All Forum Posts by: J Scott

Originally posted by "troyce1":

My main point is not put down LARGER deposits to entice sellers to accept contracts, if you can still back out and keep your earnest money.

I assume you means to say "why not put down LARGER deposits"...

And this is all a matter of preference and your financial situation. Personally, I've offered to put down up to $10K in earnest money if I think the seller is going to be motivated (or reassured) by doing so. This isn't a big deal, as I buy many of my properties for cash anyway, and I always have the contract contingencies (for me, a 7-day due diligence period) that I can use to get out of the contract if need be, and get my EM back.

That said, obviously others would rather put down as small an EM deposit as possible. While it's good for them if they need to back out of the deal after the contingencies are gone, I'm pretty sure if they and I made an otherwise identical offer to a seller, I'd get the contract with my EM over them.

So, you make the call on where you'd like the risk to be...

Here's how I started...

1) If you think a property is a good deal (based on some rough estimation of rehab costs and ARV), get it under contract with a contingency for a 7 or 10 day due diligence period (this let's you back out if you later realize it's not a good deal).

2) Once you have the property under contract, get an inspector to come out an give you a report on the condition of the property. He should be able to tell you about the condition of all the major structural and "expensive" components, such as foundation, electrical, plumbing, roof, hvac, etc. A good one will also tell you about the obvious stuff as well, in case you really have no experience. A good inspection will run you between $150-400, depending on the inspector.

3) Once you have your inspection report, find a contractor (or more than one) to come out and give you either an estimate or bid. If you plan to have the work contracted out, you can ask the contractors for a bid, and they will provide you a full statement of work with their price proposal for free (they expect they might get a job out of it). If you don't plan to hire contractors, then find a contractor who will -- for $100 or less -- come out and give you a "pre-purchase estimate." This will be a ballpark estimate of how much it would cost to rehab the property (most contractors will do this for a small fee). Keep in mind that the numbers may be higher or lower than your actual costs (depending on how you do rehab), but it's a good ballpark.

4) Have your agent (or an agent or an appraiser) do a BPO or comp analysis for you to determine your ARV. If you're not working with an agent, you may have to pay a couple bucks for this, but it's better than trying to guess an ARV with no experience.

Now, for about $300-500, you have all the information you need -- you know the purchase price (you have the property under contract), you know what's wrong with the property, you know how much it will cost to fix, and you know what you'll likely be able to sell for after rehab.

Sure, it's cutting into your profit, but would you rather risk $500 upfront, or the $100K you're paying for the house?

Here's how I started...

1) If you think a property is a good deal (based on some rough estimation of rehab costs and ARV), get it under contract with a contingency for a 7 or 10 day due diligence period (this let's you back out if you later realize it's not a good deal).

2) Once you have the property under contract, get an inspector to come out an give you a report on the condition of the property. He should be able to tell you about the condition of all the major structural and "expensive" components, such as foundation, electrical, plumbing, roof, hvac, etc. A good one will also tell you about the obvious stuff as well, in case you really have no experience. A good inspection will run you between $150-400, depending on the inspector.

3) Once you have your inspection report, find a contractor (or more than one) to come out and give you either an estimate or bid. If you plan to have the work contracted out, you can ask the contractors for a bid, and they will provide you a full statement of work with their price proposal for free (they expect they might get a job out of it). If you don't plan to hire contractors, then find a contractor who will -- for $100 or less -- come out and give you a "pre-purchase estimate." This will be a ballpark estimate of how much it would cost to rehab the property (most contractors will do this for a small fee). Keep in mind that the numbers may be higher or lower than your actual costs (depending on how you do rehab), but it's a good ballpark.

4) Have your agent (or an agent or an appraiser) do a BPO or comp analysis for you to determine your ARV. If you're not working with an agent, you may have to pay a couple bucks for this, but it's better than trying to guess an ARV with no experience.

Now, for about $300-500, you have all the information you need -- you know the purchase price (you have the property under contract), you know what's wrong with the property, you know how much it will cost to fix, and you know what you'll likely be able to sell for after rehab.

Sure, it's cutting into your profit, but would you rather risk $500 upfront, or the $100K you're paying for the house?

Originally posted by "Primo_Coach":

Terry,

I would not put down more than a $10 deposit no matter what. It doesn't matter if I am wholesaling or doing a subject-to, all of my contracts are $10 deposits and nobody has ever had a problem with this.

You've never bought from a bank, have you? :)

Some things I think about:

- Likelihood of Being Able to Flip: What is the neighborhood like, are things selling, are they selling close to asking price, what is DOM for your area, what is the current financial situation, etc.

- Will It Be a Good Rental?: Will it cash flow as a rental? If not, disregard that option.

- What is Your Cash Situation?: If you hold this one, can you afford to buy others, or will you have to wait it out until you can sell something?

One recommendation I would make is to make a decision on sell or rent BEFORE you start the rehab work. You would hate to put $40K into a property to get it ready for sale, only to find out you have to rent. At that point you may have been able to just put in $5K instead, and you wouldn't risk having tenants destroy all your new finishes.

Originally posted by "nationwidepi":

In order to bring in multiple parties who all contribute funds to a re investment, you must be licnesed by the SEC or utilize an LLC or other entity making each party a shareholder/owner of the company. This is how I understand the law and I suggest you consult with a tax attorney on this before proceeding.

This isn't necessarily true. You need to register with the SEC to *market* these types of deals, but if you just want to bring together a group of your friends and/or family members, the SEC has no bearing on that.

Also, while your lender might have requirements for how this is done (they may require all parties to be on the mortgage and/or title), if you have a partnership agreement, any group of people can jointly own an interest in any asset. I would certainly see an attorney to get this type of partnership agreement drafted.

It's also quite possible that the bank will not allow you to finance property in the LLC's name, in which case the borrows will also have to apply as co-borrowers and sign the financing docs in their name. The property can be held in each of your names (Tenants in Common), and after closing you can quit claim it to the LLC if you want.

Do a search (on here or on Google) for "Tenants in Common". This is likely how you'd want to hold title; in additional, you can set up separate LLCs for each investment, with each partner a member of the LLC.

Originally posted by "mouschi":

is it your opinion, that rentals are not good to get into? Do you mainly do rehabs/flips etc?

No, I don't think that's what Wheatie is saying. Without trying to put words in his mouth, I believe he was just demonstrating for you that if a deal is good, it doesn't matter how much you put as a down payment; and conversely, if a deal is bad, putting more a down payment isn't going to suddenly make it a good deal.

The key is that there are multiple different metrics that you should be looking at to determine if a particular deal is a good one. First and foremost (in my opinion), you want positive cash flow. This will be your lifeline to ensure that you don't get into trouble with the property; as long as you have positive monthly cash flow, you shouldn't have to worry about the bigger real estate picture.

But, that's not the only metric you need to look at. As Wheatie pointed out, cash-on-cash (COC) return is another one. This is the ratio of how much money you are making each year in comparison with how much you put into the deal. If you put $20,000 into a savings account, you'll make about 3% return (from interest); if you put that same $20,000 into a rental property, how much will you make in return? If it's not much more than 3%, it seems like just putting your money in a savings account would be easier. You want to be able to make significantly more than that for all the work to be worth it.

Once you know that you're cash flow positive and you know what your COC return is, then you can figure out other metrics, like total return (this is your COC return plus the extra value you get from building equity and tax advantages). For some types of properties, you might look at cap rate, or debt service to income ratios. You might want to find out your internal rate of return (IRR), etc.

Basically, there are lots of important measures of how well your investment will work for you on a deal, and you need to examine at least a couple of them to determine if it's a good deal or not. You can't just look at a single variable (like cash flow) and say a deal is good or bad.

Thanks Michael...