All Forum Posts by: Account Closed

There is in Denver a Mortgage Company that is currently making 75% LTV refinance loans on fix-and-rent properties, but it must be rate-and-terms only (no cash-out). They also work closely with a hard money lender that provides 100% LTC on acquisition and repairs, up to 65% ARV (maybe 70% ARV on some deals). Both companies currently operate only in Colorado on 1-to-4 unit residential only.

I've met investors who are using these lenders to buy Denver-area fixers with hard money, then refinancing for long term fixed rate cash flow. They are building positive cash flow with nothing down (100% financing).

Not to put too fine a point on it, the big benefit of using an LLC (taxed as a partnership) for rentals, and an s-corp (or LLC taxed as a corp) for flips is for tax considerations.

A flipper is subject to designated "dealer status", which means he is not afforded the opportunity for an IRC 1031 exchange, regardless of how long he owned the property. The capital gain tax must be paid at the time of sale, even when selling on an installment (seller financing).

Eventually, rental property will be sold and you want to take advantage of the IRC 1031 exchange, so you own that property in an LLC. You can also take advantage of an installment sale (seller financing) to defer capital gain tax.

Thus, put your rental activity in an LLC (taxed as a partnership), and put your flip activity in an s-corp or LLC taxed as a corp. This will avoid contaminating all of your businesses with "dealer status".

Dealer status may also apply to operating as a sole proprietorship (buying/selling in your personal name), so be careful and get expert tax advice.

I am not a lawyer or accountant, so ignore everything I just said and get your own professional advisor.

A "master lease option" for a single family residence is more properly called a "sandwich lease", not MLO. The "master tenant" is simply exercising his right to sublet to a sub-tenant. The MLO terminology generally applies to a property with multiple tenants, like an office building or an apartment building.

An office building would have an MLO probably with net lease terms to the tenants. The tenants pay rent plus taxes, insurance, and maintenance. (Btw, many of those gigantic skyscrapers in New York city are actually under a master lease option with delegation to a property management company.)

An apartment building MLO would have gross lease terms to the tenants. The tenants generally pay only rent, and the owner pays the taxes, insurance, and maintenance.

In either case, the "master tenant" also has a purchase option on the property and a recorded Memorandum of Option to cloud the title to prevent the owner from selling the property.

Payments to the owner include the master lease payment and incremental option consideration that extends the option period and applies towards the purchase price.

Also get a title insurance policy with option endorsement to protect the right to exercise the option.

Also, the sub-tenants do not have an option to buy, because the "master tenant" cannot offer an option contract without being an owner of record on the title.

Commercial, especially apartment buildings, can take you to the next level. Take a look at my education page on my SmithSyndication website for links to free YouTube videos. It's a work-in-progress that I add a few videos each month. There are also free articles about various aspects of commercial investing.

In Colorado, I receive a weekly Excel spreadsheet for the Notice of Default (NOD) list from a title company. It includes all types of property, names, addresses, current loan balance, original loan balance, attorney, etc. It's all free.

You can probably get similar information from a title company in California. Call around to the big name title companies and see what they offer.

Some states, like California, require a modest earnest money deposit in a pre-foreclosure situation with an owner occupied home. Check your state's pre-foreclosue laws for owner occupied residential properties.

Other than that, the earnest money deposit is not consideration and is not legally required to have a binding contract. A binding contract is determined by an equitable exchange of consideration or the promise thereof.

Most real estate contracts involve the promise of an equitable exchange of consideration: As buyer, I promise to deliver $100K to the closing agent, and as seller, you promise to deliver clear marketable title to the closing agent. That is a valid binding contract. The earnest money deposit is just a deposit, not consideration, because both parties have a claim on the deposit until the contract concludes.

You can also use a promissory note (0% interest) for the earnest money deposit, to be redeemed by any mutually agreeable event, such as conclusion of due diligence (inspection) period or upon contract assignment. Never offer a promissory note that you cannot redeem according to the contract terms.

There are also circumstances where the seller provides the earnest money deposit, instead of the buyer, but that is an advanced topic for another discussion thread.

In addition to the Memorandum of Option, I would negotiate to attach a lien against the property for the value of the rendered repairs. Some judges don't understand option contracts, but most of them understand liens. Escrow a release for the lien and for the memorandum with a neutral 3rd party who will record the releases upon conclusion of the option contract.

Also consider getting from a title company a "title insurance policy with option endorsement" to protect your right to exercise the option.

A $40K option price that is paid $500 per month as additional option consideration is 0% seller financing. Your "all in" is $60K=$40K+$20K, which is well within the 65% ARV rule of thumb. In this situation, you probably would not even need the "lease agreement" portion. Just include full possessory rights and repair rights in the option contract (and the lien for the repair costs).

Your contract (or an attached disclosure) should specifically state that you do NOT intend to occupy the property as your residence.

The listing broker has specific instructions from the seller to hold all non-OO offers until the "First Look" period expires. State and federal law requires all offers to be submitted anyway, so the seller will also hold the non-OO offers until after the "First Look" period expires. Don't put the broker in a bad spot by submitting a non-OO offer before the expiration.

Use the "First Look" waiting period for a detailed inspection with your General Contractor to write a "scope of work" estimate with labor & material costs. Get your financing ready and submit an all cash offer with proof of funds at soon as the waiting period expires.

Never sign an affidavit without your attorney reviewing and approving it.

Beware of deed restrictions or performance liens that prevent you from reselling the property within a limited time period.

Has anyone used the Home Fixers "Improvement Cost Estimator"? I would appreciate a reliable review of it here, or in a new discussion thread.

http://www.homefixers.com/helpice.php
http://www.homefixers.com/fliptoolbox.php

Getting a "standard" realtor contract is alright, as long as you attach your custom addendum that effectively erases the junk in the main contract body that you don't want, and adds superceding language that you want.

Most realtors are prohibited from "unauthorized practice of law" under their state licensure laws. They cannot interpret or write custom contracts. They must fill in the blanks on the state-approved form. They will freak out when you submit a custom contract or a very complex addendum. So, keep it simple and to the point.

I like to use very simple weasel clauses, something like this:

1. "This contract is contingent on Buyer's written approval, in Buyer's sole subjective opinion, on all inspections, reports, analyses, insurance quotes, surveys, that Buyer may deem necessary. If Buyer does not provide written approval within the specified time period, then this contract shall terminate and the parties shall be reasonably restored and released from liability and any duty to perform."

2. "The parties agree that in the event of contract termination due to an unsatisfied contingency, closing agent shall immediately return the earnest money deposit without further approval of the parties."

Run it by your attorney and clean it up anyway you want. It simply means that your written approval during the due diligence period depends on whatever you think is important. If you decide to cancel, then you don't need further permission from the seller to get back your deposit.

With those two clauses, you really have very little risk and not much to fear of getting into a bad deal.

Two cents worth. Your mileage may vary.