All Forum Posts by: Account Closed

I ask first for the trailing 24 months income & expenses (Annual Property Operating Data), and the trailing 12 months rent rolls (mostly to match up the stated rents with the income numbers, and to look for "bunching" in the lease expiration dates. I don't want a big chunk of leases expiring at or near the same time. (If you see a large percentage of month-to-month, that's a red flag. Be careful, because your tenants can leave quickly.)

Then I look at what kind of debt structure the property can afford to pay according to the cost and structure of available financing. I don't care much about comparable CAP (capitalization) rates, because almost all income properties are financed with multiple tranches with different yield requirements. All of that boils down to a derived CAP rate that covers the required tranche yields with a positive cash flow. (I know it sounds very technical, but the calculations are quite easy in a spreadsheet.)

As I tend to focus on distressed properties, the current I&E numbers don't mean much. The realistic pro-forma (future performance) after repositioning and stabilizing the property is what really matters. I can then calculate an After Repositioning Value (ARV), subtract a retained equity margin, then calculate the cost of a refinance loan to repay my private investors/lenders. Then I know how much to offer with numbers to support it.

Unfortunately, when the parties to the bilateral purchase & sale agreement (PSA) agree to the earnest money deposit as full liquidated damages without specific performance, then that's the agreement. Most FSBO sellers are bad negotiators, and distressed sellers are in so much emotional pain that they cannot think straight. That's why having a competent advocate for the other side is important.

I agree that some guru teach plunking down $10 EMD as full liquidated damages, which is unethical by reason that only an unrepresented naïve seller would accept it. That's not what I am suggesting that wholesalers should do. I am saying that putting the property under a PSA is taking the property off the market for a period of time (10 days, 20 days, 45 days, etc.), and that the parties should negotiate in good faith for an EMD that adequately compensates the seller for that time off the market in the event of breach as full liquidated damages. When a judge sees "full liquidated damages", that's very clear and specific. You're not acting like a broker, you didn't escape via a contingency; you just failed to perform your duty as a buyer and the seller was compensated as agreed. If the seller (or advocate) negotiated competently, then it is ethical. Otherwise, terminate the negotiations and walk away.

EMD is almost the same as non-refundable option consideration for a unilateral option contract. The seller is compensated upfront for taking the property off the market for the duration of the option period (which may be extended by rendering additional option consideration). (I strongly recommend escrowing the option consideration in the event that the seller is unable to perform when the option is exercised. Distressed sellers seem to attract liens like a magnet.)

So, the only substantive difference in this context is when the seller is compensated after the wholesaler backs out of the deal (i.e., upfront or on the backend with EMD forfeiture). If the seller is advised upfront in writing that the wholesaler intends to assign the deal to someone else, then the matter boils down to how much compensation the seller wants if the deal craters. (Maybe the seller is actually hoping the deal craters so he gets the money and then can sell to a higher offer.) As long you believe that the seller (or his advocate) is competently negotiating with you, then that's the best you can do. Otherwise, don't sign the contract and just walk away.

An option contract can provide for ripening directly into a PSA, or a PSA can be attached to the option contract (signed and notarized only by the seller). (I prefer the latter.) If the option contract is assigned, then the assignee becomes the optionee who then exercises the option and signs the PSA (which then conveys equitable interest in the property), and then closes the deal.

I like the fact that an option contract is exactly that, an option and not an obligation to buy the property. That puts the seller on notice upfront that the property may not get sold and the seller is compensated upfront.

So, in my humble opinion, I would rather go the route of the option contract with attached notarized PSA, because then the intent of the parties is very clear.

The distressed motivated seller is very unlikely to sue a wholesaler for weaseling out of a contract because of immaterial external contingencies. After all, the seller is distressed and therefore is probably not in a position to sue for damages. However, the state real estate commission board is just a phone call or an email away to file a complaint for violating licensure law. The seller may be unable to force you to buy the house, but he can bring down a ton of bricks on you from the commission board. They have streamlined access to the judiciary and can put you in front of a judge so fast your head will roll. (Speaking figuratively, of course. I mean, how can you roll a head?...)

That's why a reasonable earnest money deposit that is forfeited as full liquidated damages provides the wholesaler with an exit from the deal without further responsibility to the seller.

Also remember that a neutral 3rd party escrow agent may interplead the earnest money into a court of competent jurisdication in the event of a dispute (e.g., the seller disputes the release of earnest money because he thinks that you somehow hoodwinked him). Now you're in front of a judge that is reading your contract and wondering why you substituted your duty to perform as a buyer with a new duty to perform like a broker (i.e., find a 3rd party to buy the property from the seller).

When you use a contingency that is based on an immaterial issue, I think it's also a breach of ethical conduct. The reason that brokers are licensed is to protect the public. As unlicensed professional investors, we must observe strong ethical guidelines when dealing with the public, especially naïve or uneducated. If the other party is incapable of understanding the transaction, then walk away or find a competent advocate for that party. (Try to get the seller to sign a non-fiduciary disclosure so there's written evidence that the seller knows you are acting on your own account for profit and cannot claim later that he thought you were representing his interests.)

So, for everyone out there, I ask: Would you take the risk of appearing (in writing) that you are acting like a broker without a license, or would you rather keep your contingencies restrained to the material issues between buyer and seller (i.e., condition of the property and your capacity to perform as a buyer [obtaining financing]) by plunking down an earnest money deposit as full liquidated damages? If you cannot find a buyer and you cannot buy the property, then the EMD provides compensation for damages caused by your breach of contract; your EMD is forfeit and your responsibility to the seller ends.

Seems to me that $1000 or $500 or $100 or whatever EMD you can negotiate is less risky and less costly compared to retaining an attorney to defend you in court. You can even offer a promissory note for EMD that is redeemed upon conclusion of the inspection period or upon contract assignment, whichever occurs first. (Never offer a note that you cannot redeem. That's just like writing a bad check and we all know that's fraud.)

Bottom line, there are many folks reading this thread, including many welcome newcomers. If this discussion causes some folks to think critically about how they conduct their business, how they structure ethical deals, and how to stay out of the defendant's chair, then that's a good result. For those who disagree with me and want to keep doing what's always worked for them, that's fine with me. Although, when the dreaded summons from the commission board arrives, I would like to be there to say "I told you so", but that would be mean-spirited.

I stand by what I said, even though I am not an attorney. Every time anyone asks about this issue, I'll say the same.

Legal information is not legal advice. If you want legal advice, talk to an attorney.

Two cents worth. Your mileage may vary.

By the way, there is a YouTube video (tutorial 7) of my Power Debt Plan spreadsheet that shows the advanced concept of pulling out some cash with a HELOC and using that as a down payment on positive cash flow rental property. The positive cash flow services the HELOC and improves the paydown of the other debt account. That's an example of using "good" debt with proper leverage. You can find it on my UltimateBargains YouTube account.

This forum is great! I just learned a good reason to go wireless and a good recipe for rabbit!

Too funny....and it makes sense!

These are the best books that I've found for beginners for fix-and-flip and wholesaling:

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"FLIP: How to Find, Fix, and Sell Houses for Profit"
Rick Villani and Clay Davis
ISBN-10: 0-07-148610-0
ISBN-13: 978-0-07-148610-1

"Getting Started in Real Estate Day Trading"
Larry Goins
ISBN-13: 987-0-470-41862-8 (cloth)
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As for earnest money deposit, it's not legally required for a valid binding contract (EMD is a deposit not consideration), unless the parties specifically agree in the contract that EMD is required or there is an unusual situation like California pre-foreclosure of an owner occupied home (in that situation CA law requires a nominal cash EMD of about $100 if I recall correctly), and some other states have some inane consumer protection laws regarding pre-foreclosure of owner occupied homes.

Having said all that, if you are buying from a For Sale By Owner (FSBO), then I suggest using a 0% interest promissory note for the EMD, that is redeemed upon completion of the inspection period or upon contract assignment, whichever occurs first. Be sure that you recover your EMD (or have the wholesale buyer redeem the note) in addition to your assignment fee profit. Never offer a note that you cannot redeem; that's just like writing a bad check.

I shouldn't have to say this, but I will: NEVER GIVE ANY MONEY/NOTE TO THE SELLER. Always using a neutral 3rd party escrow/title company to hold everything (contracts, deposits, etc.).

I am not a lawyer, so ignore everything I just said and get advice from your own attorney.

My spreadsheet says the Property A 2nd will pay off first, then roll that payment into the Property A 1st (total pmt is $1,775) to pay off in another 3 months (total time is about 74 months) for free-and-clear Property A. Then roll the $1,775 payment for Property A into Property B (total payment is now $2,725) to pay off in another 67 months). Total time to free-and-clear for both properties is about 140 payments (just over 11 years). Your total interest savings is $84,662.

I am reluctant to recommend pulling cash out of your residence to pay off the other properties, because that is just shifting debt from one account to another account. I very much prefer the suggestions to pull out cash to invest in other income properties with a cash-on-cash return (CCR) that is much higher than the cost of that money. Then use the excess cash flow to apply to the paydown of the other properties.

Examples from my spreadsheet:
1. Add $100 per month reduces the time to 134 payments, saving $89,273.
2. Add $500 per month reduces the time to 113 payments, saving $103,213.

Two cents worth. Your mileage may vary.

While there are property mgt companies that will accept a house, they will probably charge more than a local RE broker. I would suggest going to your local REI club and ask for referrals. You'll probably hear names of RE brokers who handle property management as a side business. Be sure they are responsive to tenant requests/complaints, and they know the legal procedure for eviction.

If you are looking for prop mgt for larger properties, then go to irem.org and use their search thing to find managers in your area.

Bunnies/rabbits are difficult to house-break. They do their "business" anywhere they want (usually on your carpet in a secluded corner).

Two cents worth. Your mileage may vary.