@Account Closed
It's interesting that both of you brought up notes. I've been investing in loans on Equity Multiple, which is a commercial RE crowdfunding site. I picked the short term ones (hold period < 1.5 yrs). Equity Multiple has a good track record and they seem to do a superb job at underwriting deals. The interest rates are around 10%. The deals are backed by collateral. So far so good. I get to invest alongside experienced institutional investors and a bunch of other retail investors. Completely hands off and skipping the "dirty" people.
I realized that owning residential rentals isn't exactly a passive investment, even with property managers. Unfortunately, the PMs too often fall into the "dirty" people category.
Doesn't have to be the Jacksonville market. It's just that I've already established good working relationships with some people in Jacksonville that I know are reliable. I can definitely enter other markets, it's just gonna take some extra digging and research to find the good ones to work with.
A chunk of my assets is under Merrill Lynch management. My advisory team is great; they even got on a Forbes list last year. But the thing is, I don't want to completely rely on other people to manage my money, so I've been experimenting with a bunch of alternative investments, including some exotic ones, like marine vessel acquisition, law firm financing, lawsuit pre-settlement advances, etc.
@Jeremy Z. Keen observation. I came to the same conclusion. I've made connections with some great local RE professionals. Property managers, brokers, realtors, contractors, flippers, wholesalers, even cops. I plan to hoard on cash, wait for the market to crash, overcome my fear of global warming, re-enter the Jacksonville market with the help and guidance from those awesome people. I'm sure my next deal there will be better.
@Ned Carey I'd rather be over cautious than not to be cautious enough, especially since I'm a newbie and the property is ~2700 miles away. When I make decisions, I only care about the worst case scenario and whether I can handle it or not, which involves asking "what if" questions.
Roofstock inspection reports aren’t created equal. The report for this particular property is only 13 pages long including all the pics, not very detailed. Some Roofstock inspection reports are over 100 pages long.
My then prospective buyers cared about the roof permit and factored into their offer amount.
@Nina M.@Jason G.@Heshel Mangel@Account Closed It took my entire president's day afternoon to write that last post. Hope it helps. Best of luck to you all and happy investing. :)
Here’s the first half of the long story, focused on the permitting issue and this particular property. I can answer Jason’s remaining questions focused on Roofstock, the contractual terms, local broker’s insight, etc in a later post, probably in a few weeks, as this post is already verbose. I just used Jason’s questions as a template. The order of the questions has been rearranged for a better flow.
I have not reached out to Roofstock about this undisclosed permitting issue, because I don’t plan to seek recourse from them or the seller and there’s nothing left to be intervened. The reasons can be explained in details in the second half of the long story. Somebody from Roofstock relayed a vague message saying they’ll respond to my correspondence from a while back about a separate issue. I haven’t heard from them, they probably forgot about it, and I don’t feel like following up. It’s a thing of the past. I doubt it has anything to do with this permitting issue.
1. What market was this property in and what was the purchase price?
Jacksonville, Duval County, Florida. The seller bought the property in 2015 for 29K. I bought it in 2017 for 95K before taking into account the closing costs. The seller rehabbed the property, kept it as a rental for about a year and then sold to me. I sold it to the wholesaler in Feb 2019 for 107K. The property was built in 1956. Roofstock certified.
Here’re the market value estimates from different sources around the time I sold it:
Roofstock: 118K - 136K
Zillow: 134K
Redfin: 149K
The wholesaler’s (my buyer) Facebook ad comps: 150K
I entered the right market but bought the wrong property from the wrong seller. The Jacksonville market is pretty hot right now, and the property has appreciated quite a bit.
The 30K+ of loss I mentioned in the original post is the total amount lost from this property. I only accounted for about 5K of loss of profit from this permitting issue/sold at discount, but it could be anywhere between 5K to 40K. The other ~25K is related to tenant issues.
2. What was the undisclosed permitting issue that the local flipper discovered from the public record?
Full roof replacement. There’s a lot more to it, it’s not just about a roof. The ramifications that stemmed from it were complicated. The discovery of the unpermitted roof was the trigger.
Based on the property’s price history and market value trends, I speculate it was in a run-down condition that needed a complete rehab when the seller acquired it in 2015. A 4-pt inspection I ordered for insurance purpose seems to confirm this. The 4-pt inspection report indicated that all the major systems were updated around 2015. I checked the permit history of this property on the City of Jacksonville Building Inspection Division website. It only shows two permits for this property: “roof permit pulled in 1991” and “existing building (not sure what that means) permit pulled in 2001”. I assume permits pulled before 1991 aren’t on electronic record. The website doesn’t show any permit pulled in 2015. After seeing this, I immediately started to wonder what other work performed in 2015 was also unpermitted.
On top of that, I was very concerned about the quality of the rehab work the seller did based on my knowledge of the seller’s shady and despicable conduct. The seller isn’t an individual, it’s a company that engages in all sorts of real estate activities. The seller did some other work for me after selling me the property, which turned out to be a total disaster. Looks like they even brazenly lied in writing against their own words from previous emails to rip me off a paltry couple hundred bucks. Later on, I found out they appeared to be committing fraud and doing illegal stuff.
I believe the seller is a plague on the local community, especially since it isn’t an affluent region, lots of the residents live paycheck to paycheck, numerous people complained about being ripped off. A lot of those people are financially vulnerable and lack resources to go against the seller. The seller also appears to be gaining unfair competitive advantage through cheating while many of its competitors earn recognition through hard work and serving the community.
I tried to warn others and posted online a screenshot of a consumer alert a website issued against the seller. The seller’s attorney sent me a threat letter before. I’m not a contentious type of person, but when my rights get infringed upon, I stand my ground and fight back to the end. I might have to anti-SLAPP and even sue them back for malicious prosecution or malicious use of process depending on what happens in the future. I sure hope the seller knows about the Streisand Effect and doesn’t act egregiously in the first place.
My logic goes, if the seller went so far to rip me off just a couple hundred bucks and they scam people, it would make sense for them to hire the cheapest labor, cut corners, use the cheapest material for the rehab in order to maximize their profit from the flip. It would also make sense for them to not pull permits to save on the permit application fees and finish the rehab asap without delay. Who knows how long the rehab work they did to this property would last, and when it’ll start to fall apart. But I do know that, when it starts to fall apart, I could be hit with some big-ticket items.
In hindsight, I should have hired a local inspector to do a super comprehensive and thorough inspection immediately after closing. In that way, If anything alarming came up and was too much for me to handle, I could benefit from the Roofstock 30-day money back guarantee and sell it right back to Roofstock. I don’t know if this is really feasible in practice though, and I certainly do not recommend abusing it. I think investors should only go for it if they really have solid reasons, otherwise, it’s just not a nice thing to do. Buyer’s remorse setting in is not a solid reason, for instance.
3. What was the cost of remedying the permitting issue should you have chosen to do so?
It is possible to permit after the fact. If I provide proof that I didn’t know about the issue, I might not even get fined. Laws regarding permits are local and vary from city to city. The cost of pulling one permit is usually only a couple hundred bucks.
Technically, a permit needs to be pulled for almost any major repair, like reroofing, repiping, rewiring, replacing HVAC system. But from what I’ve learned, the city of Jacksonville is stricter with certain types of repair work than others. For instance, they usually do not enforce swapping out a water heater without a permit, but they tend to make a bigger deal out of a full roof replacement without a permit.
But here is the catch. I risk opening a Pandora’s box by attempting to obtain a permit for the roof.
A code compliance inspector from the city would have to inspect the unpermitted structure and sign off on it. If the roof wasn’t installed properly, I might have to rip the entire thing off and redo with a permit. The roof is fairly new with a remaining useful life of as long as ten years according to the Roofstock inspection report. In addition, what if I attract unwanted attention to the other parts of the property that I strongly suspect aren’t permitted?
I thought about hiring my own inspector to check out the property first to see whether it could pass a code compliance inspection, and then decide whether to contact the city or not. Here’s the problem. The inspector wouldn’t know for sure unless the floor gets busted up and drywall torn through.
The city of Jacksonville usually doesn’t do a good job at enforcing permits. I read some BP post discussions to get a better idea on permitting issues. A podcast guest on show #47, who’s also a broker, wrote that he had heard many horror stories where a buyer calls the city to get an idea of the city's attitude towards certain unpermitted structures, and the city says on the phone that everything is fine and after they buy the property they get hit with all these costs and fines. Since the guy was a podcast guest, I suppose he’s an expert. My takeaway from that post is do not count on the city to cut me some slack when they actually find out.
What about resale? Well, without me having to disclose, my then prospective buyers quickly found out on their own and interrogated me about it, asking it be reflected as a discount.
4. Why did you choose to sell the property vs keeping it as a buy and hold investment?
From my answers to the previous questions, you can tell that remedying the issue is tricky.
What about don’t remedy it and rent it out?
Insurance companies feel differently about unpermitted structures, many of which do not cover unpermitted structures or personal injuries caused by unpermitted structures. For those that don’t cover unpermitted structures, if the insured can prove that he/she had no prior knowledge and was not being negligent, the insurance company might still cover it. This is a grey area. To further complicate the matter, many insurance companies use wide blanket statements in the policy, so they have wiggle room to argue in court instead of telling people what exactly they insure or don’t insure.
The roof is at the mercy of mother nature, which hasn’t been very merciful to Jacksonville in recent years. During the short duration of my ownership, Jacksonville was under the influence of a category 5 hurricane and a category 4 hurricane: Irma in 2017 and Michael in 2018. I can imagine during a hurricane, the tenants huddle under the roof while the roof gets battered. If the roof wasn’t installed to meet safety standards, and crashes down, severely injures or kills the tenants, and the insurance company denies my claim, I’d be screwed.
I emailed my insurance agent, asking whether my insurer would deny a claim in this hypothetical scenario, she emailed back and said, “To answer your question about SFIC approving or denying a claim, I really can’t answer that question. The necessary steps to follow would be that a claim is filed by the insured via a call to the insurance claims department and then an investigation would be conducted by an insurance claims adjuster who would then make a decision as to whether the claim would be paid or not.”
My potential liability is further increased by my decision of not putting the property under an LLC when I bought it.
What about don’t remedy it and leave it vacant?
I thought about leaving it vacant and wait for it to appreciate over the next one to two years and then sell. You’ll find quite a few online articles that depict a very rosy outlook for the Jacksonville market, forecasting double-digit appreciation for 2019.
However, I think leaving a property vacant for too long is risky. During vacancy, I have to incur some costs, such as property tax, property management fees, insurance, and possibly property damages from break-ins. The community rating is only 2.5 star according to Roofstock. Moreover, I feel that the market is at its peak right now. Some brokers and flippers I’ve talked to share my sentiment. Who knows when the next recession will hit. One thing is for sure, once I detect some telltale signs, it’d be too late to act.
In conclusion, if I couldn’t remedy the issue, couldn’t use it as a rental without remedying the issue, couldn’t just hold a vacant property for years, then the only logical option left was to sell, to just get it off my back.
5. Why did you choose to sell the property to a wholesaler vs selling it on MLS?
Sell on the MLS:
When the home gets listed on the MLS, it would likely get hundreds or even thousands of views. I'd risk attracting unwanted attention to this permitting issue, and then it's the Pandora's box scenario again. Some nosy people might even rat me out to the code-compliance folks. Imagine the city sends out a code compliance inspector and orders me to do all those invasive things to the property, while it's on the market. That can't be good. Also, a buyer might request the issue to be remedied, which could hamper closing.
Sell to wholesaler:
Selling to the wholesaler as-is was more discreet and no hassle with repair requests.
I put my contact info on the public record when I bought the property, so I received unsolicited postcards in the mail from local wholesalers. I just called about a dozen of them, figured out they use the same formula to run numbers, their offers came close, I picked the second highest offer (the highest seemed a bit shady).
Here’re some other pros of selling to wholesalers: no agent commissions paid, buyer pays all cash, buyer pays all closing costs, no financing contingency, short inspection contingency (the wholesaler actually just walked the property before making an offer and that counted as the inspection), quick closing.
The cons of selling to wholesalers:
They offer below market value -- the 70% rule.
Many wholesalers got a bad rep. They basically practice real estate without a license.
The wholesaler eventually assigned the contract to another buyer and the title company did a double closing. Basically, the wholesaler flipped the contract/PSA and charged the end buyer an assignment fee.
In retrospect, I should have gone on several Jacksonville wholesaler’s Facebook pages to find out whom they market properties to, then compile my own buyer list and directly contact those end buyers. I could probably have walked away with a couple thousand dollars more.
6. What due diligence did you personally do prior to executing the PSA?
This is the first property I bought from Roofstock, and the first property I bought in my entire life, so I was a brand new newbie. My due diligence can be divided into two parts: on Roofstock and on the property.
My due diligence on Roofstock:
I looked up the founders. My logic went, if the founders/leaders are legitimate, the company and employees should also be good. I found out that the Roofstock CEO went to Stanford. A close family member of mine also went to Stanford. I myself worked on a Stanford research team. Roofstock CDO went to LSE. My family member’s co-founder also went to LSE, then to Stanford. The Roofstock CDO worked at Merrill Lynch for years; I’ve been a Merrill Lynch wealth management client for years. My family member’s startup also serves investors, but from a different sector. Some of Roofstock’s VC investors even approached my family member for the next funding round. These are hardly any real connection, but I have the tendency of trusting people who share things in common with me. I believe everybody has that tendency more or less.
I’m not a trusting person at all, but I trusted Roofstock. I believed and expected Roofstock to possess a sense of honor, integrity, decency, and abide by a set of moral and ethical rules. If I didn’t think highly of Roofstock, I wouldn’t have bought a second property from them about a year later.
My logic also went, if Roofstock is legitimate, the providers they recommend or certify should also be good, especially since Roofstock claims on their website that “we’ve found providers you can count on,” “rigorous certification means you can focus on your investment strategy rather than due diligence.” I assumed Roofstock had done more than enough due diligence on the providers for me, so I did not do much on my part besides checking out a few online reviews, which turned out to be a grave mistake. Roofstock providers is a juicy story for another day. Again, I think Roofstock tries hard to find the best ones, but it’s difficult for any business, not just Roofstock, to simultaneously juggle that many types of providers in that many states in that many communities. I gotta give Roofstock credit for finding the goods ones I’ve worked with though.
My due diligence on the property:
I checked out amenities around the property on Google Map. Grocery stores, day care centers, parks, restaurants, shopping malls, distance to downtown, major highways, etc. I checked Zillow and Redfin for price histories. I also checked citydatadotcom for the demographics of the population, the average income, and a bunch of other things pertaining to the local community as a whole. I went on homedisclosuredotcom to check for hazards, noise level, criminal offenders nearby, etc. And of course, all the documents in the Roofstock diligence vault. The Roofstock closing coordinator actually emailed me all the docs in a zip folder saying, “Please see attached a zip file of all the documents from the Diligence Vault.” Docs included are inspection report, house canary value report, insurance quote, but no disclosure form. Not embedded in the PSA either.
At the time of purchase, my biggest concern was actually the registered sex offender neighbor. The lease I inherited indicated there was only one female tenant. I was concerned about her safety and whether the resale value would be adversely affected by a neighbor like that. It turned out the sex offender was the least of my concern. It also turned out the tenant had unauthorized occupants living with her all along. Apparently, I fixated on the wrong issues.
As a rather clueless newbie, it never occurred to me that I should check permit record. Seller didn’t mention it, neither did Roofstock. Nobody reminded me to check. It kinda just slipped through the crack. I suspect there are other things I should have checked but didn’t know to check, and still don’t know to check. Maybe I dodged some bullets without even knowing about it by cashing out on this property.
I eventually realized that the onus of due diligence ultimately falls on the buyer, although it looks like failing to investigate permits is a common form of malpractice committed by buyers' agents for MLS transactions. I definitely should have done extensive research on the seller. I'm keeping my fingers crossed that the other property I bought from Roofstock will remain good to me.
Writing reviews brings me closure, but more importantly, I hope by sharing my experience, you newbies out there can avoid paying some tuition. It’s not fun to be the one going through all that, and it certainly could have been a lot worse.
To be continued……..
@Jason G. Those are all great questions, Jason. I can certainly touch all of them in a long version of the story & analysis with ample details, but that would take me a while to write. No point to spend that much time if few people will read it. I'll answer your questions if more people are interested in learning the details.
I notice that you comment on almost all Roofstock related posts usually to defend Roofstock. Are you affiliated with Roofstock in any way? Looks like there are investors that have established an advertising relationship with Roofstock, such as the ones who wrote Roofstock reviews on Listen Money Matters and The College Investor.
Looks like most of the reviews or case studies on Roofstock are about the closing process. I suppose since the vast majority of investors who’ve purchased properties from Roofstock use the properties as buy-and-hold rentals and Roofstock is a start-up that hasn’t been around for long, not a whole lot of investors have sold those properties. I got burnt on my way out when I tried to sell one acquired through Roofstock, which I’ve only kept for ~1.5 years. I wasted a lot of time and lost over 30K from this property. The only thing I gained is increased cancer risks from all that stress.
The short version of what happened:
A local flipper I befriended pointed out a serious undisclosed permitting issue he discovered from public record, which compelled me to sell the property at a discounted price to a local wholesaler instead of keeping it as a rental or selling on the MLS. The Roofstock inspection report made no mention of this issue. I have strong reasons to believe the seller chose not to disclose intentionally.
Due to the way the Roofstock purchase and sale agreement was drafted and certain provisions in Roofstock's Terms&Conditions that investors have to agree to but few actually read before using their website, the seller and Roofstock are well protected from liabilities, much better than a seller and brokers would in a typical MLS transaction scenario. As a result, I have very limited ways or no way of recourse.
Combined with some other things that have happened and my interactions with Roofstock, I feel that buying properties from Roofstock is like buying properties without a buyer’s agent, their “one stop for all” business model is inherently flawed, and the water is too deep for newbie buyers. The increased efficiency is achieved at the cost of buyers' best interests.
Furthermore, despite Roofstock’s effort to find top providers to work with their investors, it looks like Roofstock struggles to bring all of them up to standards and keep them in check. The quality of service from different providers (title companies, PMs, inspectors) swing so widely that the good ones exceed my expectations, and the bad ones make me wonder how they stay in business or why hasn’t got taken out by the FTC. I’ve dealt with just as many bad ones as the good ones. In some cases, buyers have the options to pick the ones they prefer; in other cases just a hit or miss.
Last but not least, Roofstock advisors' excellent work ethics can’t compensate for their lack of knowledge of the local markets. On the other hand, lots of the sellers are institutional investors or local RE professionals, which inevitably shifts even more risks to newbie buyers.
This is a 1-star review for newbie buyers; 3-star review for seasoned buyers who know what to watch out for when evaluating deals; 5-star review for sellers, especially those who want to evade scrutinization from shrewd local brokers and failure-to-disclose-property-defects lawsuits.
Well, since I rate Roofstock 5 stars for sellers, why don't I just list it for sale on Roofstock? The simple answer is that the actual market rent ($900-965/mo) to list price ratio (ARV 120 -140K) would not be enticing to SFR buyers. The market rent Roofstock gave ($1025/mo) when I made the purchase was inflated btw.
I can post a long version to elaborate on the above-mentioned points if more than 10 people on BP are interested to know more.
I just sold my rental in Jacksonville FL to a local wholesaler (closed yesterday). The buyer/wholesaler paid all the closing costs. The only thing deducted from the gross sale price for the seller/me is the prorated property tax of this year.
What I learned from my experience is that you gotta be extremely careful with the wording of the provision regarding closing costs in the purchase and sale agreement.
In my case, the original wording in the PSA was "Buyer and seller agree to pay customary closing costs." I caught it and brought it to the buyer's attention. The buyer assured me he'll pay all the closing costs and their company website also states they'll pay all costs. So he changed the provision to "Buyer will pay customary closing costs."
During closing, the closer from the title company sent me the ALTA Settlement Statement and I was shocked to see ~2K in closing costs deducted from the gross sale price, including over $600 of the title insurance premium. I called the closer and told her she must have made a mistake in the calculations or misread the PSA. She said the wording was vague and subject to misinterpretation. She interpreted it as since buyer pays customary closing costs, and it's customary in Jacksonville for buyers to pay part of the closing costs, so that means the seller should cover the rest of the closing costs. I then contacted the buyer/wholesaler in panic, thinking it must be a contract trap, to which he said he'll fix the situation right away and let the closer know he'll pay all the closing costs. Luckily, this is a legitimate wholesaler and it closed as expected.
So in conclusion, if the buyer agrees to pay the closing costs, make sure it says "Buyer will pay ALL closing costs" on the PSA. Don't leave any room for misinterpretation.