the tenant acknowledges it is in default, you have given them additional time cure this one time, but if they don't get completely current by the agreed date, then you may start eviction proceedings immediately.  You do this because you want the tenant to understand you don't have to give a NEW 7-day letter if they don't pay by the agreed date.  But, unless you put this in writing and both of you sign, a judge might make you start your notice all over again.

Also, most landlords get some sort of payment in connection with the Forbearance Agreement. The agreement should acknowledge that partial payment, and also say the landlord is not accepting that as payment in full, it does not cure the default, and the landlord is under no obligation to accept partial payments in the future.

If a tenant does not cure within the time period, but then you agree to let them get caught up later, think about requiring the tenant to sign a new lease as a condition of not evicting them. The new lease might be more restrictive than the old one. It might make the rent due on the 1st and delinquent on the 2nd. The rent might be slightly higher because the tenant is a risker tenant. You might require  a guarantor.  Whatever you can get to make yourself feel safer in your future rent payments.

If you will consistently issue 7-day default letters for all of your tenants when they are late, you will see timely rent payments improve.  Some tenants will become offended if they are late one month and receive the default letter. You should explain that you recently learned you must do this consistently whenever a tenant is technically in default, otherwise you might be vulnerable to Fair Housing complaints. That is actually true. If only some tenants receive default letters, then you run the risk of some tenant claiming you treated them more harshly because of their race, familial status, disability, etc.

Good luck!  Let me know if you have other questions.

Hi Reed, I sometimes have classes in the Auburn area.  Check out my website, and I'll comp a ticket for you.  As far as investing, you should start out in Auburn. Look for those sad little, faded-out, yard signs that say "For Rent." Maybe you can't even read the phone number any more. THAT is an owner who is looking for someone to take a problem off their hands. You can master lease such a property for a term of three to five years with an option to purchase, and then make any necessary repairs, do your marketing, and put a tenant in place for a larger rent than you are paying. OR, better, you can often buy such a property with owner financing. Usually, the owner just wants regular income anyway, not a lump sum. That is why they are a landlord. But, landlording hasn't been working out so well for them in recent times, and they are looking for a solution.

Another option is tax sales. I'm a BIG believer in buying tax sale properties.  You can buy them for next to nothing, you rent them out, and even if the owner redeems, you get to keep all the rent. Often, the owner does not redeem, and you just got a decent property for a couple thousand dollars in acquisition cost and repairs.

Thanks, Ryan, I'll give them a call.